Market and economic update for the week of May 12
Last week was light in terms of U.S. data, although Janet Yellen’s Capitol Hill testimony seemed to indicate the U.S. economy is on the right track. Her testimony indicated she believes the economy was emerging relatively healthy from the winter slump of colder-than-normal weather and larger-than-normal amounts of snowfall.
One concern she cited, which the Federal Reserve will be watching, is the state of the housing market. Housing data has yet to rebound from its winter hibernation; however, we anticipate some recovery in activity should become evident as data from March and April is released and spring weather potentially brings a seasonal upswing in activity.
Two data components did not move markets but seemed to indicate potential future improvements in economic data. Weekly initial unemployment claims fell by 26,000 to 319,000, which indicates to us that we should expect the jobs market to continue to improve. Second, wholesale inventories grew 1.1% for the month, indicating some improvement in industrial activity to close out the first quarter. This week, April data will be in focus, which will provide us with a glimpse of U.S. economic activity post-polar vortex, including retail sales, inflation, industrial production, and housing starts.
Outside the United States, the European Central Bank (ECB) meeting was the key event. ECB President Mario Draghi indicated no changes at this time, but the committee was prepared to ease monetary policy at their next meeting in June. Inflation data for the eurozone remains well contained with producer prices falling 0.2% in March and retail sales growing just 0.9% for the prior 12 months. ECB easing will move toward a renewed expansion of monetary support, but we believe economic growth will likely remain quite modest in the eurozone.
Geopolitical risk remains a headline concern for global economies. The Russia-Ukraine conflict continues, although at this point it seems like there is little to stop the slide of Ukraine into the Russian sphere of influence, if not outright control. This shift in the balance of power may embolden others to assert power to resolve their own territorial disputes.
Negotiations continue with Iran regarding its nuclear development, although little progress has been made and the July 20 deadline looms. Conflict continues to be an issue across the Middle East and North Africa. Leadership has been a vacuum in the transition to a democratically elected government in Libya and Egypt, though in Egypt the military has stepped into the void and at least order remains. In Libya, rebels control key oil terminals and have turned off oil spigots in order to exert their will over the political process. We expect geopolitical risk to remain a wild card this year for global economic growth and for markets in general.
For more information, go to https://reserve.usbank.com/insights/market-economic-update-05-12-2014.
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.
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