{"id":886,"date":"2012-07-09T11:27:09","date_gmt":"2012-07-09T17:27:09","guid":{"rendered":"http:\/\/www.sunlakesofarizona.com\/blog\/?p=886"},"modified":"2012-07-09T11:27:09","modified_gmt":"2012-07-09T17:27:09","slug":"economic-notes-for-the-week-of-july-9th","status":"publish","type":"post","link":"https:\/\/dev.sunlakesofarizona.com\/blog\/2012\/07\/economic-notes-for-the-week-of-july-9th\/","title":{"rendered":"Economic Notes for the Week of July 9th"},"content":{"rendered":"

The ISM<\/strong> manufacturing index<\/strong> figure on Monday was certainly a disappointment, as it fell from May\u2019s 53.5 down to 49.7\u2014certainly larger than expected and below the critical \u201850\u2019 mid-line of the diffusion index.\u00a0 This is now at its weakest point since the summer of 2009.\u00a0 Most of the components in the index were individually poor, with the new orders, production and export orders pieces all significantly down.\u00a0 The employment measure was flat, however, and represented one bright spot in an otherwise dreary report, and the prices paid piece was also down\u2014a good thing in this case\u2014as commodity input costs fell, providing less of headwind for manufacturers.\u00a0 Also, the level of the index itself, at around 50, is not especially low from a historical standpoint, is on par with about where we are at below 2% GDP growth is nowhere near recession levels.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

The ISM non-manufacturing index<\/strong> on Thursday fell as well, but to a lesser degree than the manufacturing survey, from 53.7 to 52.1\u2014so it stayed above the \u201850\u2019 level.\u00a0 The general business index and new orders declined, while the employment component edged up a few points\u2014again, inconsistent with broader economic slowing.\u00a0 Prices paid also fell, which is a positive for businesses.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

In other news, construction spending<\/strong> rose +0.9% in May, which was higher than expected and annual benchmark revisions to the series offset a bit of the good news.\u00a0 Factory orders<\/strong> for May were up (by +0.7%), which offset some of the ISM disappointment to some degree, and were higher than expectations of an unchanged number.\u00a0 Core durable goods (non-defense, ex-aircraft) figures were up, while inventory accumulation was down.\u00a0 All-in-all, a fairly neutral result.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

On a much more positive note, new car sales<\/strong> were strongly higher as June results were quite robust from a year-over-year standpoint.\u00a0 American automakers GM and Ford had strong months, as did foreign makers VW and Toyota, among others.\u00a0 VW, in fact, is experiencing its best year since the early 70\u2019s.\u00a0 While at first glance, this might not be seen as necessarily that relevant to the U.S. economy, but there has been a steady trend over the last few decades of foreign brands being built in the U.S.\u2014specifically, the American South, where labor costs have historically been lower.\u00a0 So, at a deeper level, these gains for foreign-domiciled firms might not help S&P earnings, but do provide an economic plus domestically.\u00a0 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

The ADP private employment<\/strong> number from Thursday morning showed an increase of +176k jobs, much more than the +100k expected.\u00a0 ADP is often looked at as a precursor to Friday\u2019s \u2018official\u2019 jobs figure\u2014even though the correlation between the two can vary.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Initial jobless claims<\/strong> fell by 14k to 374k for the last week of June, which was a larger drop than expected, and the four-week moving average was largely unchanged at 386k.\u00a0 Continuing claims<\/strong> were close to 3.3 million, close to expected and largely unchanged.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Friday\u2019s employment situation<\/strong> report was expected to be somewhat negative, at +100k or even fewer jobs added.\u00a0 The +80k number that actually came in was certainly a disappointment, and the unemployment rate<\/strong> was unchanged at 8.2%.\u00a0 The slowing came mostly from private sector job growth in the \u2018trade, transport and utilities\u2019 area (which includes retail).\u00a0 There were some other positive pieces, though such as a longer average workweek and higher hourly earnings; so the year-over-year growth rate (at +2.0%) was a bit above consensus.\u00a0\u00a0 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

How do we interpret these ISM and employment figures?\u00a0 We\u2019re certainly slowing, but individual data from month to month can be inconsistent.\u00a0 For example, firms seem more cautious, but employment has grown (which is somewhat counterintuitive).\u00a0\u00a0 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

This isn\u2019t the first mid-cycle slow patch we\u2019ve encountered during the past several years, so it may be premature to suggest further extreme slowing.\u00a0 It could also be as simple as the fact that we\u2019ve already rebounded from extremely low levels since the recession lows, so there is less extreme upside available.\u00a0 The very slow \u2018muddle through\u2019 economy has been and continues to be a prudent base case for where we appear to be.\u00a0 Because of the very low level of activity in certain sectors (homebuilding, construction, certain manufacturing), there isn\u2019t much slack that would amp up recession risks, but there isn\u2019t really a very good case for a high-growth catalyst, either.\u00a0 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

Risk assets look attractive; if for no other reason than the lack of attractive alternatives in a period of low interest rates and fairly \u2018normal\u2019 inflation measures.\u00a0 While still volatile, these continue to appear to be investors\u2019 best opportunity to earn a positive \u2018real\u2019 return looking ahead.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

What\u2019s the deal with the LIBOR scandal?\u00a0 First of all, a quick definition and explanation of LIBOR might help.\u00a0 It stands for the London Interbank Offered Rate, which is regulated and published daily by the British Bankers\u2019 Association (a trade group) based on quotes from almost 20 different banks.\u00a0 Essentially, it\u2019s the average rate for what banks will charge for short-term lending activities, and has turned into a popular baseline interest rate for companies seeking very short term lending (sometimes for periods as short as overnight).\u00a0 Generally, loans are quoted at a \u2018spread\u2019 over LIBOR, such as LIBOR+50bp, LIBOR+300bp, etc. with higher risk loans being more expensive to finance.\u00a0 Many longer floating rate loans, such as those owned in the bank loan asset class, are also quoted in this way, and allows the \u2018floating\u2019 of their interest rates in line with the market.\u00a0 Even adjustable-rate home mortgages and credit cards use LIBOR as a base for calculations.\u00a0 By Wall Street Journal estimates, perhaps up to $800 trillion of financial products are pegged to the base LIBOR rate (when notional value of derivatives are included)… so 1 basis point can mean a lot.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

What started all this was news of a $450 billion settlement from Barclays Bank in London, payable to U.K. and U.S. bank regulators who claimed the bank \u2018manipulated\u2019 rates for the past several years, going back to 2005.\u00a0 The alleged purpose of the rigging was to move rate quotes (those published and provided to regulators in order to determine LIBOR) up or down, based on what might have been more favorable to investment positions held within the bank.\u00a0 The CEO, COO and chairman are now gone and further investigation is ongoing.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

This may affect other banks and may result in more fines, but the true number of culprits is yet to be determined.\u00a0 Much as with events during the financial crisis, somewhat lax and\/or sporadic oversight resulted in an environment where traders, who are compensated by trading profits, were able to manipulate a system in their favor\u2014since market \u2018quotes\u2019 are fast-changing and difficult to monitor.\u00a0 Based on past episodes of manipulation, excess risk-taking, inappropriate risk hedges or just lack of common sense, this isn\u2019t entirely surprising, although the \u2018payoffs\u2019 of a bottle of nice champagne or coffee seem a little ridiculous.\u00a0 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

But this does represent another hurdle in banks\u2019 efforts to clean up their reputations in the wake of the 2008 crisis.\u00a0 Scandals like this which affect the pocketbooks of everyday consumers don\u2019t help, but do provide more ammunition for the pro-regulatory lobby.\u00a0 Expect more news, lawsuits, and probably some type of large-scale settlement(s) at some point.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Market Notes <\/em><\/strong><\/span><\/p>\n

\u00a0<\/span><\/p>\n\n\n\n\n\n\n\n\n\n
Period ending 7\/6\/2012<\/span><\/strong><\/td>\n\n

1 Week (%)<\/span><\/strong><\/p>\n<\/td>\n

\n

YTD (%)<\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

DJIA<\/span><\/td>\n\n

-0.75<\/span><\/p>\n<\/td>\n

\n

6.03<\/span><\/p>\n<\/td>\n<\/tr>\n

S&P 500 <\/span><\/td>\n\n

-0.48<\/span><\/p>\n<\/td>\n

\n

8.96<\/span><\/p>\n<\/td>\n<\/tr>\n

Russell 2000<\/span><\/td>\n\n

-0.27<\/span><\/p>\n<\/td>\n

\n

8.69<\/span><\/p>\n<\/td>\n<\/tr>\n

MSCI-EAFE<\/span><\/td>\n\n

-0.65<\/span><\/p>\n<\/td>\n

\n

2.29<\/span><\/p>\n<\/td>\n<\/tr>\n

MSCI-EM<\/span><\/td>\n\n

0.92<\/span><\/p>\n<\/td>\n

\n

3.23<\/span><\/p>\n<\/td>\n<\/tr>\n

BarCap U.S. Aggregate<\/span><\/td>\n\n

0.30<\/span><\/p>\n<\/td>\n

\n

2.91<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n\n\n\n\n\n\n
U.S. Treasury Yields<\/span><\/strong><\/td>\n\n

3 Mo.<\/span><\/strong><\/p>\n<\/td>\n

\n

2 Yr.<\/span><\/strong><\/p>\n<\/td>\n

\n

5 Yr.<\/span><\/strong><\/p>\n<\/td>\n

\n

10 Yr.<\/span><\/strong><\/p>\n<\/td>\n

\n

30 Yr.<\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

12\/31\/2011<\/span><\/td>\n\n

0.02<\/span><\/p>\n<\/td>\n

\n

0.25<\/span><\/p>\n<\/td>\n

\n

0.83<\/span><\/p>\n<\/td>\n

\n

1.89<\/span><\/p>\n<\/td>\n

\n

2.89<\/span><\/p>\n<\/td>\n<\/tr>\n

6\/29\/2012<\/span><\/td>\n\n

0.09<\/span><\/p>\n<\/td>\n

\n

0.33<\/span><\/p>\n<\/td>\n

\n

0.72<\/span><\/p>\n<\/td>\n

\n

1.67<\/span><\/p>\n<\/td>\n

\n

2.76<\/span><\/p>\n<\/td>\n<\/tr>\n

7\/6\/2012<\/span><\/td>\n\n

0.08<\/span><\/p>\n<\/td>\n

\n

0.27<\/span><\/p>\n<\/td>\n

\n

0.64<\/span><\/p>\n<\/td>\n

\n

1.57<\/span><\/p>\n<\/td>\n

\n

2.66<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

Stocks were generally lower with the poor ISM results and continued concerns about slow economic activity U.S. and abroad, although emerging markets were up on the week.\u00a0 Domestically, telecom and staples rode out the week in the best shape, while industrials and financials fared worst.\u00a0 Small-caps lost a bit less than large-caps, so there was no real pattern of stock performance during the week.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

In bonds, government and interest-rate sensitive debt performed best, while foreign bonds lagged with a stronger dollar.\u00a0 Speaking of foreign rates, the Bank of England is restarting its asset purchase program\/QE with an additional \u00a350 billion and the ECB is expected to lower rates another 25 bps.\u00a0 The People\u2019s Bank of China reduced rate by another 31 bp, down to 6%, in an effort to keep stimulus flowing in a slowing economic scenario.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

In commodities, agricultural contracts were up while most others were flat to negative.\u00a0 Grains have been the biggest winners in recent weeks as the Midwest drought has become the worst since 1988 (and perhaps since the \u2018dust bowl\u2019 years of the Great Depression).\u00a0 Corn and soybeans have undergone the biggest moves upward.\u00a0 Oil remains weak, and perhaps could be oversold at this point, according to some analysts\u2014and remain at levels only appropriate if we enter another recession.\u00a0 So, a bounceback a bit higher here would not be entirely surprising.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Alcoa begins the 2nd<\/sup> quarter earnings race this week.\u00a0 Revisions for companies in the S&P have been trending lower over the past several weeks as economic conditions slow further.\u00a0 Whether these estimates have been lowered far enough to satisfy investors remains to be seen in the coming few weeks.\u00a0 For the S&P as a whole, 2nd<\/sup> quarter earnings are expected to be roughly flat, with a 7-9% growth rate for 2012 as a whole.\u00a0 However, P\/E\u2019s remain below 13, which is under the historical average.<\/span><\/p>\n

\u00a0 <\/span><\/p>\n

Have a good week.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Karl Schroeder, RFC, CSA, AACEP<\/span><\/p>\n

Investment Advisor Representative<\/span><\/p>\n

Schroeder Financial Services, Inc.<\/span><\/p>\n

480-895-0611<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Sources:\u00a0 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\u2019s, Standard & Poor\u2019s, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.\u00a0 Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return\/excluding dividends.\u00a0 Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.\u00a0 All information and opinions expressed are subject to change without notice.\u00a0 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.\u00a0 Schroeder Financial Services, Inc. is a registered investment advisor.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

The ISM manufacturing index figure on Monday was certainly a disappointment, as it fell from May\u2019s 53.5 down to 49.7\u2014certainly larger than expected and below the critical \u201850\u2019 mid-line of the diffusion index.\u00a0 This is now at its weakest point since the summer of 2009.\u00a0 Most of the components in the index were individually poor,Read more<\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[],"class_list":["post-886","post","type-post","status-publish","format-standard","hentry","category-finance"],"_links":{"self":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/886","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/comments?post=886"}],"version-history":[{"count":1,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/886\/revisions"}],"predecessor-version":[{"id":887,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/886\/revisions\/887"}],"wp:attachment":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/media?parent=886"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/categories?post=886"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/tags?post=886"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}