Economic Update 4-20-2015

• Economic results on the week were in keeping with the recent lackluster trend, with weaker-than-expected retail sales and manufacturing.  Inflation came in a bit stronger, but remains flat to slightly negative on a year-over-year basis when energy price declines are considered.

• Equity markets lost ground last week upon a variety of factors later in the week, not helped by challenging economic data.  Bonds rose on lower interest rates, while commodities generally were aided by a weaker dollar and rising oil prices.

U.S. stocks came in about a percent lower on the week, mostly due to a poor ending on Friday.  An odd Bloomberg outage the prior night raised concerns during foreign trading and subsequently, spurred selling, and the sentiment carried over to our shores. Overall, earnings reports weren’t terrible, and outperformed expectations somewhat, although it’s still early in the reporting season.  From a sector standpoint, energy led due to strong oil dynamics, followed by materials and financials; industrials and consumer cyclicals lagged, but the bulk of sectors were in a tight band around each other.

Foreign equities fared a bit better, with the dollar weaker by about 2% as measured by standard indices. Emerging markets experienced with another strong week and year-to-date gains have reached nearly 10%, with strong performances from Russia and Brazil (upon higher oil).  Highlights were new concerns that Greece will miss an IMF payment on May 1, after asking for an extension and being denied.  A Morgan Stanley report issued last week stated an almost 1-in-2 chance of Greece exiting the Eurozone, although other economists/strategists feel such an outcome is less likely, so this drama continues as it has for several years.  Regardless, this cast a shadow on European returns, with Japan’s ended up just under flat as their national pension fund announced an dramatic increase in the allocation to Japanese equities from 12% to 25%.

Chinese equities have been on a tear in local terms, due to increased liquidity from mainland China-to-Hong Kong linkages; however, regulators responded to this boom last week with restrictions on margin buying and increased availability of shares for short selling purposes (thought to provide a counterweight to investor bullishness in a given market).

Chinese GDP for the 1^st quarter came in at 7%, the lowest in six years, and almost exactly where the regime predicted it would (the typical precision is uncanny, you might think).  This is compared to 7.5% or so estimates from recent years—perceived by some as a weakness, but, also, the economy is maturing and slowing, and as economics would predict, the large amount of overall debt is perhaps becoming a drag on economic growth.  More recent data on industrial production fell dramatically, to its lowest level in seven years, although still at a 6% year-over-year growth rate.  However, it appears the growing service sectors may in much better shape than segments of the industrial economy.  All-in-all, as China continues to be a major growth engine for the world economy, the progression of this ‘soft’ or ‘hard’ landing continues to be closely watched—with policymakers there seemingly careful of fueling a credit bubble by adding too much stimulus, while, at the same time, careful to add targeted liquidity and accommodation in areas needed.  After that was written, in fact, PBOC officials lowered reserve requirements Sunday by a percent from 19.5% to 18.5% in doing just that.

U.S. bonds gained as interest rates ticked down on the week by about 10 basis points.  As expected, longer duration issues outperformed, while the majority of other investment-grade domestic debt gained in line with the BarCap Agg.  High yield and bank loans came in a few basis points behind, albeit still positive. A decline in the U.S. dollar normally helps the returns of foreign fixed income issues, and did in developed markets, but wider spreads in emerging markets reduced some of this benefit.

Commodities gained as energy overall rose 8% on the week, with help from both oil and natural gas contracts.  WTI crude inched back upward again from the low $50’s to near $56 at Friday’s close, as news of some slowing U.S. production (mostly through expected lower output from shale plays) was coupled with the takeover of a refinery in Yemen by militants. Industrial metals also gained slightly, while agricultural commodities bucked the trend by weakening as wheat prices fell by almost as much as oil gained. Forecasted heavy rains in the Southern Great Plains are hoped to reduce the impact of drought in the area, which is good news for growers, but a damper on pricing.

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.