Economic Notes for the Week of June 11th

The Federal Reserve beige book of regional economic conditions came out this last week, and the conclusion was ‘moderate growth,’ although labor has fallen off a bit.  Almost all of the Fed’s regions (Philadelphia was the exception) were generally showing decent growth.  Echoing these same sentiments, Chairman Bernanke’s remarks to the Joint Economic Committee weren’t earth-shattering in terms of surprises.  He classified current economic growth again as ‘moderate,’ although ‘significant downside risks to the outlook’ remain.  Also, he commented on labor market slowing, which he and other economists believe may be partially due to weather issues earlier on in the year and/or choppiness due to a recovery process as the result of excessive layoffs during the Great Recession. 

As always, and something we have to remember, is that one-half of the Fed’s ‘dual mandate’ is ‘maximum employment.’  This is somewhat unusual for a central bank, but adds an element of politics into an otherwise purely banking-oriented institution.  What does this mean?  Perhaps additional stimulus for jobs’ sake, as opposed to just stimulus from an economic growth perspective is always on the table.  What the market was hoping to hear were clues about what it would take for additional easing to happen, but we didn’t really get much here.  Perhaps more from the upcoming FOMC meeting.  There walking a careful line between providing enough stimulus to keep the economy from slowing down excessively, but not enough to stimulate more than necessary (inflation and political risk).

Factory orders were down -0.6% month-over-month in April, while expectations called for a slight increase.  Mostly, the drop came from lower nominal values for petroleum orders/shipments (from drop in oil prices).  Durable goods were unchanged for the month; non-durable goods x-petroleum products were modestly higher by +0.2%.  While a bit negative overall, the report isn’t that surprising and the lower oil prices are a positive to some degree in most other areas.

The ISM non-manufacturing index moved higher (even if slightly) from 53.5 to 53.7, which was slightly better than expected.  New orders and general business activity were up, while employment fell (in line with other employment reports).  The general theme for these data points continues to be slow economic growth, but not outright slowdown—contrary to sentiment the week before.

On the employment front, initial jobless claims for the June 2 week came in at 377k, which was close to the 378k forecast number.  Continuing claims were up by +34k to 3,293k, and the number receiving benefits from extended unemployment programs fell by 100k.

Over the weekend, Euro finance ministers agreed on an aid package to help Spain, mostly via short-term loans to banks (over $100 billion worth).  Expect markets to react favorably to any event like this in coming weeks… assuming there are enough details and will to make it viable.  Again, as we’ve mentioned in the past, the critical issue isn’t the dollar amount exactly (which is usually more than enough to paper over the problem), but the perception of confidence and willingness to keep solidarity intact and isolate problems, in order to prevent them from causing ‘contagion’ elsewhere.  Such a targeted effort at banks is one way of doing this.  Expect others as needed, since the fallout from not acting would be far worse.

Market Notes

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Despite the world coming to an end the week before, stocks had their best week of the year.  Central banks worldwide reiterated their intentions to stimulate a global recovery, including steps in Europe to provide capital support to Spanish banks.  In the U.S., small-caps outperformed large caps, and financials, materials and tech outperformed the most, while staples, health care and utilities lagged from a sector standpoint.

Internationally, developed market stocks with the above-mentioned more positive sentiment in Europe, outperformed emerging markets.  EM stocks benefitted from the Chinese PBOC cutting their interest rates by 0.25% down to 3.25% during the week.

Bonds lost ground slightly with higher government rates, while foreign debt and U.S. high yield were positive.

Agricultural commodities were strongly higher—led by sugar and grains.  Precious metals gave back some of their gains in favor of risk assets.

Have a good week.

Karl Schroeder, RFC, CSA, AACEP

Investment Advisor Representative

Schroeder Financial Services, Inc.


Sources:  FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder’s, Standard & Poor’s, U.S. Bureau of Economic Analysis, 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.