Market and economic news last week was busy and upbeat. In the capital markets, U.S. Treasuries and gold sold off, but everything else went up. On the global economic front, there were plenty of positive signs as well.
Here are a few highlights:
1. The U.S. economy continues to expand
The Fed’s Beige Book confirms that the economy no longer needs extraordinary support from the Fed. The report showed the economy continuing to expand and the labor market continuing to improve. The pace of growth was characterized as “moderate” in seven districts and “modest” in five – a broad and robust economic recovery (weak nowhere).
2. U.S. job market reports met or exceeded expectations
The “establishment” report showed the economy adding 217k jobs (prior months revised -6k), while the (household survey) unemployment rate was flat at 6.3% after dropping sharply last month. That said, having more people working (as reported by the businesses actually paying them) matters more than a flat unemployment rate (which is created by extrapolating from a survey of 60k people to the whole country). Average hourly earnings are up 2.1% year over year (y/y) – just above inflation and initial unemployment claims (4-week moving average) fell to 310k, a new cycle low.
- Both the Markit PMI manufacturing and ISM non-manufacturing (services, construction, and mining) indices rose, and April factory orders were a little better than expected. The inventory/sales ratio was unchanged.
- Construction spending came in on the soft side, up 0.2% month over month (m/m), but it was the third consecutive increase; orders are up 8.6% y/y.
- May motor vehicle sales rose to a 16.8 mm annual rate, the highest since February 2007. Sales of U.S.-made vehicles rose to a 13.3 mm rate, the highest since January 2006.
- Credit cards (outstanding revolving credit) debt posted a huge $8.8 billion gain.
- Total consumer credit rose a record $26.8 billion as non-revolving credit (primarily car and student loan) rose $18 billion.
- The savings rate is trending down as consumer confidence rises. Until now, the deleveraging of the consumer has kept spending growth subdued. If behavior changes, GDP growth will accelerate…but remember: jobs and earned income are what matter most: treat debt-fueled consumption warily.
4. Europe is slowly getting better
- Q1 Gross Domestic Product (GDP) was up 0.9% y/y and unemployment declined from 11.8% to 11.7%. It reached 5.2% in Germany and 25.1% in Spain.
- The May services PMI was trimmed to 53.2. The manufacturing PMI slid to 52.2 on German (52.3) softness; on the upside, Spain (52.9) hit a four-year high.
- May flash CPI fell to 0.5% y/y. Core was 0.7% y/y. Falling inflation or deflation was present in most categories. This report ran counter to expectations that seasonal effects had depressed earlier readings and that a rebound would be seen in the May data. If there is no bottom in the data, a powerful trend toward deflation remains intact. This data release was broadly viewed as making an ECB rate cut later in the week almost 100% certain.
Last week Pioneer’s Group CIO, Giordano Lombardo provided an update on the ECB’s June 5 announcements. For a more detailed look at recent ECB actions and their potential impact, click here.
Of course, not everyone was pleased by the ECB’s move
- Bild, Germany’s largest-circulation newspaper had this headline at the top of page one: “How bad will old age poverty get?
- Bild has a point: a low risk-free interest rate punishes elderly savers (whose “appropriate” asset allocation is risk-averse). It’s also happening here in the U.S. and in Japan.
The ISM manufacturing report added unexpected volatility to markets.
- ISM initially released a May manufacturing index showing the pace of growth slowing (down from 54.9 to 53.2); after two corrections, the number (55.4) showed accelerating growth.
- Those who sold on the initial report were wrong-footed and suffered losses as the market fell, then rose, in response to the data.
Last Week in The Capital Markets
- Currencies: The Euro was up 0.1% against the dollar for the week – but it was exciting intra-week…more below. The Chinese Yuan ticked down 0.1% against the dollar. The Japanese Yen fell 0.7%; most emerging market (EM) currencies were up against the dollar.
- Bonds: The 10-year U.S. Treasury yield rose 12 basis points (bps) to 2.60% (it had touched 2.40 in late May); the 10-year TIP yield rose 14 bps to 0.40%. The BoA Merrill Lynch High Yield Index fell 22 bps to 352. German 10-year yields fell 1 bps to 1.35%, but peripheral sovereign yields dropped in response to the ECB actions.
- Equities: The S&P 500 Index ended the week up 1.3%, its third consecutive weekly gain of over 1%. Within the S&P 500, cyclicals and small-caps beat defensives: Financials and Consumer Discretionary led; Telecoms and Consumer Staples lagged. MSCI Japan continues to look like a leveraged inverse bet on the Yen; with the Yen down, MSCI Japan was up almost 2%. MSCI Emerging Markets was also up almost 2%; India and Russia, each up almost 5%, led again. MSCI Europe was up just under 1%; “Club Med” outperformed France and Germany.
- Commodities: WTI was almost flat for the week, down $0.16 to $102.77. Gold slipped another $3 (0.3%) to below $1,250.
Data Sources: The Wall Street Journal, Financial Times, Bloomberg.