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Weekly Review - June 30, 2014

Weekly Review - June 30, 2014

Guest Post - Monday, June 30, 2014


  • Economic data was mixed, but survey responses showed stronger positive sentiment and housing appears to show some improvement. The final 1st Quarter GDP release was amended downward, but this was largely blamed on weather effects and appears to be reversing for the current quarter.
  • Equity returns were generally negative on the week, as the negative GDP report and Iraq situation weighed on sentiment. In more typical risk-off fashion, bond returns were higher on lower yields across the globe.

Economic Notes

(-) The third/final estimate for 1st Quarter GDP came in a lot worse than expected, showing a contraction of -2.9%. Obviously, this was a deterioration from the initial and second estimates of -0.1% and -1.0%, respectively, and worse than the expected -1.8% final figure. The downgrade was almost exclusively due to additional weakness in consumer spending in healthcare (-1.2%, two-thirds of the total contribution) and net exports (-0.6%). A result this poor is actually unprecedented outside of recessionary periods, which again reminds us how severely the winter weather affected things (unprecedented at least since 1947 when modern quarterly government stats were developed, as there has never been a GDP decline of over -1.5%, except for right before or during a recession).

The weak quarter has been attributed to those redundantly discussed weather effects, for the most part, with some Affordable Care Act components. Acting under the assumption the poor quarter is a temporary aberration, the typical and hoped-for relationship is that goods/services not consumed but postponed during the poor quarter will be pushed ahead and consumed in Q2–the rationale many economists have for a higher figure. At the same time, it would not be surprising to see continued 'growing pains' from treatment, measurement and side effects of the ACA; the full portion of which may take some time to filter through the entire economy over the next several years. A few more bearish commentators are using this quarter as an 'I told you so' moment to reinforce the theme that the underlying economy isn't as strong as we'd like to believe. The slow growth seen in prior quarters is certainly the backdrop for that view, although more recent survey, production and employment results have pointed to improvement–how much improvement will be the issue. On the brighter side, expectations for this quarter's GDP generally fall in the 3.5-4.0% range, but we'll have to wait until the end of July for that initial figure.

(-) Durable goods orders came in weaker for May, down -1.0% compared to a consensus forecast of no change. Volatile defense orders fell by almost a third and non-defense aircraft also dropped several percent, which trimmed the ex-transports figure to -0.1%. Arguably the most important component (since it's used in the equipment part of the GDP report), core orders, rose +0.7%, which beat expectations by a few tenths. Core shipments also rose +0.4%, about half of the level expected and manufacturing inventories grew a percent.

(0) Personal income/spending for May was a bit weaker than expected overall. Income grew +0.4% in line with wage/salary growth, as expected, while spending grew only half as much, growing +0.2% (although the 12-month growth number, at +3.5%, is the best in several months). The Affordable Care Act has thrown a wrench into some of the accounting expectations, adding +2% to transfer receipts (part of non-wage income), but some of the spending appears to be due to some inconsistencies with how the government is accounting for these healthcare purchases, so this particular month may not be as worthwhile a sample. After all this, the personal savings rate rose to 4.8%. The headline and core PCE price indexes rose +0.2%, which was largely in line with expectations, representing year-over-year gains of +1.8% and +1.5% respectively–similar to other inflation measures.

(+) The Markit manufacturing PMI survey rose from 56.4 in May to 57.5 in June, which exceeded the forecast of 56.0. Strength was seen in new orders and output, both up several points, while employment was just above flat. Input and output prices both moved up, in keeping with recent inflation reports that are firmer than previous. The Markit services PMI rose to 61.2, sharply outpacing the forecast of 58.0, and featured gains in new business and employment. Both reports are solid, and have proven to be among the better estimates of activity in recent years. Markit is a private U.K-based firm that provides global industrial surveys among other work, and whose U.S. survey is gaining traction on the traditional well-known version supplied by the Institute of Supply Management (ISM) since the late 1940's. A few global investment firms offer a similar survey, with a few tweaks based on the proportion of what they think is most important (new orders, deliveries, inventory growth, etc.) all in an attempt to hash out this data in the most timely way possible, but all of these are showing significant improvement in recent months.

(-) The S&P/Case-Shiller index rose a flattish +0.2% for April, which significantly underperformed the +0.8% gain expected. In fact, it was the slowest monthly rate of increase in two years. The more solid city reports were Boston, Detroit and Minneapolis, which exhibited 1-2% gains. This brought the year-over-year index figure to a +11% gain, which is not terrible by any means.

(-) Similarly, the FHFA home price index was flat for April, underperforming the anticipated gain of +0.5%, and bringing the 12-month gain to +5.9%. Of course, this index differs from the Case-Shiller in that it also includes regions outside the 20-city urban group and represents homes financed with certain government agency mortgages. Weaker numbers in New England as well as Texas/Louisiana (-1% for both regions) represented the worst performances.

(+) Existing home sales rose a bit more than expected for May (+4.9% versus consensus of +1.9%), which was good news for a recently choppy housing market. Single-family homes gained +6% to 4.89 mil. annualized units, and were responsible for the increase, particularly in the South; condos/co-ops were generally unchanged during the month and inventories rose +2%. While better, the result is still -5% below where it was a year ago.

(+) New home sales also gained sharply, up +18.6% for May, versus expectations of a modest +1.4% increase, and moved to a new recovery high of 5.04 mil. annualized units. The gains were generally seen nationwide, as NE, South and West were higher, while the Midwest results were flat. Inventories were unchanged, and there appear to be signs of stronger activity here in response to stronger sales catalysts. The homebuilding industry tends experience a bit of a momentum component compared to other industries–the stronger the homes sales pace, the more builders jump on the bandwagon.

(+) The Conference Board consumer confidence index for June rose to a post-recession high of its own to 85.2, up from last month and surpassing expectations of 83.5. Consumer assessments of their present situation and future expectations both grew by several points, as did the labor differential (jobs more plentiful), so good news all the way around.

(+) The U. Michigan consumer sentiment measure rose 1.3 points, to 82.5, from the preliminary to the final estimate (consensus called for 82.0). From the survey results, household assessments of the current situation and future expectations both rose over a point in improvement, while inflation expectations moved upward a tenth of a point (just above the consistent long-term average of 3%).

(+) From the prior week, the Conference Board's index of leading economic indicators rose +0.5% in May, representing the 4th consecutive gain. The series showed broad-based strength in interest rate conditions, jobless claims and manufacturing hours, while the building permits segment weighed on net gains. The coincident and lagging indicators also rose +0.3% and +0.4%, respectively. As can see from the graph below, the trends remains quite positive.

(-) Initial jobless claims for the June 21 ending week dropped by 2k to 312k, which was just 2k higher than forecast. No special factors appeared to be at play that would cause the data to be suspect. Continuing claims for the June 14 week came in 11k higher at 2,571k, compared to the 2,565k expected.

Read the "Question for the Week" for July 2nd, 2014:

Why is my portfolio trailing the S&P 500? What do I need all this 'diversification' stuff for?

Market Notes

Period ending 6/27/2014

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate




U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















The markets fell a bit on the week in a summertime lull, of lower volume and minimal volatility (see above). Consumer discretionary and utilities were the strongest performing sectors with gains of a percent, while consumer staples and industrials brought up the rear, losing a percent each.

Internationally, emerging market stocks eked out a small gain, including China/SE Asia and Russia, the former conducting a bit of indirect financial easing (through lack of expected restrictive activity) and the latter due to additional lightened Ukrainian pressures. Developed nations lost ground on average–Europe and the U.K. faring the worst. Despite the Bank of England keeping rates unchanged/low, fears of an eventual increase sooner than expected weighed on sentiment, as did weaker European PMI results (albeit still positive).

Bonds gained solidly on the week, with yields falling 5-10 basis points across the curve, resulting in one percent gains for long Treasuries. High yield and floating rate were weaker on the week.

Developed foreign markets in Europe also gained strongly to a similar magnitude, helped by a half-percent drop in the dollar and continued uncertainty in Iraq. The U.K. central bank kept rates unchanged on the week, which may have also been a contributor. Japanese bonds fell as inflation hit a three-decade high of 3.4% year-over-year–what the government would consider a success. Emerging market bonds also gained on a net basis with positive data in several nations, as well as a rate cut in Turkey.

European real estate led world returns in the asset class with a one percent-plus gain, while U.S. mortgages and residential also earned positive returns–helped by lower interest rates. Asian and U.S. retail REITs were the weakest-performing on the week, with minor losses.

Commodities were generally down on the week. WTI crude oil was lower by $2 down to just under $106, as was Brent crude down to $113–both closely watched due to events in Iraq, a large producer. On the positive side, industrial metals copper and nickel both gained on the week by several percent due to tighter supplies. Concerns in China about lowered demand for copper due to shady collateralized loan dynamics may be replaced by demand for the metal growing elsewhere (a positive development). Several soft commodities, such as cotton, coffee and sugar, continued to correct by several percent from previously high levels.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), AXA, Associated Press, Barclays Capital, Bloomberg, Capital Research and Management Company, 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. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

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