July Economic Update

Monthly Economic Update

July 2013

THE MONTH IN BRIEF

Sometimes the direction of the stock market can change on a few sentences, even a few words. That was certainly the case on June 19, when Federal Reserve Chairman Ben Bernanke mentioned the possible end of QE3 in 2014 and the prospect of reducing the central bank’s monthly bond purchases later in 2013. A global selloff occurred after his remarks, and the S&P 500 lost 1.50% for June. Still, the major U.S. indices fared pretty well compared to foreign benchmarks. It was a miserable month for commodities, particularly gold. You could find plenty of positives in the housing sector, even with home loan rates ascending. While stocks retreated last month, most investors remained confident in the bull market’s strength.^1,2

DOMESTIC ECONOMIC HEALTH

June brought a lot of good news about the economy, even as Wall Street groaned about the prospect of the Fed tapering QE3. The Institute for Supply Management’s June manufacturing PMI jumped north 1.9 points to 50.9, indicating renewed expansion. The latest Labor Department jobs report had employers adding 175,000 new jobs in May, although the unemployment rate crept up to 7.6%. Consumer spending had improved in May (up 0.3% with household incomes rising 0.5%), and consumer confidence rose in June– the month’s final survey from the University of Michigan came in at 84.1, approaching a six-year peak, while the Conference Board’s June poll rose to 81.4, its best mark since January 2008. Retail sales grew 0.6% in May.^3,4,5,6,7

Inflation was again trivial: the Consumer Price Index had advanced just 0.1% for May and but 1.4% in a year. Producer prices, on the other hand, went north 0.5% in May. Durable goods orders jumped 3.6% in May.^.8,9,10.

Judicial rulings, legislative inaction and commentary from opinion leaders also made economic news last month. The Supreme Court struck down Section 3 of the Defense of Marriage Act (which had stopped same-sex marriages from being federally recognized), paving the way for gay and lesbian couples to file joint federal tax returns and access partner health insurance benefits, and gain eligibility for Social Security survivorship benefits. Congress did not find a solution to prevent interest rates on federally funded student loans from doubling to 6.8% on July 1, translating to a $2,600 average hit to a student borrower. (Capitol Hill legislators were talking about a retroactive fix, however.) The International Monetary Fund publicly urged the Federal Reserve to maintain QE3 at current levels at least until the end of 2013 while cutting its 2014 forecast for U.S. growth to 2.7%. Standard & Poor’s upgraded America’s credit outlook to “stable” from “negative”, significantly reducing the chance of another U.S. credit rating downgrade like the one it issued in 2011. ^9,11,12,13

GLOBAL ECONOMIC HEALTH

Eurozone unemployment reached a new all-time high last month at 12.1%; eurozone consumer inflation hit 1.6% in June, compared with 1.4% in May and 1.2% in April. Germany was the bright spot – its jobless rate was down at 5.3% in June. The eurozone Markit PMI rose half a point to 48.8 in June – not good, but a 16-month peak. Ireland and Spain had manufacturing PMIs of 50 or better; those of Italy, Germany and France were all under 50 (meaning sector contraction).^14,15

China has recently coped with a dangerous “shadow” banking system: high-interest, off-balance-sheet loans linked to real estate and stock speculation. In June, the Chinese government tried to discourage such informal lending by allowing cash conditions to tighten, while instructing the nation’s banks to depend less on short-term borrowing and improve their capital ratios. The People’s Bank of China let short-term interest rates surpass 7% at one point in June. This led to a four-year low for Chinese stocks and fears of a credit freeze. The central bank intervened and provided cash infusions to ward off that last threat, but still maintained its stance. China’s Markit PMI declined to a 9-month low of 48.2, while the government’s “official” PMI slipped to 50.1, a 4-month low. Markit manufacturing PMIs showed expansion in India (50.3) and Indonesia (51.0) and contraction in Taiwan (49.5) and South Korea (49.4).^16,17,18  

WORLD MARKETS

Name a consequential stock index, and you will name an index that pulled back in June. The S&P 500’s loss wasn’t so bad next to these others: FTSE 100, -8.08%; DAX, -6.15%; CAC 40, -7.69%; Micex, -4.76%; FTSE Eurofirst 300, -7.56%; Nikkei 225, -4.43%; KOSPI, -6.19%; Sensex, -3.79%, Hang Seng, -9.25%; Shanghai Composite, -14.74%; TSX Composite, -4.87%; Bovespa, -15.31%;  MSCI Emerging Markets Index, -6.79%; MSCI World Index, -2.61%.^19,20

COMMODITIES MARKETS

A strengthening dollar, some sentences from Ben Bernanke and anxieties about demand in China and other emerging markets made June a rough month for commodity futures. The June gains: oil, +1.54%; soybeans, +4.21%; cotton, +5.15%. In the loss column: copper, -7.87%; silver, -11.94%; platinum, -8.37%; gold, -10.79%; wheat, -5.66%; cocoa, -1.54%; coffee, -5.02%; sugar, -2.65%; natural gas, -14.42%. NYMEX crude ended June at $96.56; gold sank to a two-and-a-half-year low on the month’s last COMEX trading day, settling at $1,211.60. Even the U.S. Dollar Index lost some ground in June – 0.29%, to be precise.^21,22.

REAL ESTATE

The National Association of Realtors said existing home sales rose 4.2% for May, with the median price at $208,000 (15.4% better than a year before). NAR also said that pending home sales had climbed 6.7% in May to the highest level since December 2006. As for new home buying, the Commerce Department reported a third straight monthly gain – 2.1%. April’s edition of the S&P/Case-Shiller Home Price Index showed a 12.1% annualized increase in home prices across 20 metro markets, which was the index’s best yearly gain since March 2006. U.S. housing starts were up 6.8% in June while building permits were down 3.1%.^,5,10,23,24.

Was the door closing on the days of cheap mortgages? On June 27, Freddie Mac announced that the average rate on the 30-year FRM was at 4.46%, up from 3.81% on May 30. Other home loan types also showed major interest rate increases during that interval. The average rate on the 15-year FRM rose from 2.98% to 3.50%, rates on the 5/1-year ARM averaged 3.08% compared to 2.66%, and rates on the 1-year ARM went from 2.54% to 2.66%.²⁵

LOOKING BACK…LOOKING FORWARD

Even with June’s losses, the Dow racked up its best first half of a year since 1999. The S&P 500 advanced more in the year’s opening half than it had in 15 years. The Russell 2000’s June loss wasn’t so bad – just 0.68%. Note the (once again) positive real yield on the 10-year TIPS.²

Sources: cnbc.com, cnbc.com, bigcharts.com, treasury.gov – 6/28/13^{,2, 26,27}

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

While the Fed will taper its easing effort at some point and eventually wrap it up, it is still buying $85 billion of bonds per month in the near term and a fair amount of faith remains in the current bull market’s longevity. A recent USA TODAY article cited some interesting data from Ned Davis Research Group (NDR): since 1963, it has taken bear markets an average of 24 months to arrive after the Fed has tightened. In the year after such policy moves, the broad U.S. stock market was up 73% of the time, and up 3.4% on average. Of course, the stock market has violated all kinds of historical “norms” in the past decade, and few bears would have imagined all-time peaks for the Dow and S&P 500 just four years after stocks lost half their value. Optimism may be muted in the wake of the Fed’s inevitable decision, but it hasn’t disappeared.^1,10

UPCOMING ECONOMIC RELEASES:

Here are the key economic news items scheduled for July: the ISM May non-manufacturing index, the June ADP employment report and the June Challenger job-cut report (7/3), the Labor Department’s June jobs report (7/5), the June 19 Fed policy meeting minutes and data on May wholesale inventories (7/10), the June PPI and the University of Michigan’s initial July consumer sentiment survey (7/12), June retail sales and May business inventories (7/15), June’s CPI and NAHB housing market index (7/16), June housing starts and building permits and a new Fed Beige Book (7/17), the Conference Board’s June index of leading indicators (7/18), June existing home sales (7/22), the May FHFA housing price index (7/23), June new home sales (7/24), June durable goods orders (7/25), the final University of Michigan consumer sentiment poll for July (7/26), June pending home sales (7/29), May’s Case-Shiller home price index and the Conference Board’s July consumer confidence survey (7/30), and then on July 31, a Federal Reserve policy announcement, the initial estimate of Q2 GDP and the comparatively early arrival of the July ADP employment report. The numbers on June consumer spending will appear on August 2.