Weekly Economic Update

Economic Update:

  • Economic data looked a bit better, as winter weather problems continue to dissipate towards more normal ordering and manufacturing conditions.  However, some data remains lackluster (GDP for the first quarter was revised down into negative territory).  The ECB stands poised to ease to stem deflation fears and spur economic growth.
  • Markets reached new all-time highs again, as large-caps outperformed small-caps.  Bonds also gained as interest rates fell to their lowest levels in months.

U.S. stocks experienced a generally flat-to-slightly positive week, as the S&P set a new all-time high again.  From a sector standpoint, defensive utilities and consumer staples outperformed, while consumer discretionary and industrials lagged by gaining just under a percent.  While all market caps were sharply higher, large-caps outperformed small-caps again and the Russell remains in negative territory on the year.

In foreign markets, Europe and Japan gained a percent and a half while the U.K. was flat.  In Japan, business confidence and employment have improved, demonstrating that the recent sales tax increase may not have been as damaging as first feared.  European peripherals such as Italy and Spain performed well, in light of an upcoming ECB meeting where expectations are for an easing of monetary conditions.  German unemployment rose by 25k, which was higher than expected, but didn’t excessively weigh due to the upcoming policy meetings.

Emerging markets generally lost ground on the week in several regions.  Indian stocks fell back several percent in a reversal of the sharp election rally in recent weeks.  Russia moved higher early with discussion of a trading bloc with several former Soviet republics following the large deal with China for natural gas exports the previous week but came back to earth.  The Ukrainian election of a moderate private sector-oriented candidate (billionaire chocolate magnate) who seemed somewhat ambivalent to leaning towards the West or East appeared to placate the situation in that part of the world for the time being.  Thailand experienced a coup again (the week before last, actually), but this happened so many times—as in a dozen times since 1930—that markets weren’t exactly fazed.

The ten largest banks in China reported a large increase in overdue loans (588 billion yuan ~ $94 billion worth) last year, which was a 21% increase over the prior year and highest level since 2009.  It seems government efforts to thwart ‘shadow banking’ activities have created a more difficult environment for the paying back of more traditional bank loans.  The overheated property market seems especially vulnerable, as the president of the country’s biggest developer noted the ‘golden era has passed,’ and is focusing more on owner-occupiers rather than investors.

Will this be a Bear Stearns-like tipping point?  Many economists don’t think so.  But the Chinese have been aware of this growing problem for some time, haven’t really addressed it until recently, but may need to use a portion of their vast foreign exchange reserves to shore up the system.  The good thing is that there is an ample amount of reserves to do so, for now.  As China’s economy slows to a more moderate pace, their status as the world’s growth engine may erode.

Bonds were unchanged on the front part of the yield curve, but gained a bit on the long end by a few basis points, despite almost $100 billion in new supply last week.  Consequentially, long treasuries ended up with the best returns, gaining a percent, followed by strong results from international developed and emerging market debt—which generally gained over a percent.  Several European areas gained on hopes for ECB easing measures this week (i.e., negative interest rates discussed earlier) to boost economic growth and calm deflation fears.  Other sectors gained a few basis points, with the exception of floating rate and Japanese debt, which lost by a few ticks.  The yield on the 10-year treasury ended the week/month at 2.48%, which is quite low, and even lower from a ‘real’ after-inflation perspective.  This drop has certainly bucked the growing ‘smart money’ view that rates are too low, with Consensus Economics estimates for rates 12-months out to be in the 3.4-3.8% range.

Real estate returns were led by Europe and U.S. mortgages, the latter due to strength in bonds, while Asia and U.S. retail and residential lagged—albeit still with positive returns.

Commodity indexes were down a few percent on the week, with negative returns from energy, precious metals and agricultural commodities.  Natural gas contracts were sharply higher, bucking the trend, related to the Russian-Chinese deal to set a floor on prices.  Aluminum and cocoa were also higher on the week, likely as a contrarian response to low pricing and crop shortages.  Gold and silver were the worst performing assets on the week, for gold the largest weekly drop in eight months and silver in 11 months, as investors moved cash to equities and Ukrainian geopolitical tensions eased.

 

Period ending 5/30/2014 1 Week (%) YTD (%)
DJIA 0.73 1.92
S&P 500 1.24 4.97
Russell 2000 0.77 -2.02
MSCI-EAFE 0.97 3.78
MSCI-EM -1.46 2.49
BarCap U.S. Aggregate 0.37 3.87

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2013 0.07 0.38 1.75 3.04 3.96
5/23/2014 0.04 0.37 1.55 2.54 3.40
5/30/2014 0.04 0.37 1.54 2.48 3.33

 

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

 The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  FocusPoint Solutions, Inc. is a registered investment advisor.

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