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Feb082015

Monthly Economic Update for July 2014

THE MONTH IN BRIEF
A geopolitical crisis in the Middle East didn’t halt the advance of U.S. stocks in June. Indicators did much to bolster investor confidence – the housing market seemed to have pulled out of its winter slump, manufacturing PMIs for the U.S. and China were reassuring, and consumer confidence improved even as consumer prices increased. Gold and oil futures pushed north during the month while mortgage rates more or less stayed put. Again, the bull market found some fresh legs.

DOMESTIC ECONOMIC HEALTH
Households felt better about the economy in June. The month saw a 3-point rise in the Conference Board’s consumer confidence index (to a mark of 85.2) and also an advance for the University of Michigan’s consumer sentiment index (a final reading of 82.5).1

Consumer spending held up as inflation pressure increased. The Federal Reserve’s PCE index showed yearly inflation hitting 1.8% in May, a 19-month peak; the May Consumer Price Index recorded a 1-month advance of 0.4% and a 12-month increase of 2.1%. The Commerce Department measured a 0.2% gain in personal spending for May (along with 0.4% wage growth). Retail sales improved 0.3% for May, and the Commerce Department revised the April increase to 0.5%.2,3,4

On the factory front, the Institute for Supply Management’s June manufacturing PMI came in at a solid 55.3 (it was at 55.4 for May), indicating continued sector expansion. ISM’s service sector PMI had displayed a 56.3 May reading. Headline durable goods orders slipped 1.0% for May (but just 0.1% with transportation orders removed). Wholesale inflation actually declined 0.2% in May (the biggest dip since October), even as the Producer Price Index showed a 2.0% yearly advance.1,5,6

Further evidence emerged of the U.S. economic recovery. Labor Department data showed 217,000 new hires in May, marking the fourth straight month in which payrolls expanded by 200,000 or more. By May, the economy had gained back 100% of the 8.7 million jobs lost during the recession.4

In the federal government’s final estimate, Q1 GDP was even poorer than previously thought. The economy shrank 2.9% in the opening three months of 2014, with consumer spending rising only 1%. Still, economists widely projected Q2 growth between 3-4%.2

GLOBAL ECONOMIC HEALTH
The Islamic State in Iraq & Syria (ISIS), a militant Sunni faction set on creating a new nation, captured key cities in northern and western Iraq and part of Syria in June on its way to declaring a caliphate (and shortening its name to the Islamic State). As peace in Iraq came undone, the bulk of the country’s oil supplies had yet to be threatened: the majority of oil production in Iraq happens in its southern half, and its northern regions haven’t exported oil since March. Still, the ambition of ISIS and its fast conquest of so much territory sent oil prices higher in June and bred worries about the fighting quickly spreading into neighboring nations.7,8

In more positive news, global manufacturing seemed in decent shape. China’s official factory PMI stood at 51.0 for June, and June’s eurozone manufacturing PMI had a decent 51.8 reading. The United Kingdom’s June factory PMI was up at 57.5 and Germany’s reached 52.0; France’s official PMI showed sector contraction with a mark of 48.2.9

Deflation was a growing concern in the euro area: the European Central Bank measured yearly inflation at just 0.5% in June. The ECB’s annual inflation target is currently 2.0%, and its deposit rate is at -0.10%, which essentially punishes banks for parking euros. The latest data from China showed yearly inflation running at 2.5% in May, relatively high in current global terms but relatively placid in historical terms (it contended with 28.4% inflation in 1989 and 2.2% deflation in 1999).10,11

WORLD MARKETS
Generally speaking, stocks did better in the Far East and in the Americas than they did in Europe. The Sensex went +4.94%, the Hang Seng +0.47%, the Shanghai Composite +0.45%, the Nikkei 225 +3.62%, the Manila Composite +2.96% and the Kospi +0.36%; the Asia Dow went +1.90%. Australia’s ASX 200 fell 1.76%. Canada’s TSX Composite rose 3.71% for June, Mexico’s IPC All-Share 3.32% and Brazil’s Bovespa 3.76%.12

On the other hand, the Europe Dow lost 0.45% in June and the STOXX 600 retreated 0.69%; Germany’s DAX pulled back 1.11%, France’s CAC 40 slipped 2.14% and Ireland’s ISEQ lost 4.06%. The United Kingdom’s FTSE 100 declined 1.47% on the month. Russia’s RTS was an exception, recording a 5.43% June climb. The Global Dow advanced 1.58% for June, while the MSCI World Index rose 1.65% and the MSCI Emerging Markets Index gained 2.25%.12,13

COMMODITIES MARKETS

Oil futures closed out the month at $105.37 a barrel in New York, going +2.46% for June. Natural gas futures fell exactly as much as oil rose, but unleaded gasoline advanced 1.49% and heating oil 2.98% for the month.14  

Gold rallied to $1,322.00 on the COMEX at month’s end, rising an impressive 6.23% in 30 days. Silver soared 12.05% for the month, settling at $21.01 on June 30. Copper futures gained 1.43% in June, platinum futures 2.30%. The U.S. Dollar Index dipped 0.73% on the month, ending June at 79.78.14,15

Ag futures were up and down for June, as follows: coffee, -2.68%; wheat, -9.92%; cocoa, +2.75%; corn, -9.25%; soybeans, -5.89%; cotton, -14.94%; sugar, +1.55%.14

REAL ESTATE
The May home sales data was terrific, wiping away anxieties about the real estate market stalling out. The fifth month of the year saw a 4.9% improvement in existing home sales according to the National Association of Realtors, plus an 18.6% leap in new home buying. Census Bureau data showed new home sales were at their hottest pace since May 2008.16

Associated real estate statistics also brought some reassurance. NAR said that pending home sales improved a whopping 6.1% in May; analysts at Briefing.com thought they would rise but o.5%. Home prices were up 10.8% year-over-year through April, as measured by the 20-city S&P/Case-Shiller index. The one sour note concerned builders: the Census Bureau measured a 6.5% May drop in housing starts, along with a 6.4% reduction in building permits.1,3,5

Mortgage interest rates barely budged during June. Freddie Mac’s Primary Mortgage Market Survey recorded the following movements in average interest rates on these home loan types from May 29 to June 26: 30-year FRM, 4.12% to 4.14%; 15-year FRM, 3.21% to 3.22%; 5/1-year ARM, 2.96% to 2.98%; 1-year ARM, 2.41% to 2.40%.17

LOOKING BACK…LOOKING FORWARD
Bearish analysts have contended for months that the bull market is due to end. In June, their case looked weak.

June ended with the S&P 500 at 1,960.23; it rose 1.91% for the month. The Nasdaq pulled off a 3.90% June gain, and the Dow advanced another 0.65%; at the close on June 30, the Nasdaq stood at 4,408.18, the Dow at 16,826.60. Small caps did much better than the blue chips in June – the Russell 2000 gained 5.15% for the month to go +2.52% YTD. While the crisis brewing in Iraq pushed gold and energy futures higher in June, it only took the CBOE VIX up 1.49%; the “fear index” closed June at 11.57, down 15.67% on the year. The Nasdaq Biotech index rose 7.30% in June while the Dow Jones Utility Average gained 5.69%; after two quarters of 2014, those indices were respectively up 13.37% and 17.41% YTD.12

% CHANGE

Y-T-D

1-YR CHG

5-YR AVG

10-YR AVG

DJIA

+1.51

+12.36

+19.84

+6.12

NASDAQ

+5.54

+28.35

+28.04

+11.53

S&P 500

+6.05

+21.38

+22.65

+7.18

REAL YIELD

6/30 RATE

1 YR AGO

5 YRS AGO

10 YRS AGO

10 YR TIPS

0.27%

0.48%

1.78%

2.10%

Sources: online.wsj.com, bigcharts.com, treasury.gov - 6/30/1412,18,19 Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

Bullish sentiment certainly hasn’t evaporated this year, even as YTD stock market performance has moderated to something more akin to the status quo. The S&P entered July having gone more than 1,000 days without a correction, one of the more astonishing market statistics of late. That’s 33 months without a 10% drop. (If you’re curious, the record is seven years. The S&P went 2,553 days without a correction across 1990-97.) Even the unrest in Iraq hasn’t rattled U.S. markets to any lasting degree; lately, investors have seemed almost as focused on economic developments in America and China. Things could certainly change, and change for the worse, but for the moment little seems to be impeding U.S. stock gains.20