Wednesday, July 2, 2014

Perspectives from Above the Noise – Week of June 30, 2014


A relatively quiet week for economic data ended with equity markets little changed. Perhaps the most notable characteristic of the week’s market action was a continued absence of volatility, with the S&P 500 now having gone 49 straight trading days without a 1% gain or loss – the longest such period since 1995. That this highly unusual lack of equity market volatility is occurring despite ongoing geopolitical unrest in the Ukraine and Iraq and a very steep selloff in the Dubai equity market makes it even more remarkable. Many commentators have pointed to Fed policy as the driving force behind the vanquishing of volatility.

While U.S. economic data has recently become more mixed, a better-than-expected reading for the HSBC Chinese manufacturing flash PMI has sparked some renewed optimism for a second-half pick up in the world’s second-largest economy. That would be consistent with the last three years in which Chinese growth has accelerated in the second half of each year.

For the week, the S&P 500 lost -0.10%, the Dow Jones Industrial Average fell -0.56%, and the MSCI EAFE (developed international) dropped -0.82%.

Here are the 3 stories this week that rose above the noise:

San Francisco Fed: U.S. Inflation Will Likely Remain Low Through 2015

A new research paper from economists Yifan Cao and Adam Shapiro of the Federal Reserve Bank of San Francisco predicts that U.S. inflation may remain “well below” the Fed’s 2 percent target through next year. The research paper also predicts unemployment will decline to 5.5 percent by the end of 2015.

Inflation has increased in recent months to reach an 18-month high, but still remains below the Fed’s target. If inflation continues to accelerate and advance past 2 percent, the Federal Reserve may increase short-term rates sooner than expected.

Pending Sales of U.S. Existing Homes Rise Most in Four Years

The number of contracts to purchase previously owned U.S. homes jumped in May by the most in more than four years, a sign the residential real-estate market is rebounding after a slow start to the year. The pending home sales index climbed 6.1 percent in May, the biggest advance since April 2010. The gain exceeded the most optimistic estimate in a Bloomberg survey of economists, whose median forecast called for a 1.5 percent gain.

The report on pending home sales followed a report yesterday from the Commerce Department that showed sales of new homes soared 18.6 percent in May to their highest level in six years. The combined reports suggest the economically important U.S. residential housing market has begun to regain its footing this spring after a sluggish first quarter.

Mid-Year Emerging Markets Update: ‘Recovery Phase’

Mark Mobius, executive chairman of Templeton Emerging Markets Group, provides his narrative for an emerging-market recovery, with a number frontier markets offering “some of the most exciting opportunities.”

Mobius notes that investor sentiment has improved, global liquidity fears have subsided, and upcoming emerging market elections (including Brazil) could prove to be positive market catalysts. Furthermore, the use of smartphones and the internet revolution have the potential to accelerate growth in many countries.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.