Economic Update

• Stronger reading in May’s preliminary Market PMI index brought optimism to the second half of this year.
• Housing sales data were mixed: New home sales rebounded in April after two months of declines; and existing house sales were up less than expected, staying well below the unit level in April 2013.
• Initial jobless claims came in weaker than the consensus expectation with a small improvement for the 4-week moving average and continuing claims.
• U.S. tech and small cap stocks helped the market approach an all-time high before the long Memorial Day weekend.

Heading into Memorial Day weekend, U.S. equity markets were led higher by technology and small cap stocks.  Small cap stocks outperformed mid cap and large cap stocks.  Cyclical and economic sensitive sectors beat defensive sectors.  Technology, consumer cyclical and financial sectors led the market, all generating north of a 1.5% return, while utilities, consumer defensive and telecom sectors lagged.  In general, growth-style outperformed value-style.

Outside the U.S., international developed stocks underperformed U.S. and emerging market stocks.  The MSCI Europe index lagged the MSCI Pacific index by 55 bps for the week.

In emerging markets, after a decade of negotiations, Russia signed a 30-year agreement to supply natural gas to China.  The deal was reported to be worth $400 billion and included items helping finance Russia’s billions of dollars of pipelines and facilities in Siberia.

Amid slow liquidity entering into the Memorial holiday, BarCap U.S. Aggregate Bond index was flat last week.  U.S. Treasury yields barely moved.  The release of the FOMC’s late-April meeting minutes did not cause major surprises.  Participants’ views on the economic outlook were unchanged.  The biggest news on the investment-grade corporate bond markets was that AT&T will issue new debts to partially fund its announced acquisition of DirectTV.

Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds lost 53 bps, underperforming emerging market bonds by 96 bps.  Investors had concerns related to the European parliamentary elections during the weekend.  Anti-European Union and euro-skeptic parties gained strong votes in France, Greece and Denmark.

Foreign REITs returned 23 bps, outperforming U.S. REITs by 77 bps in the week.  Commodity returns were up 35 bps measured by the DJ-UBS index.  The energy heavy S&P GSCI Commodity index outperformed the DJ-UBS commodity index, delivering 85 bps.