Weekly Economic Update

Economic Update 11-24-2014

  • A busy week of economic data releases: modest weaker industrial production and below consensus expected capacity utilization in October; absent deflationary risk, both domestic PPI and CPI in October came in slightly above the consensus expectation, but remained within the Fed’s inflation target.
  • Mixed housing market data in October showed disappointing housing starts with stronger building permits number and an upside in existing-home sales.
  • U.S. job markets continued to slowly improve as initial jobless claims stayed below 300k for the tenth week, the first such stretch since 2000.  The 4-week moving average of continuing claims fell to its lowest level since January 2001.
  • Fueled by major central banks’ further monetary easing commitments, global equity markets were generally up with EM outperforming domestic equity and EAFE stocks.

The domestic equity market marched higher for the fifth consecutive week as global central banks pledged to continue stimulating economies with additional accommodative measures.

The S&P 500 index hit several new all-time highs last week, ending its year-to-date performance above 13%.  Large cap stocks outperformed both mid and small cap stocks.  Within the S&P 500 index, the materials, energy, utilities and health care sectors led the markets, outperforming the telecom, technology and financial sectors.

Outside the U.S., bad news came from the world’s third-largest economy: Japan’s GDP declined 1.6% in the third quarter after having contracted 7.3% in the second quarter.  To deal with Japan’s recession, Prime Minister Shinzo Abe announced a package of economic stimulation plans, including an 18-month delay of a sales tax hike originally targeted for October 2015.  Meanwhile, European Central Bank President Mario Draghi reiterated the bank’s commitment to expanding its bond purchase program if the Eurozone economy deteriorates further.  European investor confidence was boosted as Germany narrowly averted recession in the third quarter.  Germany’s Q3 GDP growth gained 0.1% after the second quarter’s negative reading.  The MSCI Pacific index declined 1.55%, 3.9% underperforming the MSCI Europe index’s 2.39% for the week.

Within the emerging markets, China’s central bank unexpectedly cut the benchmark interest rate for the first time in more than two years to boost growth.  Emerging markets stocks performed relatively better than both the EAFE markets and domestic equity markets.

The MSCI BRIC index was up close to 2%, ahead of the broad emerging markets.  The EM Latin America region rallied 7.28%, outpacing both emerging countries in Europe and Asia.

The BarCap U.S. Aggregate Bond index was slightly positive, up 9 bps.  Compared to the above 3% yield level at the beginning of the year, the U.S. 10-year Treasury yield barely moved last week and held flat at 2.31% from the week before.  Short-term bonds underperformed long-term bonds.  Government bonds did better than corporate bonds, as heavy new corporate debt issuance before the holiday season pressured the secondary market.

Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds were down by 24 bps, lagging emerging market bonds’ positive return of 0.6%.

U.S. REITs were up 1%, beating foreign REITs by 1.6% during last week.  Commodity returns were positive, up 1.06% as measured by the Bloomberg Commodity Index (former DJ-UBS index).  It slightly outperformed the energy-heavy S&P GSCI Commodity index’s weekly return of 0.81%.

 

Period ending 11/21/2014 1 Week (%) YTD (%)
DJIA 1.06 9.73
S&P 500 1.21 13.71
Russell 2000 -0.10 1.88
MSCI-EAFE 1.03 -1.96
MSCI-EM 1.37 0.17
BarCap U.S. Aggregate 0.09 5.29

 

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
11/14/2014 0.02 0.51 1.60 2.32 3.04
11/21/2014 0.01 0.53 1.63 2.31 3.02

 

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. 

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