LSA Connect

This week’s news was highlighted by the FOMC meeting, which resulted in a reiteration of the current policy of accommodative mortgage and treasury bond buying.  However, further comments regarding the timing of the inevitable ‘tapering’ off of QE down the line were taken quite negatively by several asset markets—including global stocks, bonds, real estate and commodities.

One would have thought the Fed was raising rates by a few percent based on the reaction, but all Chairman Bernanke clarified in the post-statement press conference was that the Fed expected to reduce its stimulus later this year, and perhaps end bond purchases entirely by mid-2014, assuming unemployment falls in accordance with current projections (towards their target of 6.5%—which itself is subject to future adjustment).  As we mentioned in the special Fed note last week, the market reaction was somewhat ironic in that the eventual exit was taken as a short-term negative (markets falling several percent with Treasury yields rising), while it actually signifies a greater degree of confidence in the recovery and a lessened need for government stimulus.

With a dearth of other world crises to worry about last week, perhaps Fed policy is being even more closely scrutinized than normal.  Nothing concrete was said in regard to current bond-buying or interest rate strategy specifically; rather, it was a bit of additional clarification on timing of potential activity if current trends continue—trends that many well-regarded economists have been forecasting and commenting on for some time (in fact, many feel the Fed is being overly optimistic in their timelines).  We wish we could say (not really) that some new and surprising development was shared that underpinned this negative reaction.  But it wasn’t.  This potential exit plan has been analyzed and modeled over and over again for several years now by both those inside and outside the Fed, and will continue to be going forward—if not more so.  More below on how this relates to portfolios. Continue reading →

The Federal Open Market Committee completed their meeting this morning, and the conclusion was much the same as we’ve come to expect:  continued stimulus in the form of $85 billion in bond purchases a month with the same targets (6.5% unemployment assuming no higher than 2.0% inflation).  However, their outlook seemed slightly more optimistic on the economy, and also contained an acknowledgement of diminished downside risks.

Although it doesn’t feel like it, employment has been improving this year (the unemployment rate ticked up last month with bet Continue reading →

(+) The highest-profile economic release of the week, May retail sales, were a bit higher than expected with a gain of +0.6% versus a forecasted +0.4% (including seasonal adjustments that first lowered April retail sales from +0.5%, to -0.1%, then revised them upward again to +0.2%).  ‘Core’ retail sales, which removes the more volatile components and is used by the government in GDP calculations for consumer expenditures, gained +0.3%, which was as expected.  Overall, the report was fairly balanced, with contributions from ‘general merchandise’ and online sales, while electronics and apparel declined a bit.  Contributing to the headline number were gains in autos/auto parts and building materials.

(0) Wholesale inventories rose +0.2% for the month of April, matching estimates.  Durable goods rose to a slightly higher degree than non-durables, but the differences were minor. Overall business inventories, which include manufacturing, wholesale and retail, rose +0.3%—matching expectations—while March’s number was revised lower by a tenth of a percent.

(+) Import prices fell -0.6% for May, versus an expectation of a flat result—bringing the year-over-year number to a -1.9%.  As is often the case, the May decline was related to a fall in oil prices, but a few other components also declined in unison.  Consumer prices fell -0.3% for the month (the biggest monthly drop in three years) due to a decline in health care product costs, and may translate into downward pressure on CPI. Continue reading →

On June 3^rd, 2013 Lord Abbett posted a great article that was referencing “Why Bondholders May Not Need Worry.” https://www.lordabbett.com/advisor/commentary/marketview/great-rotation-why-bondholders-may-not-need-to-worry/

This was a great article that shows that although May was a difficult month for bonds the average investor still remains skeptical of equity risk.  We have been talking for years now about this economic house built on cards and at the end of the day the question remains to be seen if equities can continue this bull run.

(-) The ISM Manufacturing report came in a bit weaker than expected, falling from April’s 50.7 to 49.0 for May, compared to the 51.0 level anticipated and pushing the measure to its lowest level in three years.  Weaker underlying components included forward-looking new orders and production, while inventories rose by a few percentages points.  The underlying employment segment, however, was largely unchanged.

(+) The May ISM Non-Manufacturing index, on the other hand, came in higher than the previous month and a bit better than expectations, at 53.7 versus 53.5.  Details were mixed, with new orders and business activity improving, while employment continued to fall (a significant drop since January).  This index, like its manufacturing counterpart, continues to plod along near its lowest level in three years, but with the diffusion index being over 50, suggests slow/moderate growth looking forward.

(-) Factory orders gained +1.0% for April, which disappointed somewhat relative to the anticipated +1.5%; however, March orders were revised down by an additional 0.7%, which tempers the overall April change.  Core capital goods shipments were revised up a bit for both months, and non-durable inventories fell a bit.  This looks to be more of a flat period for factory orders, while the lack of inventory is a bit of a negative influence. Continue reading →

The end of the Bull Market is being declared by many experts.  In the upper chart in December of 1982 the 10 year treasury was 16%.  The 10 year treasury was 1.65 earlier this year and is currently around 2.20%.   We don’t believe the interest rates can move much lower but we do have the Federal Reserve continuing to decrease supply which is lowering the interest rate with the QE3 program.   Several econo Continue reading →

In a shortened holiday week, only a few memorable economic releases were featured.

(-) Consumer spending for April was weaker than expected, falling -0.2% versus an anticipated flat reading and March growth was revised downward a tenth.  Sales as gas stations dropped a seasonally-adjusted -9% due to lower prices, which caused the bulk of the change.  However, utilities spending also fell as temperatures in April moderated in much of the nation.  Personal income came in flat for April, relative to expectations of nominal +0.1% growth, with wages/salaries and the savings rate unchanged from the previous month.

(0) The PCE price index declined -0.3% for April, a tenth more than anticipated, while core PCE grew at a mere hundredth of a percentage point (vs. an estimated +0.1% rise).  The difference between the two was yet another fall in energy prices.  On a year-over-year basis, the headline and core PCE measures rose +0.7% and +1.1% respectively, again demonstrating that inflationary pressures have remained tempered by almost any way you measure it (PCE, PPI, CPI, etc.).

(+) The Richmond Fed index came in stronger than expected, at an improved -2 versus -4, but remained in negative/contractionary territory.  In keeping with this, the underlying results reflect decreased manufacturing activity in that mid-Atlantic district, as new orders and employment fell; however, shipments and future expectations for activity and forward-looking capital expenditures improved somewhat.  This regional report is in keeping with the Phila. and N.Y. Empire surveys, which have also been recently sluggish. Continue reading →

Labor Markets

(+) The initial jobless claims number after seasonal adjustment was 340,000 in the week ending May 18, slightly lower than the expected 345,000.  Filing for first-time unemployment insurance benefits fell by 31,000 compared to the same time last year.  The 4-week moving average of initial claims was 339,500 versus 370,250 in 2012.

(+) Continuing claims for the week ending May 11 fell to 2,912,000, better than the median forecasted 3,000,000.  The figure was 3,296,000 in the comparable week in 2012.  For the year-to-date, continuing claims have shrunk by 217,000.

Housing Markets

(+/0) April existing-home sales rose 0.6% to a seasonally adjusted annual rate of 4.97 million, according to the National Association of Realtors.  It is slightly below the expected 4.98 million-unit level.  April’s resale activity is 9.7% higher than the 4.53 million-unit level in April 2012.  Low inventory, tight credit, and 31% more buyer traffic are pushing the national median existing-home price up 11% from April 2012.  The median time on market for all homes was 46 days in April, compared to 83 days in April last year. Continue reading →

May’s Conference Board Consumer Confidence report is the latest piece of data
to suggest that recent months have seen a significant strengthening of the US
economic cycle and we are unsurprised that the strong rebound in housing,
together with the breakout by the SPX index to all-time highs generated a
substantial upside surprise in the index.

Overall Confidence rose to 76.2 (1985 responses = 100), well above expectations
of 71.2 and the strongest report since February 2008. More interestingly the
Present Situation report led the breakout, Continue reading →