Monthly Economic Update for June 2013


May brought more record closes for the Dow, more
affirmations of the housing comeback, more household confidence, and certainly
more volatility as investors wondered if the Federal Reserve might soon do
less. The major concern of the month was how quickly and dramatically the Fed might
wind down its easing effort. Commodities struggled against a strengthening
dollar; domestic indicators were a mixed bag. Still, there was enough optimism to
send the S&P 500 2.08% higher for the month.1


The May 1 Fed policy minutes (released May 22) stated that “a number”
of Fed officials were open to reducing the scale of QE3 as soon as June. As
easing has driven this bull market perhaps more than any other factor, this unnerved
Wall Street. If economic indicators improved in spring, would the Fed stimulus

As it happened, some key economic indicators
faltered. Consumer spending slipped 0.2% in April (consumer incomes were flat
in that month), and the closely watched Institute for Supply Management manufacturing
PMI hit its lowest level in four years in May  – 49.0, indicating sector contraction. The
Labor Department said the economy generated 165,000 new jobs in April, in line
with the decent but unspectacular hiring growth seen in the past year (169,000
new jobs per month); unemployment ticked down to 7.5%.3,4

What really improved in May was consumer
confidence. The Conference Board’s May poll rose to 76.2 from the 68.1 reading
in April; the final May consumer sentiment survey from the University of
Michigan came in at 84.5, improved from a preliminary May mark of 83.7. Ongoing
headlines about new record highs for the Dow may have helped.5

Consumer prices declined in April, and that may
have cheered households up as well. The Consumer Price Index fell 0.4%, the
biggest monthly retreat since December 2008. (It had fallen 0.2% in March.) The
take-home pay of Americans rose 0.5% in April, and retail sales edged up 0.1%. Annualized consumer inflation
– as measured by the overall CPI – was a very weak 1.1% in April. (That was the
tamest since September 2010.) Wholesale inflation also lessened in
April – the
Producer Price Index sank 0.7%, the most in three years. Durable goods orders
rose 3.3% for April, 1.3% with the volatile transportation category factored


Eurozone manufacturing rebounded strongly in May. The
overall eurozone Markit PMI improved 1.6 points to 48.3, a 15-month peak;
Germany’s PMI improved to 49.4, Spain’s to 48.1 (a 24-month high) and France’s
to 46.4 (a 13-month high). Still, the big picture saw manufacturing contracting
in the euro area for the 22nd straight month. Economists polled by Markit also
projected the bloc’s GDP at -0.2% for Q2, which would match the retreat of Q1
and mark the seventh quarter in a row without economic growth in the region.
The European Central Bank lowered its benchmark interest rate to 0.5% last

Manufacturing shrank in most of the key Asian economies as well. The exception? Japan.
Markit’s PMI for that nation rose 0.4 points to 51.5 for May. China’s official
PMI came in at 50.8, but the Markit PMI dropped 1.2 points to 49.2, the first
contraction in seven months (a development which threw a shock into Japan’s
stock market and weighed on other exchanges). Taiwan’s PMI descended to 47.1,
India’s to 50.1 (poorest since March 2009), South Korea’s to 51.1, Vietnam’s to
48.8 and Indonesia’s to 51.6.11,12


European indices generally moved north in May; benchmarks in the Asia Pacific region
(and elsewhere in the Americas) had a tougher time of it. In the plus column:
KOSPI, +1.89%; Sensex, +1.31%; Shanghai Composite, +5.63%; TSE 50, +1.18%; TSX
Composite, +1.56%; CAC 40, +2.38%; FTSE Eurofirst 300, +1.29%; DAX, +5.50%;
FTSE 100, +2.38%. In the minus column: Bovespa, -4.30%; Bolsa, -1.60%; Nikkei
225, -0.62%; Hang Seng, -1.52%; All Ordinaries, -4.93%; Micex, -3.02%; MSCI
Emerging Markets, -2.94%; MSCI World, -0.28%.i COmposite : the TSX Composite (-2.30%), the  gan’13,14


The U.S. Dollar Index rose 1.63% in May, so it was not exactly a banner month for
the broad commodities market. May saw descents for gold (6.06%), silver (8.14%),
platinum (2.98%), natural gas (8.33%), oil (1.63%), cocoa (5.64%), wheat (2.46%),
corn (3.11%), coffee (5.79%) and sugar (5.32%). Copper did manage an advance of
2.40% in May.15,16


May brought a significant jump in home loan
rates. In Freddie Mac’s May 2 Primary Mortgage Market Survey, the average interest
rate on the 30-year FRM was 3.35%; by the May 30 survey, it had hit 3.81%. This
mirrored what happened to the 15-year FRM – interest rates on that loan type averaged 2.56%
on May 2, 2.98% by May 30. Average interest rates for 5/1-year ARMs rose 0.1%
to 2.66% in the same interval while rates on1-year ARMs
actually descended a bit, going from 2.56 to 2.54%.20


The small caps stood tall in May: the Russell 2000 surpassed the 1,000 mark for the first
time. It gained 3.87% on the month, ending May at 984.15. As these numbers show,
investors didn’t exactly sell and go away last month. Another notable
development: the real yield of the 10-year note was nearly back in positive
territory at the end of May.1,21

Historically speaking, June has not been a good month for stocks – on average, the S&P
500 has gone -0.30% in June since 1945. As recently as late May, analysts were
wondering if a pullback (or a correction) was in the offing, as even moderately
good economic data might encourage Fed officials to taper off easing. How
things changed in a week: the subpar ISM manufacturing index reading and
retreat in personal spending were bad news, but encouraging developments for a
stock market worried that the Fed might perceive the economy as stronger rather
than weaker. One of the more ardent Wall Street bulls, S&P’s Sam Stovall,
just noted that “the S&P 500’s performance in June could surprise to the
upside,” referencing that since 1945, the index has averaged a 0.4% gain in the
month following a 7-month winning streak. Even the much-respected “Dr. Doom”,
economist Nouriel Roubini, believes Wall Street will see two more years of
gains – he said so on CNBC at the start of this month. June may prove a wild
card; it may bring more volatility than previous months as investors watch for
any little hint of what the Fed might do, how the labor market is faring, how
the service and manufacturing sectors are holding up this spring, and how
freely consumers are spending and buying. For the record, the next Fed policy meeting
wraps up on June 19.23,24
for the rest of the month is as follows … the ISM May non-manufacturing index
and a new Fed Beige Book (6/5), the Labor Department’s May jobs report (6/7), April
wholesale inventories (6/11), May retail sales ad April business inventories (6/13),
May’s PPI and industrial output and the University of Michigan’s initial June
consumer sentiment survey (6/14), June’s NAHB housing market index (6/17), May’s
CPI and data on May housing starts and building permits (6/18), a Federal
Reserve policy announcement (6/19), May existing home sales (6/20), the
Conference Board’s June consumer confidence survey, the April Case-Shiller home
price index, April’s FHFA housing price index and the numbers on May new home
sales and durable goods orders (6/25), the final estimate of Q1 GDP (6/26), the
Commerce Department’s May consumer spending report and NAR’s pending home sales
report for May (6/27), and then the final University of Michigan consumer
sentiment survey for June (6/28).



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