Last week, economists, investors and homeowners welcomed the news that existing home sales improved 1.3% for April. Complementing that announcement from the National Association of Realtors, the Census Bureau said new home sales rose 6.4% in April. In annualized terms, the sales pace has flagged: new home sales have slowed 4.2% over the past 12 months, resales 6.8%.
April brought the fourth straight monthly gain for the Conference Board’s index of leading economic indicators. It rose 0.4% in April, and its March gain was revised up to 1.0% (its largest gain since last September). The index looks at 10 factors to project the health of the American economy 3-6 months ahead.
These concerns must be weighed though against generally stronger-than-expected recent U.S. economic data, including a strong ISM Non-Manufacturing (services) report, a resumption in falling initial jobless claims after a brief rise, and improved Chinese export data largely due to a weaker yuan currency. With earnings season more than 90% complete, three-fourths of reporting companies have topped consensus earnings-per-share estimates, according to Factset. Investors may also get a summer boost in the form of additional monetary stimulus from European and Japanese monetary authorities.
For the week, the S&P 500 rose +1.21%, the Dow added +0.70%, and the MSCI EAFE (developed international) gained +0.54%.
Here are the 3 stories this week that rose above the noise:
Are Emerging-market Equities Finally Catching Up?
Emerging-market equities experienced net inflows for the first time in over a year during April. Emerging-market performance significantly lagged developed markets in 2013, but they are outperforming in 2014.
Last year, investors began to pull money out of emerging markets when the Federal Reserve first discussed tapering its bond-buying program in May, which resulted in a sharp decline for many emerging-market currencies. Investor sentiment for emerging markets has improved in recent months, but emerging markets still face several headwinds including slower economic growth and elevated geopolitical risks in several regions.
E.C.B. Plots Strategy for Staving Off Deflation
European policy makers and economists met this week in Lisbon in advance of the formal June 5 governing council meeting to discuss the European economy, including the growing deflation concern. While the annual inflation rate of 0.7% is well below the European Central Bank’s (ECB) 2% target, the specter of deflation threatens to undermine the weak economic recovery in the Eurozone.
Most economists expect the ECB will take some form of action on June 5, however there are differing opinions as to what moves should and will occur. Among the policy options are ECB asset purchases (similar to U.S. quantitative easing), a reduction in the benchmark interest rate to 0.15 percent from 0.25 percent, and a negative deposit rate that would charge lenders for parking money at the central bank.
Bond Market to Fed: Your 4% Rate Forecast Is Way Too High
A Bloomberg article examines some implications of the strong start to the year for bond markets, which has resulted in the best year-to-date gains for long-term Treasuries since 1995. One implication of current market yields is that bond investors believe that the Fed will keep interest rates lower for longer than even the Fed’s own forecasts conclude. A further implication is that bond investors seem to be pricing in a prolonged period of subpar economic growth despite a growing consensus among economists that growth will accelerate over the remainder of the year.
Behavioral and technical factors may explain some of the bond market strength this year after a very volatile 2013, but additional declines in yields in the coming months would suggest the bond market is betting against a strong global economic recovery developing anytime soon.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
