Economic Update 6-15-2015

• Economic data from last week looked a bit stronger, with some positive surprises from retail sales and a few sentiment surveys; the JOLTs and jobless claims reports, however, disappointed.

• Despite some day-to-day volatility in equity markets and recent trends higher for interest rates, on net, U.S. stock and bond markets ended very little changed.  However, a falling dollar helped foreign indexes inch higher.  Commodities also gained, led by stronger pricing in energy.

U.S. stocks gained slightly, in a surprisingly flat week on net, despite some day-to-day volatility related to the Greece-IMF negotiations.  From a sector standpoint, financials and consumer staples gained nearly a percent to lead, while energy and technology were the laggards on the week, down an equivalent amount.

Developed market foreign stocks outperformed U.S. issues on the week, while emerging market names fell back slightly on average.  The commodity export nations, including Russia, Australia, South Africa and Brazil led, gaining strongly; Germany and Japan led the developed market group.  Japan’s 1Q GDP came in at +3.9%, about a percent better than expected and the best quarter since 1990, although some distortions remains following last year’s sales tax hike; however, bank lending there has improved, which is perhaps a better real-time indicator.

The biggest news abroad continued to focus on Europe—and the negotiations between Greece and the IMF—which started slow, appeared to show signs of positivity mid-week but broke down late in the week; apparently the weekend session ended after only 45 minutes.  (We give the timetable, as market drama tended to follow it closely last week.)  The late-June European Union leaders’ summit may be the final stand for this issue, if a resolution can’t be found before then.  Big sticking points appear to be labor market reform and pension cuts—both of which are political third rails in most nations, but especially in an economy as hard-hit as Greece.  The late-June date is important, as the IMF packaged all of June’s payments into one bulk payment of €1.6 billion, so this could end up being one big default, instead of several smaller or a partial default.  The result is the same.

S&P accordingly lowered Greece’s credit rating from CCC+ to CCC, which is a reflection of the already-present worries about an outright default or a policy mistake of some kind.  The latter is probably a bigger worry than the former, since the goal of these negotiations all along has been to avoid a debt default, but both sides have a good deal riding on these negotiations and have domestic constituents to please.

Fixed income experienced a calm week for the first time in several, with interest rates rising then falling back to where they started the week across the yield curve.  Core U.S. bonds were barely changed, with governments outperforming bank loans and other credit.  Foreign bonds gained strongly on the week, however, with help from a weaker dollar, as local currency returns were slightly negative.  European bond pressures persist as rates continue to be pressured upward from their extremely low levels.  The biggest gains were in the U.K., Japan and Australia, while emerging markets also fared positively in USD terms.

Real estate in the U.S. gained a fraction of a percent, in keeping with other domestic equities; retail faring worst with mixed retail sales numbers.  Domestic REITs were surpassed by much stronger gains in Europe, U.K. and Asia, all of which gained several percent.

Commodities gained slightly on the week, with energy the leading segment (natural gas being the biggest gainer upon hot weather demand, but also other areas), followed by precious metals.  West Texas Intermediate Crude, the most closely-watched item in the basket, hovered within a few dollars of $60/barrel most of the week before settling right at that round number by Friday, gaining a few percent on the week.  Agriculture and industrial metals ended up in the losing column for the week.

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.