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The Markets
The Federal Reserve may be on track to raise short-term interest rates later this year, as a favorable jobs report may be signaling the start of anticipated economic growth and inflationary expansion. However, other economic indicators have not been as positive, further enforcing the Federal Reserve's "wait and see" approach. Possibly in response to a seemingly impending rate hike, 10-year Treasuries jumped 28 basis points to 2.41%, while large-cap stock indexes continued to pull back, with the Dow (-0.90%) and S&P 500 (-0.69%) both sinking a little further compared to last week.
Last Week's Headlines
- A consensus among creditors, officials from European institutions, and the International Monetary Fund has been reached on a proposed bailout deal for Greece. It is anticipated that a condition of financial relief includes significant economic reforms aimed at tightening up the country's fiscal budget. However, negotiations with Greece over the deal are tenuous, but ongoing.
- According to the Bureau of Economic Analysis, consumers saved more in April (0.4%) compared to March, while consumer spending was essentially unchanged. Wages and salaries ($17.7 billion) and disposable personal income ($48.8 billion) increased in April, while personal consumer expenditures decreased $2.6 billion. From the perspective of inflation, the price index for personal consumption expenditures increased less than 0.1% in April.
- Confirming that the first quarter was relatively soft, the Bureau of Labor Statistics productivity and costs report showed nonfarm business productivity decreased at a 3.1% annual rate and labor costs increased 6.7% (partly due to a 3.3% rise in compensation). Output fell 1.6%, while hours worked actually rose 1.6%.
- U.S. manufacturing grew in May according to reports released on Monday. Markit's U.S. Manufacturing Purchasing Managers' Index™ indicated "robust expansion of U.S. manufacturing output," while the Institute for Supply Management (ISM) manufacturing index revealed that new orders grew 2.3% and employment increased 3.4% compared to April. Both sources noted that exports fell, undoubtedly influenced by the strong U.S. dollar.
- The ISM non-manufacturing index for May came in at 55.7%, which is 2.1% lower than April. However, for the composite index, a reading above 50% indicates that the non-manufacturing economy is generally expanding; below 50% means that it is generally declining.
- New factory orders data provides insight into how busy manufacturers may be in coming months filling orders for durable goods (e.g., televisions and computers) and nondurable goods (clothing, food, and beverages). According to June's Census Bureau report, new orders in April decreased $1.8 billion or 0.4%, following a 2.2% March increase. Unfilled (backlogged) orders decreased 0.1%, while shipments (an indication of current sales) were virtually unchanged from March.
- Other market segments showed gains. Several auto manufacturers reported unexpected sales increases in May. Construction spending grew 2.2% in April compared to March. Gains were noted in residential construction (0.6%), nonresidential construction (3.1%), and public construction (3.3%), according to the Commerce Department.
- Concerns that underwhelming exports would hamper second-quarter growth may have been partially quelled with the U.S. Bureau of Economic Analysis report that the goods and services deficit was $40.9 billion in April, down $9.7 billion (19.2%) from March. April exports were up 1.0% or $1.9 billion ahead of March exports, while April imports were $7.8 billion less than March imports.
- Oil prices dropped in response to a reported increase in U.S. oil inventories coupled with OPEC's statement that it won't change its production target. The Energy Information Administration reported that crude oil inventories decreased by 1.9 million barrels in the May 29 week. The national average retail regular gasoline price increased for the seventh week in a row to $2.780 per gallon on June 1, 2015, $0.006 per gallon above last week.
- May's nonfarm employment increased by 280,000, while unemployment remained essentially unchanged (up 0.1%) according to the Department of Labor's employment situation report. Further evidencing momentum in the labor market, hourly earnings grew by 0.3% as did labor participation (up 0.1%), while the advance figure for seasonally adjusted new jobless claims for the May 30 week was down 8,000 to 276,000.
Eye on the Week Ahead
The labor market will be in the news with the Labor Department's Job Openings and Labor Turnover Survey and jobless claims reports. Consumer retail sales and producer prices may provide further indication of inflationary trends. And the Department of the Treasury will release its monthly account of the federal government's budget. Will progress be made in negotiations with Greece?
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
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