The April ISM rose somewhat unexpectedly in April (from 53.4 to 54.8—strongest since June of last year), and the composition was not bad either, as new orders, production and employment were all higher. The inventory portion of the index was down, which was an indirect positive as well. This was arguably the most important release of the week.
On the negative side, construction spending rose less than expected for March (up +0.1% versus consensus +0.5%), and a few prior months were revised downward. As for details, the private construction spending side was up almost a percent, while government outlays dropped by a bit more—causing the net difference.
The non-manufacturing ISM was weaker than the manufacturing version, however, and declined more than expected for April—falling to 53.5—as general business activity, new orders and employment fell.
Personal spending for March rose slightly less than anticipated at +0.3%, but the starting base had been revised a bit higher. On the other hand, personal income grew at a pace of +0.4%—higher than forecast. On the real estate front, national rental vacancy rates declined (-0.6% to 8.8%) and the homeownership rate declined 0.6% down to 65.4%. Homeowner vacancies are still well above pre-crisis levels.
The employment situation data was closely watched this month, especially due to March’s disappointing outcome. First, the Wednesday ADP data showed up weak with a change of +119k versus a forecasted +170k—which was a sign of data to come later in the week. Results here were mixed as manufacturing and construction fell while service sector jobs were up.
Initial jobless claims fell last week to 365k, which was a bit better than the median forecast of 379k. Continuing claims came in at 3,276k for the April 21 week, which as lower than the expected 3,311k figure.
With a gain of +115,000, nonfarm payrolls rose less than expected (+160,000), though, at the same time, some prior month data was revised higher by over 50,000 workers. The report was mixed, as retail industries added workers, while manufacturing and construction was softer. A common theme through the reports is that a weather ‘payback’ (or better-than-average job improvement earlier this year due to better weather) has affected current weeks somewhat—which is quite possibly true. The unemployment rate declined from 8.2% to 8.1% (consensus expectations called for no change), but the improvement was mostly due to lower labor force participation, which just changed the math behind the ratio.
That said, there is an apparent loss of job growth momentum here. At the same time, it’s important for these survey numbers to be taken in context. From a mathematical point of view, the statistical ‘error’ of the jobs report is +/- 100,000 jobs (yes, 100,000), so a good part of the report is prone to miscalculations and later revisions. So, why do we (or Wall Street) care so much about these reports? For better or worse, it’s all we have to go on until the next data point comes out.
After the recent uneventful CPI releases, we haven’t heard much about inflation in a while. The Atlanta and Cleveland branches of the Federal Reserve have constructed a series of unique CPI measurements that build on the traditional ‘headline’ and ‘core’ CPI numbers in order to take a deeper look at individual inflation components and the impact of each in different scenarios. As a background, the conventional ‘headline’ CPI most often quoted includes the entire government basket of measured goods and services, while the ‘core’ CPI excludes food and energy, due to the inherent volatility of those two inputs from month to month.
So, in going a step further, the Fed created four sub-indexes—essentially ‘sticky’ and ‘flexible’ versions of the headline and core CPI calculations. The ‘sticky’ metrics contain prices that tend to be a bit less volatile (things such as household furnishings, restaurant meals and rent), while the ‘flexible’ measures contain the most frequently-changing prices (like fuel, electricity, new vehicle prices, hotel lodging and various types of food and commodity price-related items).
For the past ten years, the year-over-year ‘Sticky CPI’ and ‘Core Sticky CPI’ have remained fairly consistent—as expected—in a 1-3% annualized rate range. In fact, the two are almost indistinguishable from each other. The ‘Core Flexible CPI’ provides more volatility, again, as expected, with results generally falling into a year-over-year range of -3% to +3% over the decade. The ‘Flexible CPI,’ which contains the index’s most volatile components, provided the most dramatic results with a range of -10% to +10% year-over-year inflation (or deflation, that is, for the negative numbers). The flexible measures certainly showed the largest month-to-month variance as well.
Without getting too stuck in minutia, the Fed found that the ‘sticky’ prices contained more information about future inflation expectations, while the ‘flexible’ prices responded more dramatically to shorter-term economic conditions and slack. Additionally, forecasts of future inflation based on only sticky price data have tended to be more accurate. If we use these as a guide, it appears that consensus inflation expectations are fairly close to normal and what we’ve seen in recent years (2.5-3.0%).
Period ending 5/4/2012 1 Week (%) YTD (%)
DJIA -1.42 7.58
S&P 500 -2.41 9.61
Russell 2000 -4.06 7.32
MSCI-EAFE -2.29 6.49
MSCI-EM -0.64 10.54
BarCap U.S. Aggregate 0.31 1.65
U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2011 0.02 0.25 0.83 1.89 2.89
4/27/2012 0.09 0.26 0.82 1.96 3.12
5/4/2012 0.07 0.27 0.78 1.91 3.07
Stocks and most risk assets lost ground this week with signs that the conditions have lost a bit of momentum on the economic and job growth front. Growth persists, but at a more tempered pace, as noted above—and are the types of things that worry risk investors.
However, large cap held up quite a bit better than small cap and foreign stocks were mixed—emerging markets performed the best of all. In the S&P, defensive utilities, telecom and staples led the way, while technology, energy and materials suffered the most.
Bonds were up on the week, as the economic/jobs uncertainty moved assets away from risk and pushed down yields. Foreign developed market bonds were down, while emerging market debt gained ground a bit. In the portfolios, high yield led the way, followed by floating rate—surprisingly enough, since yields generally fell.
In regard to foreign bonds, the ECB left interest rates unchanged at 1.00%, which was complete with a Mario Draghi press conference defending the non-move. Some comments included: economies throughout the region are soft, but bank balance sheets are improving—with some economic improvement expected later in the year, as measures taken by central banks taking some time to be filtered through into the real economy. At the same time, the ECB recognizes that individual country differences remain a hurdle to broader policy implementation.
Commodities were generally down along with risk assets. Precious metals had the best performance, along with agriculture, while energy dropped the most. Oil has been correcting dramatically in May.
As a postscript, European election results over the weekend in France (defeat of President Sarkozy by socialist party candidate Francois Hollande) and gains in the Greek parliament by both ends of the spectrum—radical left-wing/anti-austerity groups as well as even more radical anti-immigrant movement on the far right. Should we be surprised by any of this? Probably not. Post-election excitement, expect more of the same.
Have a good week.
Karl Schroeder, RFC, CSA, AACEP
Investment Advisor Representative
Schroeder Financial Services, Inc.
Sources: FocusPoint Solutions, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Reuters, Schroder’s, Standard & Poor’s, 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. Schroeder Financial Services, Inc. is a registered investment advisor.