Economic Update 9-8-2014
- Economic data for the week came in fairly strong, highlighted by the ISM manufacturing report, which is closely watched by markets. However, the August employment situation report for August was a bit disappointing.
- S. stocks gained on decent economic data and eased geopolitical tensions; bonds lagged on higher rates.
U.S. equities moved slowly higher on the week. From a sector standpoint, consumer staples led with a 1% gain, followed by utilities, while energy fell back, losing almost -2% on the week. Large-caps continued to outperform small-caps domestically.
Developed market foreign stocks were mixed, with half-percent gains in Europe and Japan, while the U.K. fell backward by almost a percent. Emerging markets were the leaders again on the week, this time led by Russia, China and Poland—the former due to a reported cease-fire with Ukraine (strange being that they were never an official participant, but involved nonetheless).
The seesaw in fixed income continued, with mid- to long-rates moving higher by 10-15 bps on some stronger economic growth numbers—consequently, long bonds suffered the brunt of the damage, but the higher volatility didn’t help any segments to a positive degree, at least in the U.S. Some areas like high yield corporate were lower on a seasonal change from summer slumber to an autumn-like higher-issuance mode, creating some spread widening.
The ECB cut its benchmark rate from 0.10% to 0.05% as well as rolled out plans to purchase private asset- and mortgage-backed securities, but stopped short of a full ‘QE.’ As expected, most European bonds gained on lower yields following the announcement, with the periphery leading the way (Italian bonds, for one, have experienced a great run over the past 12 months).
Real estate groups were generally in the positive on the week, in line with broader equities. U.S. core REITs gained just below a percent on the week, followed by Asia at half that pace, and Europe faring worst with a loss. Obviously, weak European tenant demand fears go along with a weak economic growth, rendering this fairly easy to explain.
Broad commodities indexes were down about a percent on the week, about the same magnitude as the increase in the U.S. dollar on the week. Industrial metals, particularly nickel, led the way. On the downside, grains, cocoa and natural gas fared weakest—in the case of natural gas, a dramatic -7% decline—on forecasts of cooler summer weather. Strong crop harvest forecasts have resulted in potentially higher supplies and price declines in the agricultural group as of late. Good for food prices/inflation fears, bad for commodity investors.
The unemployment rate fell a tenth to 6.1%, inline with consensus. This was largely due to a one-tenth decline in the labor force participation rate, to 62.8%. The household employment component showed a gain of +16k, while the ‘payroll consistent’ version of this to account for definitional differences, equated to a decline of -41k jobs. The U-6 underemployment measure improved two-tenths to 12.0%, the lowest point since Fall 2008 when the graph was moving in the opposite direction higher. Average hourly earnings rose +0.2% on the month, which was on target with expected, bringing the year-over-year gain to +2.1% (even more tempered than the unit labor cost report noted earlier). The average workweek came in at an unchanged 34.5 hours.
|Period ending 9/5/2014||1 Week (%)||YTD (%)|
|BarCap U.S. Aggregate||-0.46||4.32|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
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.
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