Stocks surged in an action-packed week, giving the NASDAQ two record closes in a row. For the week, the S&P 500 gained 2.41%, the Dow rose 1.84%, and the NASDAQ soared 4.25%.1
Investors around the world breathed a sigh of relief when EU negotiators finally reached a deal on Greece after weeks of brinksmanship. However, all is not won yet since the deal must pass several Eurozone parliaments next and Greece must apply for a new International Monetary Fund program.2 But, the European Central Bank approved more emergency relief and Greek banks are due to reopen this week.3 Will this new bailout resolve all of Greece’s issues? Certainly not. In fact, we may see new acts in the Greek drama if a snap general election is called this fall or if the IMF refuses to support the deal.4 However, Europe avoided a painful Greek exit and Greece has stepped back from the brink (for now).
On the U.S. side, earnings season really got going last week; despite some outsized performance from a few companies, earnings have gotten off to a lukewarm start, with early results suggesting that revenues may be weaker than what we saw in the first quarter. However, financials are showing strength and some standouts in the tech sector drove the NASDAQ to new record closes.5 Shares from technology giant Google (GOOGL) skyrocketed on strong earnings, giving the stock the biggest one-day rally in history.6
In other news, Federal Reserve Chair Janet Yellen testified before House and Senate committees last week, reiterating the Fed’s commitment to raising rates later this year. Though Yellen is comfortable with the improvement shown by the labor market, she wants to be cautious about the timing of interest rate hikes to avoid stalling the economic recovery.7
Looking ahead, earnings season will continue heating up this week, giving analysts piles of new reports to digest. Investors will also take a look at more housing data to gauge how the sector looks this quarter. Though summer is often a sleepy time for markets, recent events are keeping traders close to home and we may see more volatility in the coming weeks.
Wednesday: Existing Home Sales, EIA Petroleum Status Report
Thursday: Jobless Claims
Friday: PMI Manufacturing Index Flash, New Home Sales
Jobless claims fall more than expected. After three weeks of increases, the number of Americans filing new claims for unemployment benefits fell. Summer jobs data tends to be volatile, but the drop is a sign of health for the labor market.8
Inflation rises in June. The cost of consumer goods rose for a fifth straight month in June, driven upward by rising gasoline and other costs. This increase supports the Federal Reserve’s plan to raise interest rates this year.9
Housing starts rebound in June. Groundbreaking on new homes increased by 9.8% last month and new permits rose, boosting expectations of a housing market resurgence this year.10
Retail sales decline. U.S. retail sales unexpectedly slipped last month as Americans cut back on major purchases like autos and home goods. Though the decline could be seasonal, it raises worries that the economy might be lagging.11
U.S. markets ended the week on a down note as investors struggled with weak economic data and concerns about Greek debt negotiations. However, markets were able to end the month of May in the black. For the week, the S&P 500 lost 0.88%, the Dow dropped 1.34%, and the NASDAQ fell 0.38%.[i]
On Friday, we got a look at revised first-quarter gross domestic product (GDP) growth numbers, and we found out that the economy actually shrank 0.7 percent last quarter instead of growing.[ii] The news wasn’t unexpected, as economists knew that the economy struggled with issues like a harsh winter, a port shutdown, and a strong dollar that ate away at U.S. exports. However, it’s unwelcome because it means that the economy still hasn’t reached escape velocity and the recovery may still be fragile.
Though we don’t have data on the spring quarter yet, many economists expect a significant rebound in economic growth. We’ve seen estimates ranging from 1.0 percent to 3.2 percent, so it’s clear that there’s a lot of room for debate.[iii] Markets also took a hit from stalled Greek debt negotiations. Greece is currently deadlocked in talks with creditors for a new round of loans needed to service its debt and make government payments. To give you a brief bit of history: Greece was at the center of the European debt crisis after financial markets imploded in 2008.[iv]
To ward off a sovereign debt default, which might have touched off another European crisis, Greece accepted loans from European and international lenders in 2010. In exchange for the money, Greece agreed to institute austerity measures, massive cuts to government spending, designed to bring the national debt under control.
However, the cuts were deeply unpopular with Greek citizens, and a new leftwing Greek government elected in January rose to power on a wave of anger at the effects of austerity – rampant unemployment, brain drain, and low economic growth.[v]
What’s the big deal now? New Greek leaders refuse to reinstate austerity measures, and their creditors don’t want to extend more loans unless they meet their economic terms. If Greece doesn’t get another infusion of cash by its next debt deadline on June 5, the country will default on debt payments, which may trigger a banking crisis and possible exit from the European Union.[vi] Though the long-term effects of a “Grexit” (Greek exit) can’t be predicted, investors are likely to worry that where Greece goes, other countries may follow.
If Greece fails to reach an 11th-hour deal with its creditors this week, it’s likely that European and U.S. markets would react badly to the news. Let’s hope that this latest round of brinksmanship can be resolved; as always, we’ll keep you informed. The week ahead is also filled with domestic economic data, including the May employment report, which investors hope will show that the labor market continued its upward trend after a March blip.
Monday: Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Tuesday: Motor Vehicle Sales, Factory Orders
Wednesday: ADP Employment Report, International Trade, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book
Thursday: Jobless Claims, Productivity and Costs
Friday: Employment Situation
Consumer sentiment beats expectations though still weak. U.S. consumers remain cautious about the current state of the economy, leading some analysts to worry about consumer spending this quarter.[vii]
Durable goods orders fall. Orders for long-lasting factory goods fell in April, but the underlying data indicates that business spending is slowly picking up. Excluding volatile transportation orders, orders climbed 0.5%.[viii]
New home sales rise more than expected in April. Sales of newly constructed single-family homes surged in April, indicating that a housing sector resurgence may be underway. Hopefully, the strengthening job market will support sales activity.[ix]
Pending home sales looking up. A forward-looking indicator of U.S. home purchases rose in April for the fourth straight month in a very positive sign for the housing sector. The gauge rose 14% over April 2014, the highest level since May 2006.[x]
Despite flirting with new records, markets weren’t able to hold on to gains last week and closed mixed after comments about interest rates were made by Federal Reserve Chair Janet Yellen. For the week, the S&P 500 gained 0.16%, the Dow lost 0.22%, and the NASDAQ gained 0.81%.
Yellen gave a speech Friday that underlined her determination to raise interest rates this year as long as the economic recovery continues. Though she didn’t really say anything new, her comments underscore the fact that the Fed is committed to returning to normal monetary policy as soon as economists feel the economy can handle it. She also emphasized that interest rate hikes will be done gradually over a period of years, which should help cushion the blow to financial markets.
Could Yellen have been floating the idea to see how markets will react to a more aggressive stance on interest rates? Possibly. If so, the next few weeks could give us an idea of how investors will treat the news. Her speech also highlights her optimism about economic growth despite some weak reports in recent weeks.
Last week’s jobs report showed that the number of Americans filing new claims for unemployment benefits rose slightly to 274,000. However, the four-week moving average, a less volatile indicator, fell to the lowest level since April 2000. Outside of the energy sector, which has lost thousands of jobs due to low oil prices, layoffs in the U.S. have been minimal in the past months.
Though jobless claims (a good indicator of layoffs) rose slightly, claims from Americans renewing unemployment applications fell to the lowest level since November 2000. Currently, the overall trend is one of steady improvement in the labor market, which we hope will translate into higher consumer confidence and spending this summer.
Core inflation data also supports a move to higher interest rates later this year. The Fed has the “dual mandate” of keeping unemployment low and inflation stable and had tied monetary policy changes to two numbers: a headline unemployment rate of 5.2-5.6% and annual inflation of 2.0%. While the employment goal has been reached, the inflation target has been more elusive.
While some economists have worried about too-low inflation, the latest Consumer Price Index (CPI) figures suggest that core CPI, the number most used by economists, rose 1.8% in the last year. This stable rise, just under the Fed’s target, indicates that price pressures remain stable but are moving higher and closer to the 2.0% goal.
Looking ahead, analysts will be closely watching Friday’s second reading of the Q1 Gross Domestic Product (GDP) report. Unfortunately, the news isn’t expected to be good, and many economists expect to see that the economy shrank amid harsh winter weather and dock strikes. However, there’s considerable hope that the economy is rebounding in the second quarter (much as it did last year).
Monday: U.S. Markets Closed For Memorial Day Holiday
Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, New Home Sales, Consumer Confidence, Dallas Fed Mfg. Survey
Thursday: Jobless Claims, Pending Home Sales Index, EIA Petroleum Status Report
Friday: GDP, Chicago PMI, Consumer Sentiment
Factory growth slows for second month. Growth in the U.S. manufacturing sector, a major driver of economic activity, slowed down for another month in May. New orders increased at a very slow pace, indicating that next month might be slow as well.
U.S. gas prices at six-year low. Just in time for the summer driving season, pump prices across the nation are at a multi-year low. According to AAA, average gas prices were just $2.74 across the country. Hopefully, fuel savings will result in greater consumer spending.
Greece can’t pay its June bills. Greek leaders announced that they won’t be able to make debt repayments next month unless they receive another round of rescue funding. Despite months of negotiation, it’s unclear whether a deal can be reached that would prevent Greek insolvency.
April housing starts surge. Groundbreaking and permits for new homes spiked in April to the highest level in over seven years, indicating that homebuilders were confident about future sales. March numbers were also revised upward in a very hopeful sign for the housing market.