Monthly Archives: June 2014

Market Insights 6/30/2014

Despite a jump in pending home sales, and mostly positive global economic data, U.S. equities finished mixed on the first day of a holiday-shortened week. All U.S. markets will close early on Thursday and remain closed on Friday.

Around the globe, geopolitical concerns continued to brew, while traders may have been treading with some caution ahead of a soon-to-be released global economic data, concluding with the U.S. June nonfarm payroll report and the European Central Bank’s monetary policy decision on Thursday.

Treasuries finished higher, along with gold prices, while the U.S. dollar and crude oil prices were lower.

The Dow Jones Industrial Average fell 26 points (0.2%) to 16,826

The S&P 500 Index declined nearly 1 point (0.1%) to 1,960

The Nasdaq Composite gained 10 points (0.2%) to 4,408

In moderate volume, 737 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil moved $0.37 lower to $105.37 per barrel, wholesale gasoline fell $0.03 to $3.04 per gallon

The Bloomberg gold spot price increased $10.72 to $1,326.89 per ounce

Pending home sales top forecasts, regional manufacturing data shows continued growth

Pending home sales rose 6.1% month-over-month in May versus the projected 1.5% rise that economists surveyed by Bloomberg had forecasted, and following the upwardly revised 0.5% increase registered in April. Compared to last year, sales were down 6.9% last month following April’s favorably revised 9.3% decrease. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected in May.

The Chicago Purchasing Managers Index showed growth in Midwest activity decelerated slightly more than expected, decreasing to 62.6 for June, versus expectations of a decline to 63.0, from the unrevised 65.5 in May, but a reading above 50 depicts growth.

The Dallas Fed Manufacturing Index showed growth in activity for the region accelerated more than expected, rising to 11.4 in June from 8.0 in May and compared to the 8.5 figure that was forecasted. Readings above zero denote expansion in activity.

Treasuries finished mostly higher, as the yield on the 2-year note dipped 1 basis point 0.45%, while the yields on the 10-year note and the 30-year bond rate declined 2 bps to 2.52 % and 3.35%, respectively.

Tomorrow will bring the ISM Manufacturing Index, expected to increase slightly to 55.9 in June, from 55.4 in May, remaining in expansion territory as depicted by a reading above 50. Last week the preliminary June Markit U.S. Manufacturing PMI Index gained 1.3 points to 57.5, hitting the highest level since May 2010. The Markit release is independent and differs from the ISM Index in that it has a shorter history and Markit weights its index components differently.

At the halfway point in 2014, we believe the second half of 2014 will show improving growth in the U.S. economy and a continued trend upward in stocks, but stocks could pullback in the near term, as valuations have extended.

Plus, recent risks have included geopolitical tensions in the Middle East, excess investor optimism and the tendency of mid-year corrections during midterm election years.

However, trying to time the market can be treacherous, so we will continue keeping longer-term strategic targets in mind when contemplating making portfolio changes.

We continue to overweight domestic large caps along with sector overweight’s in Industrials, Materials, Healthcare and Energy

Europe and Asia mixed with economic data in focus

The European equity markets diverged, with traders digesting some inflation and retail sales data in the region, kicking off a busy week for the global economic calendar, which will include Thursday’s labor report in the U.S. and the European Central Bank’s monetary policy meeting. The Eurozone consumer price inflation estimate was projected at a 0.5% year-over-year rise for June, matching economists’ expectations and the estimate in May. However, a separate report showed German retail sales rose more than expected in May.

Stocks in Asia also finished mixed ahead of a busy week for the global economic calendar, including tomorrow’s June manufacturing reports out of China and a read on 2Q business sentiment in Japan. Moreover, sentiment remained in check as geopolitical tensions continued to garner attention. In economic news in the region today, Japan’s industrial production rebounded in May from April’s drop, but the rise was below expectations, while a separate report showed small business confidence improved slightly for June.

Market Insights 6/27/2014

Another late-session rally enabled the U.S. equity markets to close the day slightly higher as an upbeat read on domestic consumer sentiment seemingly failed to spark much conviction amid lingering geopolitical concerns and a slew of divergent global economic data. Treasuries and gold were nearly unchanged, while the U.S. dollar and crude oil prices traded lower.

The Dow Jones Industrial Average moved 7 points higher to 16,853

The S&P 500 Index increased 4 points (0.2%) to 1,961

The Nasdaq Composite gained 19 points (0.4%) to 4,398

In heavy volume, 1.1 billion shares were traded on the NYSE, and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil moved $0.10 lower to $105.74 per barrel, wholesale gasoline added $0.01 to $3.07 per gallon

The Bloomberg gold spot price increased $0.20 to $1,316.79 per ounce

Markets were mixed on the week, as the DJIA decreased 0.6%, the S&P 500 Index declined 0.1%, and the Nasdaq Composite Index increased 0.7%.

Consumer sentiment revised to a month-over-month improvement

The final University of Michigan Consumer Sentiment Index was revised higher to 82.5 for June from the preliminary report of 81.2, and compared to the 82.0 revision that economists surveyed by Bloomberg had estimated. The index improved from May’s 81.9 figure but is down from the 84.1 level reached in April. The favorable report was led by upward revisions to components pertaining to current conditions and the economic outlook. On inflation, the 1-year expectation was revised slightly higher to 3.1%, but was lower than May’s 3.3% figure, while the 5-year inflation outlook was unadjusted at 2.9%, following the 2.8% posted last month.

Treasuries were nearly unchanged, with the yields on the 2-year and 10-year notes flat at 0.46% and 2.53%, respectively, while the 30-year bond rate increased 1 basis point to 3.37%

In sector news, the recent buying of oil-related assets, including the energy sector in general, as tensions in Iraq have escalated is probably not a tactical investors should look to take advantage of. That doesn’t mean that worries and sentiment can’t drive the energy sector higher, but we don’t believe the fundamental story of the group has changed at this point and it seems unlikely that actual oil supplies will be reduced to any degree. However, this is a fluid situation and if the fundamental picture appears to be changing, we’ll revise that opinion as needed. We don’t believe oil prices will rise to a level that will be overly damaging to the consumer due to the situation in Iraq, but we do acknowledge that the risk of such an occurrence has risen.

In economic news, we believe the second half of 2014 will show improving growth in the U.S. economy, with recuperation in the job market a key factor. As a result of a tightening labor market, especially at the mid and higher end where specific skills are required, wages are finally starting to show signs of increasing. This puts more money in consumers’ pockets, increases demand, and pushes companies to invest and hire more—the start of a self-sustaining expansion. The Fed continues to express concerns about long-term unemployment as the reason they expect rates to remain quite low for some time. However, we believe an inflation scare is a risk for the second half as wages are increasing and the Consumer Price Index is ticking higher.

Jobs in focus, then time off in a shortened week

In a holiday-shortened week that has all U.S. markets closed on Friday and an early close on Thursday, the U.S. economic calendar will be full of data including the ISM Manufacturing Index, the ISM Non-Manufacturing Index, the ADP Employment Change, and nonfarm payrolls on Thursday. Other releases will include the Chicago Purchasing Manager Index, pending home sales, Dallas Fed Manufacturing Activity, construction spending, vehicle sales, factory orders, and the trade balance.

Europe mixed, Asia mostly lower

The European equity markets finished mixed, as the upbeat read on U.S. consumer sentiment followed a plethora of economic data in the region, while geopolitical concerns continued to linger. A preliminary read on German consumer price inflation rose slightly more than expected for June, while Eurozone economic, industrial, and consumer confidence reports all showed sentiment waned for this month. Meanwhile, Spain’s retail sales rose in May, France’s 1Q GDP growth was unrevised at a flat quarter-over-quarter rate, and U.K. 1Q GDP was unadjusted at a 0.8% q/q pace of expansion. Finally, France’s consumer spending rose more than projected for last month.

Stocks in Asia finished mostly to the downside as the U.S. markets dipped yesterday following some disappointing economic data, while some hawkish comments from a U.S. Fed official also dampened sentiment in the region. Japan offered a plethora of economic reports for May that showed the jobless rate unexpectedly ticked lower and retail sales topped expectations, while the nation’s household spending fell sharply and consumer price inflation rose. Meanwhile, Chinese stocks were lower amid liquidity concerns as money market rates rose, while a report showed the country’s industrial profit growth slowed last month. However, equities in Hong Kong ticked higher following yesterday’s upbeat trade report for May, which showed exports rebounded much more than anticipated, resulting in a narrower trade deficit than economists had anticipated. Elsewhere, a report showed South Korean industrial production fell more than expected for May.

Market Insights 6/26/2014

The domestic equity markets were successful in reclaiming most of their early-session losses, but were unable to break into positive territory in the final hour of trading following another round of softer-than-expected economic data on the heels of yesterday’s disappointing 1Q GDP revision.

Weekly initial jobless claims came in higher than estimates and personal spending missed forecasts, while growth in Midwest manufacturing activity unexpectedly decelerated. Treasuries were higher following the domestic reports. The U.S. dollar was flat, while gold and crude oil prices were lower.

The Dow Jones Industrial Average lost 21 points (0.1%) to 16,846

The S&P 500 Index decreased 2 points (0.1%) to 1,957

The Nasdaq Composite lost 1 point to 4,379

In moderate volume, 591 million shares were traded on the NYSE, and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil moved $0.66 lower to $105.84 per barrel, wholesale gasoline lost $0.01 to $3.06 per gallon

The Bloomberg gold spot price decreased $3.09 to $1,316.09 per ounce

Jobless claims dip, while personal income and spending mixed

Weekly initial jobless claims declined by 2,000 to 312,000 last week, above the 310,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 2,000 to 314,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 2,000 to 314,250, while continuing claims increased by 12,000 to 2,571,000, north of the forecast of economists, which called for a level of 2,565,000.

Personal income rose 0.4% month-over-month in May, matching the gain that economists had projected, and April’s 0.3% rise was unrevised. However, personal spending increased by 0.2% m/m in May, below expectations for a 0.4% rise, while April’s 0.1% decline was revised to a flat reading. The May savings rate as a percentage of disposable income rose to 4.8%, from April’s upwardly revised 4.5% rate.

The Kansas City Fed Manufacturing Activity Index showed growth in the Midwest sector surprisingly decelerated in June, declining to 6 from 10 in May, where economists had expected the index to remain, though a reading above zero depicts expansion.

Treasuries were higher following the data, with the yield on the 2-year note declining 2 basis points (bps) to 0.46%, while the yields on the 10-year note and the 30-year bond dropped 3 bps to 2.53% and 3.35%, respectively.

Tomorrow, the economic calendar will be light, yielding the release of the final University of Michigan Consumer Sentiment Index for June, with a reading of 82.0 expected, a slight increase from the preliminary report level of 81.2.

Europe lower, Asia mostly higher

The European equity markets finished mostly lower, amid some disappointing announcements from the U.K. banking sector, and as the U.S. markets found pressured following some lackluster data. Geopolitical turmoil continued to be in focus. Shares of Barclays PLC. (BCS $15) finished solidly lower after the New York Attorney General said it was suing the U.K. bank for allegedly deceiving investors in the marketing of the use of non-publicized security trading venues known as “dark pools.” Barclays responded by saying that it takes these allegations very seriously, and it has been cooperating with authorities, while examining this matter internally. Also, Barclays added that the integrity of the markets is a top priority of the company. In economic news, French consumer confidence unexpectedly improved for June.

Stocks in Asia finished mostly to the upside following yesterday’s advance in the U.S. that came despite a sharp downward revision to 1Q GDP, which showed the world’s largest economy contracted by the largest amount in five years, mostly due to brutal winter weather. Chinese stocks finished higher as initial public offerings (IPOs) of some companies rallied in their first trading day as China restarted its IPO program. Gains in Hong Kong came ahead of the nation’s May trade report after the closing bell, which showed exports rebounded much more than anticipated, resulting in a narrower trade deficit than economists had anticipated. Indian equities fell with energy stocks seeing some pressure as the government deferred a decision to increase prices for locally produced natural gas for the next three months.

Market Insights 6/25/2014

After a sluggish start to the trading session, the U.S. equity markets rebounded in afternoon action closing the day higher despite some disappointing domestic data and continued tensions in the Middle East. On the economic front, durable goods orders came in mostly below expectations, while 1Q GDP was revised to the biggest rate of contraction since 2009. Separate releases showed that weekly mortgage applications declined, however, business activity in both the services and manufacturing sectors jumped to record-high levels. Treasuries were higher following the reports. Gold and crude oil prices were higher, while the U.S. dollar was lower.

The Dow Jones Industrial Average gained 49 points (0.3%) to 16,868

The S&P 500 Index increased 10 points (0.5%) to 1,960

The Nasdaq Composite added 29 points (0.7%) to 4,380

In moderate volume, 653 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil moved $0.47 higher to $106.50 per barrel, wholesale gasoline lost $0.03 to $3.07 per gallon

The Bloomberg gold spot price increased $1.18 to $1,319.47 per ounce

The final look at GDP shows large downward revision

The third and final look at 1Q Gross Domestic Product, the broadest measure of economic output, showed the previously revised quarter-over-quarter annualized 1.0% decline was adjusted to a 2.9% pace of contraction—the largest quarterly decline since 1Q 2009. Economists had expected a downward revision to a 1.8% decline, and the pace of growth was down from the 2.6% expansion posted in 4Q. The larger-than-expected downward revision came as personal consumption was revised much lower than projected from the second reading of a 3.1% increase to a 1.0% rise, versus the 2.4% gain that was anticipated, and following the 3.3% increase recorded in 4Q.

On inflation, the GDP Price Index was unrevised at a rise of 1.3%, matching economists’ expectations, while the core PCE Index, which excludes food and energy, was unadjusted at a 1.2% increase, inline with economists’ forecasts.

Durable goods orders can be volatile and the first quarter GDP print was distorted by incredibly bad weather, so investors may be taking the reports lightly. The headline durable goods figure was held down by the lumpy defense component and business spending was better than expected, while economists are expecting a bounce back in the overall economy in the second quarter.

As the U.S. economy is rebounding from the very weak first quarter, with the possibility of self-sustaining growth in our sights. Most experts se businesses putting more cash to work through capital expenditures and hiring, reinforcing future economic growth. Extremely low stock-market volatility has some concerned about complacency among investors, but the number of folks worrying about investors (not worrying) says to us that complacency may not be quite as high as thought.

We believe U.S. stocks should continue to move generally higher although activity may remain sluggish through the summer and a correction is possible given both seasonal/election cycle tendencies and elevated optimistic sentiment.

The MBA Mortgage Application Index declined 1.0% last week, after the index fell 9.2% in the previous week. The decrease came as a 0.9% decline for the Refinance Index was accompanied by a 1.2% drop for the Purchase Index. However, the average 30-year mortgage rate declined 3 basis points to 4.33%.

Treasuries were higher following the data, with the yields on the 2-year and 10-year notes, as well as the 30-year bond all declining 2 bps to 0.48%, 2.56% and 3.38%, respectively.

Tomorrow, the U.S. economic calendar will offer reports on personal income, anticipated to increase 0.4% m/m in May, and personal spending, also expected to have grown 0.4% m/m. Weekly initial jobless claims will be reported, with economists expecting a slight decrease to a level of 310,000 from the prior week’s 312,000. Rounding out the day will be the release of the Kansas City Fed Manufacturing Activity Index for June, projected to be unchanged from the previous month’s reading of 10, with a reading above zero indicating expansionary activity in regional manufacturing.

Europe and Asia lower

The European equity markets finished lower, with festering concerns toward the turmoil in Iraq continuing to pressure sentiment, along with today’s lackluster data out of the U.S., offsetting some mostly upbeat economic reports in the region. The German GfK Consumer Confidence Index rose to 8.9 for July, from an upwardly revised 8.6 in June, where economists had expected it to remain. Italian retail sales unexpectedly rose in April, while reports showed French manufacturing and business confidence both surprisingly declined for this month.

Stocks in Asia finished broadly to the downside on the heels of yesterday’s afternoon stumble in the U.S. markets amid increased concerns over the turmoil in Iraq, which overshadowed some stronger-than-expected U.S. home sales and consumer confidence data. Japanese equities declined as geopolitical concerns were met with some skepticism regarding Japanese Prime Minister Abe’s latest reform and growth plan, which he discussed after the market closed on Tuesday. The plan includes a corporate tax cut, change in investment strategy for the country’s giant public pension plan, measures to increase participation of women in the workforce and boost employment of foreigners, changes to labor laws, agriculture reform, and increased corporate governance for listed companies. Chinese stocks came under some pressure amid lingering liquidity concerns as IPOs in the nation are set to begin trading tomorrow, per Bloomberg.

Market Insights 6/24/2014

U.S. equities tumbled midday to finish in negative territory, as mostly positive domestic economic data was again trumped by escalating conflicts overseas, as reports surfaced that Syrian jets began targeting insurgents in Iraq and violence continued in Ukraine, despite a cease-fire agreement.

New home sales jumped more than expected and consumer confidence came in at its highest level since January 2008, but manufacturing activity decelerated more than forecasts and housing prices were slightly below expectations. Treasuries finished mostly higher, along with gold, while crude oil prices were mixed.

The Dow Jones Industrial Average declined 119 points (0.7%) to 16,818

The S&P 500 Index fell 13 points (0.6%) to 1,950

The Nasdaq Composite lost 18 points (0.4%) to 4,350

In moderate volume, 645 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil moved $0.14 lower to $106.03 per barrel, wholesale gasoline gained $0.02 to $3.10 per gallon

The Bloomberg gold spot price rose $1.99 to $1,319.51 per ounce

New home sales and Consumer Confidence top expectations

New home sales rose 18.6% month-over-month (m/m) in May, to an annual rate of 504,000 units, from April’s downwardly revised 425,000 unit pace. Economists surveyed by Bloomberg had expected an increase to a 439,000 rate for last month. Within the report, the median home price rose 6.9% y/y and 4.6% m/m to $282,000. The inventory of new homes was 16.7% higher y/y, and remained at last month’s figure of 189,000 units, representing a rate of 4.5 months of supply at the current sales pace, from 5.3 months in April and matching the rate in May 2013. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings.

The Consumer Confidence Index improved to 85.2 in June, from a downwardly revised 82.2 in May, well above economists’ expectations of an improvement to 83.5. This was the highest level of consumer confidence since January 2008, as both components pertaining to expectations of business conditions and the current situation improved m/m.

The Richmond Fed Manufacturing Index showed growth in activity for the Mid-Atlantic region unexpectedly decelerated in June, falling to 3.0 in June from May’s 7.0 level, where economists had expected it to remain, with readings above zero denoting expansion. The report showed capacity utilization jumped into expansion territory and growth in new order volume accelerated slightly, while employment and wage growth both slowed and order backlog fell to contraction territory.

Treasuries finished mostly higher, as the yield on the 2-year note was nearly unchanged at 0.47%, while the yield on the 10-year note declined 5 basis points (bps) to 2.58% and the 30-year bond rate fell 6 bps to 3.40%.

Plethora of data on tap tomorrow

Tomorrow’s US economic calendar will be headlined by the release of durable goods orders, forecasted to be flat month-over-month in May, after beating estimates in April and March by rising 0.8% and 3.6%, respectively. Excluding transportation, orders are expected to increase 0.3%, after gaining 0.1% in April, and orders for nondefense capital goods excluding aircraft, considered a good proxy for business spending, are anticipated to gain 0.5% on the heels of a disappointing 1.2% fall in April.

Also on tomorrow’s docket, the third and final look at 1Q Gross Domestic Product (GDP), the broadest measure of economic output, is expected to be revised to a 1.8% quarter-over-quarter pace of contraction from the 1.0% shortfall posted earlier, while personal consumption is forecasted to be lowered to a rate of 2.5% from the 3.1% originally reported, while the GDP Price Index and the core PCE index are anticipated to remain at their respective levels of 1.3% and 1.2% growth.

Europe mixed as German sentiment report misses, Asia higher

The European equity markets finished mixed, with sentiment being stymied by a disappointing read on German business confidence and continued focus on the turmoil in Iraq, while the upbeat housing and consumer confidence data in the U.S. lent some support. The German Business Climate Index, a survey of 7,000 executives, declined to 109.7 in June, from 110.4 in May, and compared to the 110.3 level that economists had anticipated. The index hit the lowest level of the year, on the heels of yesterday’s disappointing read on Eurozone business activity.

However, concerns toward the Ukraine/Russia tensions appeared to ease somewhat as separatist leaders agreed to a temporary ceasefire and Russian President Putin asked the country’s parliament to revoke Russia’s right to send troops to Ukraine, per Reuters. Finally, Bank of England Governor Carney noted that there was more slack in the nation’s labor market than expected, and this would be needed to be absorbed before interest rates started to rise, appearing to be more dovish compared to his recent comments that suggested interest rates could rise sooner than some had expected.

However, stocks in Asia finished modestly higher following yesterday’s stronger-than-expected reads on housing sales and manufacturing activity in the U.S. Stocks in Japan overcame early losses as traders awaited Prime Minister Abe’s press conference, in which he was expected to discuss his growth plan as part of his “third arrow” strategy for reviving the economy that was released last week. Meanwhile, economic news in the region was non-existent, but lingering geopolitical concerns kept gains in check across the region, and uneasiness toward the mining sector and concerns about consumer confidence pressured Australia’s markets.

Market Insights 6/23/2014

Despite favorable U.S. reports on existing home sales and manufacturing activity U.S. equities finished the first day of the week nearly flat. Traders digested some disappointing Eurozone business activity reports and upbeat manufacturing data out of China and Japan. Treasuries finished nearly flat, gold was higher, while crude oil prices and the U.S. dollar were lower.

The Dow Jones Industrial Average declined 10 points (0.1%) to 16,937

The S&P 500 Index was unchanged at 1,963

The Nasdaq Composite ticked nearly 1 point higher to 4,369

In light volume, 572 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil moved $0.66 lower to $106.17 per barrel, wholesale gasoline lost $0.02 to $3.08 per gallon

The Bloomberg gold spot price rose $1.66 to $1,316.48 per ounce

Existing home sales surprise to the upside

Existing-home sales rose more than expected in May, by 4.9% month-over-month to a 4.89 million annual rate, the second-straight monthly sales gain, compared to the 4.74 million rate that was expected, while April’s figure was revised slightly higher to a 4.66 million unit pace from the initially reported 4.65 million pace. The median existing-home price rose 5.1% from a year ago to $213,400. The increase in sales was driven by single-family home sales, up 5.7%, while multi-family sales were unchanged m/m. Sales of existing homes reflect closings from contracts entered one-to-two months earlier.

There have been a number of headwinds for housing, but some are fading, including weather, mortgage rates and inventories. The good news is that housing is less of a driver of economic growth than in the 1990s. While housing may become less of a drag on the economy as these headwinds fade, a meaningful pick-up may not be likely in the immediate horizon, due to the low rate of household formation and “real” mortgage rates rising. However, longer-term, demographics should eventually push household formation and housing starts higher.

Treasuries finished mostly flat, as the yields on the 2-year and 10-year notes were nearly unchanged at 0.46% and 2.60%, respectively, while the 30-year bond rate dipped 1 basis point to 3.42%

More housing data will come tomorrow in the form of new home sales, forecasted to rise 1.4% m/m during May at a pace of 439,000 units from the 433,000 registered in April, as well as the S&P/Case-Shiller Home Price Index, expected to show an 11.5% year-over-year increase during April, and a 0.8% m/m rise on a seasonally-adjusted basis. Other items on tomorrow’s domestic economic calendar are the Richmond Fed Manufacturing Index, with economists anticipating a reading of 7 for June, matching May’s figure, with a reading above zero denoting expansion in activity, and Consumer Confidence, forecasted to show a slight increase in confidence during June to a level of 83.5 from the 83.0 posted the month prior.

Europe lower, Asia mixed following manufacturing reports

The European equity markets finished lower, with festering Iraq concerns and some disappointing business activity reports in the region more than offsetting some upbeat economic data out of the U.S., China and Japan. The preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in both the manufacturing and services sectors—declined to 52.8 in June from 53.5 in May, and compared to the 53.4 level that economists had projected, though a reading above 50 denotes expansion. The larger-than-expected deceleration in growth for Eurozone output came as expansion in German services and manufacturing sector activity came in below expectations, while French activity in the sectors continued to contract.

Stocks in Asia finished mixed, despite the upbeat manufacturing reports out of China and Japan, while festering caution amid the intensified turmoil in Iraq and the coinciding rally in oil prices kept sentiment hamstrung. Markit’s preliminary Japan Manufacturing PMI Index rose to 51.1 in June, from 49.9 in May, and compared to the 50.1 level that economists had projected, snapping a two-month streak of figures below 50, which denote contraction.

Elsewhere, the preliminary HSBC China Manufacturing PMI Index increased to 50.8 this month, from 49.4 in May, and compared to the 49.7 level that economists had anticipated. This was the first sign of expansion for the index since December, depicted by a reading above 50. However, lingering liquidity concerns sapped sentiment, as IPOs are set to hit the market and money market rates rose in Hong Kong, while property market concerns also exacerbated sentiment and political tension between Hong Kong and the mainland further drained conviction, per Bloomberg.

Market Insights 6/20/2014

U.S. equities finished out the week in positive fashion, with the Dow and S&P 500 notching new record highs, courtesy of residual fuel from Wednesday’s reaction to the Federal Reserve’s monetary policy decision.

Continued turmoil in the Middle East and an empty domestic economic calendar kept a lid on today’s gains, while volume was high as a result of today being quadruple witching day—the simultaneous expiration of stock and index futures and options contracts. Treasuries finished mixed, as did crude oil prices, while gold was lower and the U.S. dollar was higher.

The Dow Jones Industrial Average gained 27 points (0.2%) to 16,948

The S&P 500 Index added 3 points (0.2%) to 1,963

The Nasdaq Composite rose 9 points (0.2%) to 4,368

In heavy volume as a result of quadruple-witching, 1.6 billion shares were traded on the NYSE, and 2.5 billion shares changed hands on the Nasdaq

WTI crude oil moved $0.78 higher to $106.83 per barrel, wholesale gasoline was unchanged at $3.13 per gallon

The Bloomberg gold spot price declined $6.17 to $1,314.22 per ounce

Markets were higher on the week, as the DJIA rose 1.0%, the S&P 500 Index advanced 1.4%, and the Nasdaq Composite Index increased 1.3%

Economic News Quiet Today

Treasuries finished mixed, while the U.S. economic calendar was void of any releases today, as the yield on the 2-year note rose 1 basis point to 0.46% and the yield on the 10-year note was flat at 2.62%, while the 30-year bond rate declined 2 bps to 3.44%.

The domestic equity markets were higher on the week, with the Dow and S&P 500 back in record high territory, showing some relative resiliency in the face of escalated turmoil in the Middle East, which has sparked a rally in oil prices. The bulk of the week’s advance came courtesy of a rally on Wednesday after the Federal Reserve’s monetary policy decision, in which it expectedly reduced the pace of its bond buying program and kept its short-term interest rate target near zero, while offering a mostly positive assessment of the economy. The Fed maintained a dovish tone even after Tuesday’s read on consumer price inflation came in hotter than expected for May.

Europe and Asia close out the week mixed on data and geopolitical concerns

Stocks in Europe and Asia finished mixed to end the week, amid elevated concerns about the turmoil in Iraq ahead of the weekend and amid some data on the economic front. In economic news across the pond, Italian industrial orders rose more than expected in April, German producer price inflation unexpectedly declined in May, and U.K. public sector net borrowing rose at a level below expectations for last month. Economic news further east was non-existent, but investors may have had an eye on Chinese and Japanese manufacturing reports that are set to be released over the weekend, while liquidity concerns continued as China restarts its market for initial public offerings (IPOs), as well as property market uneasiness, exacerbated by a report that showed the nation’s home prices declined for the first time in almost two years.

Market Insights 6/19/2014

Despite spending much of the session in negative territory, the U.S. equity markets finished the day mixed and slightly higher on the heels of yesterday’s afternoon rally, sparked by the Central Bank stating it will continue to be accommodative and offering an upbeat economic assessment. Treasuries were mostly lower following economic reports that showed favorable reads on weekly jobless claims, regional manufacturing growth and leading indicators. Gold rallied and crude oil prices were higher, while the U.S. dollar was lower.

The Dow Jones Industrial Average increased 15 points (0.1%) to 16,921

The S&P 500 Index was 3 points higher (0.1%) at 1,959

The Nasdaq Composite lost 4 points (0.1%) to 4,359

In moderate volume, 635 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil added $0.46 to $106.05 per barrel, wholesale gasoline gained $0.03 to $3.13 per gallon

The Bloomberg gold spot price rallied $40.69 to $1,318.40 per ounce

Jobless claims decline, while regional manufacturing growth surprisingly accelerates

Weekly initial jobless claims declined by 6,000 to 312,000 last week, just below the 313,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 1,000 to 318,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 3,750 to 311,750, while continuing claims dropped by 54,000 to 2,561,000, south of the forecast of economists, which called for a level of 2,600,000.

The Philly Fed Manufacturing Index showed growth in activity for the mid-Atlantic region unexpectedly accelerated in June, rising to 17.8—the highest since September 2013—from 15.4 in May and compared to the decrease to 14.0 that was forecasted. Readings above zero denote expansion. The report showed growth new orders and shipments, along with employment, increased, while prices paid jumped to 35.0 from 23.0, and has increased 24 points over the past two months, while prices received declined from 17.0 to 14.1.

The Conference Board’s Index of Leading Economic Indicators increased 0.5% month-over-month in May, just below economists’ projections of 0.6% growth, while April’s 0.4% gain was revised to a 0.3% rise. The report was led by positive contributions from components pertaining to jobless claims, the yield curve and credit, more than offsetting a negative contribution from building permits.

Treasuries are lower in afternoon action, with the yield on the 2-year note ticking 1 basis point higher to 0.45%, the yield on the 10-year note increasing 2 bps to 2.60%, and the 30-year bond rate gaining 3 bps to 3.43%. Bond yields are rising after yesterday’s declines that came from the Federal Reserve’s monetary policy decision, in which it expectedly reduced the pace of its bond buying program and kept its short-term target interest rate near zero, while offering a mostly positive assessment of the economy.

The Fed’s slower pace of bond buying means that its influence on Treasury yields will continue to decline, while the pace of economic growth and inflation prospects are likely to play a larger role in setting policy. With the Fed using more qualitative guidance, we think it will be important to pay attention to each release of the economic projections to get an idea of when the Fed might start hiking rates and how high they may go. We still think a hike sometime in 2015 is most likely. All in all, our view is that the Fed is still committed to a “measured” approach to changing policy.

Tomorrow, the U.S. economic calendar will be void of any major releases.

Europe higher, Asia mixed

The European equity markets finished higher, buoyed by yesterday’s monetary policy decision by the U.S. Federal Reserve, which maintained a dovish tone, despite some signs of an uptick in inflation, while also offering a relatively positive assessment on the U.S. economy. Meanwhile, stocks in the region shrugged off lingering concerns about the intensifying turmoil in Iraq. In economic news, U.K. retail sales in May declined m/m.

Stocks in Asia finished mixed amid the festering turmoil in Iraq, while the positive reaction to the U.S. Federal Reserve’s monetary policy decision yesterday helped offset some of the geopolitical concerns. Chinese stocks finished lower, despite China’s Premier Li saying yesterday that the nation’s economy will not suffer a hard landing. Resurfaced concerns about a liquidity drain weighed on the markets in the region, as China restarts its market for initial public offerings (IPOs), per Bloomberg. Finally, Indian equities extended their recent retreat from record highs as the coinciding rally in oil prices amid the escalated turmoil in Iraq has stoked inflation concerns, along with disappointing rainfall during the monsoon.

Market Insights 6/18/2014

The U.S. equity markets closed the trading day higher despite a slow start to the session amid the rising tensions in Iraq and a decline in weekly mortgage applications.

Stocks rose sharply following the afternoon conclusion of the Federal Reserve’s monetary policy meeting and comments from Chairwoman Yellen, which revealed that information received since the Committee last met indicates that growth in economic activity has rebounded in recent months.

Treasuries were higher following the domestic developments. Gold was higher, while crude oil prices were mixed and the U.S. dollar was lower.

The Dow Jones Industrial Average (DJIA) gained 98 points (0.6%) to 16,907

The S&P 500 Index was 15 points higher (0.8%) to 1,957

The Nasdaq Composite rose 26 points (0.6%) to 4,363

In moderate volume, 627 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.39 to $105.97 per barrel, wholesale gasoline added $0.01 to $3.10 per gallon

The Bloomberg gold spot price increased $4.39 to $1,274.71 per ounce

Fed continues to taper, while mortgage applications drop

The statement from the two-day Federal Open Market Committee (FOMC) meeting was released at 2:00 p.m. ET, where the Fed announced that information received since the Committee met in April indicates that growth in economic activity has rebounded in recent months. As expected, the Central Bank stated that it will continue to reduce the pace of its current stimulus program by $10 billion to $35 billion a month. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month.

Additionally, the Committee reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate, and in determining how long to maintain the current exceptionally low target range for the federal funds rate, the Committee will assess progress toward its objectives of maximum employment and 2% inflation by taking into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

The MBA Mortgage Application Index fell 9.2% last week, after the index rose 10.3% in the previous week. The decrease came as a 12.7% drop for the Refinance Index was accompanied by a 4.7% decline for the Purchase Index. The average 30-year mortgage rate increased 2 basis points to 4.36%.

Treasuries were higher, with the yield on the 2-year note declining 3 bps to 0.45%, the yield on the 10-year note losing 6 bps to 2.59% and the 30-year bond slipping 4 bps to 3.41%.

Tomorrow, the U.S. economic calendar will offer a look at weekly initial jobless claims, expected to decrease by 4,000, to a level of 313,000. Additionally, the release of the Philly Fed Manufacturing Index will come after the opening bell, anticipated to decrease slightly to a level of 14.0 for June, after registering 15.4 in May, with a reading above zero denoting expansion in manufacturing activity for the mid-Atlantic region. Lastly, the Index of Leading Economic Indicators (LEI) will be released, forecasted to rise 0.6% during May following the 0.4% uptick seen in April.

Europe ticked higher in cautious trading, while Asia was mixed

The European equity markets finished mostly to the upside, with oil and gas stocks moving higher amid the recent rise in oil prices as tensions in Iraq intensify. However, conviction was likely constrained ahead of the monetary policy decision from the U.S. Federal Reserve delivered today.

Meanwhile, the Bank of England (BoE) was in focus as the minutes from its monetary policy meeting earlier this month showed policymakers were surprised by indications regarding investors’ expectations of a possible rate hike later this year. Although the BoE voted unanimously to keep its benchmark interest rate at a record low of 0.5%, the release showed the “relatively low probability attached to a bank rate increase this year implied by some financial market prices was somewhat surprising.”

The comments may not have generated much of a reaction as last week BoE Governor Carney noted that rate increases may start earlier than some had anticipated

Stocks in Asia finished mixed on continued caution amid the escalating turmoil in Iraq and ahead of the monetary policy decision from the U.S. Federal Reserve. However, Japanese equities rose as the yen held on to yesterday’s weakness to overshadow a disappointing read on the nation’s exports for May. Japanese exports fell 2.7% y/y, after rising 5.1% in April, and compared to the 1.3% decline that economists had projected, while imports unexpectedly decreased, resulting in the nation’s trade deficit widening by a smaller amount than anticipated.

China reported that housing prices declined month-over-month for the first time in two years, per Bloomberg. Indian stocks fell amid concerns that the recent spike in oil prices due to the intensified tensions in the Middle East may stoke inflation in the nation that imports about 80% of its fuel, per Bloomberg, which also noted concerns about weaker-than-expected rainfall from the monsoon, which has been well below average this month.

Yellen Forecasts a Slow Rise in Interest Rates

Federal Reserve Chairwoman Janet Yellen was more kitten than lion on Wednesday, sticking to her guns that the central bank can hold short-term interest rates steady until the middle of next year and then raise them gradually, and downplaying recent strong inflation readings. In its latest dot-plot forecast, the Fed did see a slightly faster pace of tightening in the cards. But the slight increase was overlooked by the market that focused more on Yellen’s remark that the recent inflation data was “noisy.”

Yellen suggested the Fed is comfortable that it can hold rates steady for a considerable time after it ends its asset purchase program. Economists said the latest Fed projections point to a first rate hike in June 2015. Short-term interest rates have been steady near zero since December 2008. Investors took Yellen’s remarks as “a green light” to continue to expect low bond yields.

The Fed chairwoman said that investors should not take ultra-low rates for granted. It is important “for market participants to recognize that there is uncertainty about what the path of interest rates, short-term rates, will be, and that’s necessary because there’s uncertainty about what the path of the economy will be,” she said.

As expected, the central bank trimmed bond purchases by another $10 billion, staying on track to end its long-running stimulus program before the end of the year. This is the fifth straight meeting with a $10 billion cut in the asset purchases. The Fed will now buy $35 billion a month in Treasuries and mortgage-related assets, starting in July.

Fed officials tweaked their forecast for interest rates at the end of 2015 from the bank’s 1% estimate in March. The Fed now sees the fed funds rate closer to 1.25% by then. The dot plot also showed the fed funds rate was likely to rise closer to 2.5% in 2016 instead of 2.25% as previously predicted.

At the same time, the Fed lowered its forecast for “longer run” interest rates to 3.75% from closer to 4%. The last change is important because it signals the central bank won’t push up interest rates all that high during this recovery phase. Most Fed officials are reluctant to raise interest rates too rapidly too soon because the level of unemployment is still historically high almost five years into an economic recovery, especially among people who have been out of work six months or longer.

Even the surprising sharply drop in the official U.S. unemployment rate over the past year to 6.3% has not persuaded Fed officials that the labor market is recovering as fast as the central bank hopes.

Some of the drop reflects people leaving the labor force because they’re too discouraged about finding work, Yellen said in a press conference after the bank meeting. “We’ve had an unusually long duration of unemployment,” she said.

Economic rebound

The central bank’s policy statement that was nearly identical to the previous one issued in April. Only its description of the economy was changed — and in a way to make it more upbeat.

The Fed said that growth “has rebounded in recent months” and the labor market indicators “generally showed further improvement.” The central bankers noted that business fixed investment had “resumed its advance” after saying that it “edged down” in April.

The only negative comment was that the housing sector “remained slow.” The Fed repeated that it expects to hold rates steady for a considerable time after its bond-buying program ends. The central bank again stressed that even after the Fed starts to tighten, economic conditions may warrant keeping rates below normal.

Bowing to the inevitable, the Fed trimmed its growth forecast for 2014 because of the weak report on gross domestic product for the first quarter. But that weakness did not cause any revisions to the stronger growth of above 3% in 2015. The Fed trimmed its forecast for unemployment, but officials did not materially change their forecast for inflation despite some higher-than-expected inflation data over the past three months. Inflation would stay at or below 2% through 2016.

Yellen said she believes the recent spike in consumer inflation reflect some “noise” that’s exaggerated the upward rise in prices. The risks of higher inflation still remain low, she said.

The vote by the Fed policy committee was 10-0. There are two vacancies on the Fed Board of Governors.