The Federal Reserve Open Market Committee ended their meeting last week with little new news. Target rates, at zero to roughly a quarter of a percent, can’t be forced any lower, and, therefore, aren’t as effective at further economic stimulation as they once were. What the Fed can do (and is doing) is extending ‘Operation Twist,’ which sounds convoluted, but consists of buying long Treasuries back with proceeds gained from selling shorter Treasuries (about $270 billion worth). The point is to lower interest rates at specific areas on the yield curve where they’ll end up doing the most good—home mortgages, auto loans and capital loans for business equipment tend to fall in the intermediate range, so lower rates here are most stimulative to the economy.
Will this do much? Most economists and former Fed officials don’t think so, but it is something. If conditions continue to decelerate as we’ve seen indications of in the last few months, expect a third round of Quantitative Easing. Markets seemed to think more QE would be in the cards this go-around, but it was not to be and disappointment set in almost right away. The only explanation is that Fed officials haven’t quite seen enough negative evidence yet for more action. Another issue that we mention occasionally: the Fed’s dual mandate of stable prices and maximum employment. Labor markets have been disappointing in this current recovery, so Fed action may be driven as much by the urge to increase prospects for employment as for economic growth.
In other news, the Conference Board’s index of leading economic indicators rose +0.3% for May, which was better than many analysts predicted. Seven of the ten indicators that make up the index were up. Many of these items are things we report on week to week, but the leading indicator’s importance is these taken together. The ‘coincident indicator’ index was up +0.2% for the second straight month.
Not always seen as a critical report due to its sometimes sporadic results, the Philadelphia Fed Index was in the news again due to increased scrutiny of regional Fed surveys—those looking for kernels of data, good or bad, about the economic outlook. The index fell -16.6 in June, which bucked consensus of a flat reading, and agrees with other data pointing to manufacturing slowing. While the overall number was negative, the employment component was higher, as were firms’ expectations about business activity looking ahead six months.
On the real estate front, housing starts were weaker than anticipated, down -4.8%, as multi-family starts fell off a bit. At the same time, April starts were revised up, which tempered things a bit. Housing permits rose +7.9% in May, which was a surprise. Existing home sales were down -1.5%, which was largely in line with forecast, and was largely made up of falling figures for single family homes and condos. The months’ supply of homes increased a tiny bit from 6.5 to 6.6. The median sales price of existing homes was up +5.1% on the month.
Choppy housing conditions continue, but the positive story is that we’re not seeing further widespread deterioration. Seasonality may be contributing to some of the gains, but we’ll take positive news when we can get it.
On the employment front, initial jobless claims rose to 387k, which was about 4k higher than expected. The four-week moving average, which is the most-watched piece has also moved up to 386k, the highest point since the end of 2011. Standard 26-week continuing claims were unchanged but higher than anticipated at 3,299k; the emergency program recipients declined by 40k. It was echoed in Ben Bernanke’s comments at the FOMC press conference, but employment growth has been subpar for this point in the recovery and has frustrated policymakers. The lack of job growth may well play an important role in upcoming election rhetoric. An improving economy and employment picture play well for President Obama and other incumbents; continued weakness, or even sub-par expectations, favor challengers.
On a positive note, a recent study from the Fed Survey of Consumer Finances showed that median family net worth, despite falling almost 40% during the Great Recession, is now back up almost 15% from the low in 2009. Slightly improving home prices are a component, no doubt, as are improved financial returns from those lower levels. This ‘wealth effect’ does matter, in terms of household confidence and perceived ability to spend.
Market Notes
| Period ending 6/22/2012 |
1 Week (%) |
YTD (%) |
| DJIA |
-0.98 |
4.83 |
| S&P 500 |
-0.56 |
7.26 |
| Russell 2000 |
0.53 |
5.31 |
| MSCI-EAFE |
0.36 |
-0.24 |
| MSCI-EM |
-0.87 |
0.09 |
| BarCap U.S. Aggregate |
-0.12 |
2.26 |
| 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 |
| 6/15/2012 |
0.09 |
0.29 |
0.68 |
1.60 |
2.70 |
| 6/22/2012 |
0.09 |
0.31 |
0.76 |
1.69 |
2.75 |
On the week, U.S. stocks were down—in large part by investor disappointment of global central bank (primarily U.S. Fed and ECB) lack of response in providing further economic stimulus. We may still need it, but data hasn’t deteriorated to the point yet where they’ve found it necessary (see above). On the U.S. side, growth stocks in health care and technology outperformed while energy and utilities underperformed. European concerns continue to dominate sentiment on a seemingly day-to-day basis.
Bonds were mixed. Government issues were largely lower with higher yields, while ‘credit,’ such as high yield and foreign bonds performed positively.
Commodities were led by a spike in agricultural contracts, while energy continued to lose ground, as did precious and industrial metals. The fall in oil/gasoline prices has hurt the performance of oil stocks, but, as we’ve mentioned before, this has come at a good time for consumers and the economy—where lower energy costs are a significant aid to growth.
Have a good week.
Karl Schroeder, RFC, CSA, AACEP
Investment Advisor Representative
Schroeder Financial Services, Inc.
480-895-0611
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.