Economic Notes – June 23, 2014
- A very busy week boosted by stronger manufacturing reports from the Northeast region, better industrial production and tighter capacity utilization.
- Housing sales data were mixed: better sentiments from builders this month but weaker monthly housing starts and building permits in May.
- The headline CPI rose slightly faster than the consensus view in May; the 12-month increase surpassed 2% for the first time since late 2012.
- Initial jobless claims came in better than the consensus expectation with a small improvement for the 4-week moving average and lower continuing claims.
- U.S. equity markets rallied to record highs after the Fed reaffirmed its stance of keeping rates low for a prolonged period.
(+) The June Empire State Manufacturing Survey signaled stronger results in business conditions for New York manufacturers. The headline general business condition index returned 19.3, significantly above the consensus expected 12.8. The new orders index saw the most improvement up from May’s 10.4 to June’s 18.4, the highest level in four years. Meanwhile, indices for the six-month outlook continued painting a high degree of optimism about future manufacturing activities, including higher index levels in new orders, shipments, inventories, and employment.
(+) The Philadelphia Fed Business Outlook Survey in June indicated continued expansion of the region’s manufacturing activities. The current general activity index came in 17.8, exceeding the consensus expected 13.4 this month and the index level of 15.4 in May. Notable improvements for the underlying component indices were seen in New Orders from 10.5 in May to 16.8 in June and employment. The index for prices paid ratcheted up from 23 in May to 35 in June as the surveyed respondents reported seeing more widespread input price increase. The survey’s future activity indexes suggest accelerated growth and increased in employment over the next six months.
(+) Industrial production grew 0.6% month-over-month in May, faster than the market consensus’ 0.5% rate. April’s reading was revised up from -0.6% to -0.3%. Over a one-year period, total industrial production rose 4.3%. Within the major industry groups, mining output such as oil and gas extraction and coal mining and drilling, advanced 9.7% year-over-year. The capacity utilization rate for May rose two-tenth of a percent to 79.1%, higher than the consensus expected 78.9%. However, the utilization rate is still 1% below the average rate of the last four decades.
(+) The NAHB Housing Market Index (HMI) increased from 45 in May to 49 in June, exceeding the consensus expectation of 46. Despite improvement, the index is still one point below 50 to be considered good building conditions. All three index components rose, including current sales conditions (up 6 points to 54) and future sales expectations (up 3 points to 59).
(-) Housing starts in May came in at a seasonally adjusted annual rate of 1,001k, missing the consensus expectation of 1,028k but still 9.4% higher than the level in May 2013. The reading fell 6.6% compared to 1,071k in April as both single-family starts and more volatile multifamily starts declined in May. By region, only the South saw starts rising in May. Building permits in May were at a seasonally adjusted annual rate of 991k, 5.6% below the consensus expectation of 1,050k. It was also off 6.4% from April’s 1,059k, entirely due to the multifamily category’s 19.5% decline in building permits.
(0/-) The Headline CPI rose 0.4% in May, month-over-month on a seasonally adjusted basis, above the consensus expected 0.2% increase. The higher reading was boosted mainly by a 0.5% gain in food and a 0.9% increase in energy prices. In the last 12 months, the CPI was up 2.1%, above the 2% threshold for the first time since October 2012. Excluding food and energy, the core CPI increased 0.3% in May, exceeding the consensus expected 0.2%. The surprise was mainly due to a 5.8% jump in airline fares, the largest monthly increase since July 1999.
(+) Initial jobless claims for the week ending June 14 decreased 6,000 to 312,000 after seasonal adjustment, which was slightly lower than the 313,000 expected by consensus. The 4-week moving average was 311,750, trending down from the previous week’s revised average of 315,500.
Continuing claims for the week of June 7 declined 54,000 to a new post-recession low of 2,561k, a positive surprise from the consensus view of 2,600k. The 4-week moving average of continuing claims continued edging lower to 2,600,500, the lowest level since Nov. 3, 2007.
Despite potential escalating risks in Iraq and spill-over impact in the Middle-East, financial markets rallied after no major surprises from last week’s FOMC meeting. As expected, the Fed kept the short-term rate at 0.25% while reducing its asset purchases by another $10 billion to total of $35 billion starting in July. U.S. equity markets were led higher by small cap stocks, which outperformed both mid cap and large cap stocks for the week, but lagged for the year-to-date. The utility, healthcare, and energy sectors led the market – all generating north of a 2% return – while technology, telecom, and consumer cyclical sectors lagged. In general, defensive sectors beat sensitive and cyclical sectors.
Outside the U.S., international developed stocks underperformed U.S. stocks. The Thomson Reuters/INSEAD Asia Business Sentiment Index registered a two-year high in the second quarter, suggesting a better Asian economic outlook. The MSCI Pacific index beat the MSCI Europe index by 43 bps for the week, but underperformed by 3.6% for the year-to-date. Within the emerging markets, the MSCI BRIC index lost 81 bps, 31 bps behind the MSCI EM index. The Latin America region as a whole outperformed emerging countries in Europe and Asia.
BarCap U.S. Aggregate Bond index was up only by 4 bps last week. With no major surprises from the Fed’s meeting, the U.S. 10-year Treasury yield edged up 3 bps to 2.63% from a week ago. The Fed’s real GDP growth projection was lowered to 2.2% from a previous 2.9% for 2014, after factoring into a weaker Q1 economic result.
Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds were up 20 bps, ahead of emerging market bonds by 18 bps. Global bond markets were fairly quiet amid the dovish tone of Fed Chair Janet Yellen’s comments on slowly withdrawing current stimulative monetary program.
U.S. REITs returned 1.5%, outperforming foreign REITs by 83 bps in the week. For the YTD, U.S. REITs delivered a strong total return of 18.2%, beating foreign REITs by 11.7%. Commodity returns were up 1.32% as measured by the DJ-UBS index, similar to a total return of 1.27% from the energy-heavy S&P GSCI Commodity index.