Market and economic update: Data calm, geopolitics uneasy

Last week saw further increases in geopolitical risks. The Islamic State of Iraq and Syria (ISIS) began military operations in Iraq, appealing to Sunni militants in an effort to undermine the Shiite-led government of Prime Minister Maliki and carve out a new Sunni state. Shiite militia and government troops are mobilizing to confront the threat, while Kurdish militia in Iraqi Kurdistan have taken control of Kirkuk, site of oil infrastructure and 15% of Iraq’s petroleum supplies.

We believe the conflict will remain contained to Iraq at this time, but there is a risk that Iran, a Shiite Muslim-ruled country, and Saudi Arabia, a Sunni Muslim-ruled caliphate, could become embroiled in the conflict. Adding to macro risks was the surprise defeat of Republican House Majority Leader Eric Cantor by a Tea Party candidate in his primary election. We believe market risk may increase if this defeat is a sign of future political conflict as we approach mid-term elections.

U.S. economic data saw a relatively quiet week. Jobs data indicated employment continues to be healthy. Retail sales data for May were somewhat lower than April, but likely indicative of month-to-month volatility. Survey data indicated modest improvements to confidence, but measures remain shy of levels historically consistent with economic recovery.

• Weekly initial jobless claims rose slightly to 317,000, but levels remain consistent with improving payroll growth. The Job Openings and Labor Turnover Survey (JOLTS) indicated job openings have reached their highest level since 2007, and while the number of people quitting jobs rose, the rate remains well below average levels pre-financial crisis.
• Retail sales grew 0.3% in May, slightly lower than the 0.5% rate in April but consistent with a relatively strong pace of sales over the quarter. The National Federation of Independent Business (NFIB) Small Business Optimism Index rose to its highest level since 2007. However, the mid-month University of Michigan Consumer Confidence survey slipped by 0.7 points from May to 81.2.

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May economic data from China seemed to indicate economic activity may be stabilizing from its recent trend of slowing growth. Consumer prices rose 2.5% over the past year, up from 1.8% in April, a modest rise, but the change in trend may be an indication of an uptick in growth. Retail sales, money supply, and industrial production all strengthened slightly, confirming the HSBC and CFLP (China Federation of Logistics and Purchasing) Purchasing Manager Index (PMI) improvements. Improving growth in the United States, Europe, and Japan, in addition to the benefits of a weaker Chinese yuan relative to the U.S. dollar, may support a turnaround in economic activity into year-end.

For more information, go to https://reserve.usbank.com/insights/market-update-6-16-14.

Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank. 

This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment.

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