Weekly Economic Update

Economic Update 6-08-2015

  • Economic data last week was mixed to decent, with the headline ISM manufacturing figures, construction spending and vehicle sales coming in better than expected.  The employment situation report was also stronger than anticipated.
  • Equities experienced a more difficult week, with negative returns throughout the globe.  Rising interest rates were a concern, affecting bond prices dramatically.  Commodity index returns were down on net, with crude oil down slightly.

U.S. equities lost ground on the week as higher interest rates and Eurozone/Greece discussions drove sentiment, although some of the economic data releases weren’t bad.  By sector, financials gained with higher rates signifying improved prospects for the banking group, followed by consumer discretionary stocks, which also performed positively; higher-yield utilities lost over -4% on the week.

Foreign stock returns were largely region specific, although the bulk were in the negative, and more so than U.S. equities.  In the developed markets group, core Europe held up a bit better, with stronger retail and labor data, as did Japan, while Greece and the commodity exporters such as Russia, Australia and Chile continued to struggle along with commodity prices.  Brazilian stocks bucked the trend of a bad week and their own spiral downward as better-than-expected industrial production numbers resulted in positive returns.

The euro has been recovering, which is likely due to several factors—lack of deflation and economic improvement overall (compared to recent history and low expectations).  The Greek debt issue remains in the forefront, however, as a potential stumbling block, as European leaders have expressed frustration about the lack of progress in negotiations between Greek and European leadership.  Expect these headlines to continue in coming weeks, unless a solution of some sort is hammered out.

Interest rates have been shooting higher in the U.S., although at a more tempered rate than some yield curves overseas.  Last week, rates moved by 0.25% or more across the treasury curve, which was quite significant.  Core domestic bonds suffered across the board, with losses over a percent—bringing year-to-date returns into negative territory.  Floating rate bank loans and high yield held up significantly better; long (20+ year) treasuries lost -5% on the week alone, and served as a reminder about how much volatility can be hidden in certain parts of fixed income.

Foreign bonds lost ground as well, regardless of whether USD- or locally-denominated, as rates globally edged higher.  German yields ticked up to 0.84%, which was 0.25% higher than a month ago (and dramatically higher than the 0.05% levels just a few months ago), dwarfed only by even sharper rises in yields in the European periphery.  While the rates for 10-year Spanish and Italian debt have been hovering in the lower 2’s, not largely different from U.S. debt, Greek yields actually fell a bit over the month to 10.7%.  Naturally, these issues are trading with quite a degree of credit spread.  There didn’t appear to be a single catalyst to boost rates, other than the continued perception of continental economic improvement and perhaps the shorter-term investors narrowing their timelines of how attractive negative or very low interest rate-based trades happened to look.

Real estate lost ground on the week in keeping with but slightly more extreme than other equities.  U.S. industrial/office experienced the best results, while foreign REITs lagged by losing several percent.

Commodities suffered another down week—with the GSCI falling a percent and a half.  OPEC met late in the week, with eyes watching production target levels.  But, as it turned out, no changes were made, as it appeared OPEC (led by the Saudis) is continuing a plan of hoped-for attrition in keeping prices low enough to pressure non-OPEC member producers, as well as keep players such as Iran in check through contained revenues.  (The other option would be to cut production, providing immediate supply constraints and thereby likely raising prices.)  West Texas Intermediate crude inched downward by almost -2% to end the week just under $60—in its range of the past several weeks.  Wheat was one of the biggest gainers on the week, as excessive rainfall raised concern about crop yields, while precious metals lost the most ground.  Gold and silver have flattened out in recent weeks, as higher U.S. real interest rates (the counter-weight to gold’s relative value) have kept buyers at bay.  Industrial metals have continued to look spotty with China’s deleveraging, as opposed to years of build-up that boosted metals prices.

Period ending 6/5/2015 1 Week (%) YTD (%)
DJIA -0.87 1.25
S&P 500 -0.65 2.56
Russell 2000 1.18 5.20
MSCI-EAFE -1.71 6.74
MSCI-EM -2.20 2.70
BarCap U.S. Aggregate -1.35 -0.37

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2014 0.04 0.67 1.65 2.17 2.75
5/29/2015 0.01 0.61 1.49 2.12 2.88
6/5/2015 0.03 0.73 1.75 2.41 3.11

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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