Economic Notes for the Week of June 18th

The big number for the week, retail sales, fell in May, by -0.2%, which was along the lines of the median forecast.  The non-auto component was weaker than expected, though, by almost 0.5%.  Additionally, data from earlier recent months was revised downward.  Weakness emerged from several areas, especially those on the ‘fringe’ of spending, such as sporting goods stores, health and personal care.  However, areas like clothing, furniture and electronics were up—which appears odd, but is in line with the inconsistent results from some of these metrics.  We expect more of the same going forward.

From a manufacturing standpoint, industrial production was down in May by -0.1%, just shy of consensus expectations.  This was spurred by lower units for motor vehicles; however, utilities and mining were both up.  Capacity utilization came in at 79.0%, which just below estimates.  These figures are largely in line with a broader deceleration in economic activity during the past several months—not shrinkage, mind you—but a more tempered pace than before.  Although they bear watching, mid-cycle slowdowns have occurred during previous cycles and are not necessarily a signal of outright contraction ahead.

Inflation results were tempered, which was largely expected.  Headline CPI was down -0.3% month-over-month in May (+1.7% year-over-year), while the Core CPI figure rose +0.2% (+2.3% year-over-year).  The difference is the dramatic fall in energy prices—particularly crude oil and gasoline—during the month, which offset a small rise in shelter and goods/services costs.  The Producer Price Index (PPI) was down -1.0% month-over-month and Core PPI up +0.2% month-over-month, in line with the CPI trends but with more of an energy price impact.  Inflation overall remains benign, largely due to slow economic activity.  Import prices fell month-over-month by -1.0%, which was largely in line with expectations; year-over-year growth was -0.3%.  As with CPI/PPI, lower petroleum and natural gas prices were the primary driver for the decrease.

On the employment side, initial jobless claims rose 6k to 386 for the week of June 9th, which pushed the four-week moving average up to 382k.  Continuing claims fell 33k down to 3.278 million for the June 2nd week.

The University of Michigan consumer confidence numbers were lower than expected, falling from 79.3 in May to 74.1 in June.  The ‘current conditions’ and ‘consumer expectations’ elements were both lower; however inflation expectations were fairly tempered (have been in a range of 2.5-3.0% or so for several years, in line with both current year-over-year inflation and historical averages).

On to Europe… it appears that the Greek conservatives have won.  What does this mean?  Fears of a Greek exit from the Eurozone have receded for the time being.  Now, thoughts move to how quickly a new government can be formed and how decision-making will unfold.  This will buy Greece more time, essentially.

What should we make of the coming weeks?  Primarily, we will need to ensure that European perceptions don’t deteriorate further and/or the political processes don’t provide any unexpected shocks.  Of course, we can’t predict any of the political action, nor can we predict the market’s reaction to it.  Greece has to form a government and Spanish banking issues persist and will likely need recapitalization and/or a bailout.  Is this pushing the can further down the road?  Yes, most likely.

One caution to those who feel times like this are right to ‘dial back’ a bit on risk:  clients feel better about it, but that doesn’t make it necessarily effective.  This is a contrary view (although not an uncommon one currently), in that foreign stocks in general (particularly European stocks) have priced in an extremely dire scenario… recession and potentially a Euro breakup.  Valuations are the lowest they’ve been in decades, and there is opportunity in the ashes here.  Just as there was in the U.S. in 2008-2009.

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Equities ended up on a positive note this week.  Central banks appeared poised to act as necessary based on Greek election results, to keep banking institutions and financial markets liquid, as well as instill confidence into the system.  This seemed to be good PR on their behalf, knowing reactions to recent crises in recent years have been largely born out of uncertainty and lack of conviction.  And, due to this, short-term traders can often be the cause of needless volatility.  On the week, our portfolios were generally helped by the exposure to foreign (emerging markets in particular) and core U.S. large cap; bonds were generally less helpful in absolute terms.

U.S. large-cap equities outperformed smaller market caps, but underperformed foreign stocks and emerging markets, which came up with strong returns last week.  Domestically, telecom, energy and financials led on the week, while materials, consumer discretionary and tech trailed—all-in-all, no risk-on or risk-off trend for the week, which was a bit unusual compared to what we’ve been used to.

Bond markets were mixed to generally positive with lower rates.  Foreign debt of all types and high yield credits generally outperformed government bonds.

In the commodity markets, precious metals led the way, while agricultural contracts were down by the largest extent (by 5%).  Other areas were far less dramatic.

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.