Economic Notes – May 27, 2014

May
27

Written by: Jon McGraw

  • Stronger reading in May’s preliminary Markit PMI index brought optimism to the second half of this year.
  • Housing sales data were mixed: New home sales rebounded in April after two months of declines; and existing house sales were up less than expected, staying well below the unit level in April 2013.
  • Initial jobless claims came in weaker than the consensus expectation with a small improvement for the 4-week moving average and continuing claims.
  • U.S. tech and small cap stocks helped the market approach an all-time high before the long Memorial Day weekend.

(-/0) Initial jobless claims for the week ending May 17 increased 28,000 to 326,000 after seasonal adjustment, which was slightly worse than the 310k expected by consensus. The 4-week moving average was 322,500, slightly down from the previous week’s revised average of 323,500.

Continuing claims for the week of May 10 decreased 13,000 to a post-recession low of 2,653,000. The 4-week moving average of continuing claims continued trending down to 2,689,000, the lowest level since Dec. 15, 2007.

(+) The preliminary Markit Flash U.S. Manufacturing Purchasing Managers’ index (PMI) came in at 56.2 for May, stronger than the consensus view of 55.5. It was an improvement from April’s reading of 55.4. The index continued to register strong value above 50, signaling the solid pace of manufacturing expansion. Mainly driven by pent-up domestic demand and inventory replenishing, the index’s output, backlogs of work, quantity of purchases, and suppliers’ delivery time components all accelerated at a faster rate in May. The strengthening of the U.S. manufacturing sector provided a solid support to employment. Meanwhile, input costs rose faster than output charges as manufacturers had a hard time to pass through higher costs to end customers.

(-/0) Existing-home sales in April rose 1.3% from March to a seasonally adjusted annual rate of 4.65 million. After slow housing activities in the first quarter, existing-home sales in April marked the first month-over-month upward trend this year. However, April’s increase was smaller than the consensus of 2.2%, partly tempered by a 16.8% jump in total housing inventory at the end of April. Regionally, existing-home sales increased in the West and South, but fell in the Midwest and remained unchanged in the Northeast.

(+) Sales of new single-family houses in April were up 6.4% month-over-month to a seasonally adjusted annual rate of 433,000, exceeding the market-expected annual rate of 425,000. Compared to April of last year, new house sales declined 4.2% from 452,000. Except for the Northeast’s declining and the West’s flat sales, both the Midwest and South saw new-home sales rising.

Market Notes

Heading into Memorial Day weekend, U.S. equity markets were led higher by technology and small cap stocks. Small cap stocks outperformed mid cap and large cap stocks. Cyclical and economic sensitive sectors beat defensive sectors. Technology, consumer cyclical and financial sectors led the market, all generating north of a 1.5% return, while utilities, consumer defensive and telecom sectors lagged. In general, growth-style outperformed value-style.

Outside the U.S., international developed stocks underperformed U.S. and emerging market stocks. The MSCI Europe index lagged the MSCI Pacific index by 55 bps for the week.

In emerging markets, after a decade of negotiations, Russia signed a 30-year agreement to supply natural gas to China. The deal was reported to be worth $400 billion and included items helping finance Russia’s billions of dollars of pipelines and facilities in Siberia.

Amid slow liquidity entering into the Memorial holiday, BarCap U.S. Aggregate Bond index was flat last week. U.S. Treasury yields barely moved. The release of the FOMC’s late-April meeting minutes did not cause major surprises. Participants’ views on the economic outlook were unchanged. The biggest news on the investment-grade corporate bond markets was that AT&T will issue new debts to partially fund its announced acquisition of DirectTV.

Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds lost 53 bps, underperforming emerging market bonds by 96 bps. Investors had concerns related to the European parliamentary elections during the weekend. Anti-European Union and euro-skeptic parties gained strong votes in France, Greece and Denmark.

Foreign REITs returned 23 bps, outperforming U.S. REITs by 77 bps in the week. Commodity returns were up 35 bps measured by the DJ-UBS index.

The energy heavy S&P GSCI Commodity index outperformed the DJ-UBS commodity index, delivering 85 bps.

Have a great week!