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Why events overseas didn’t impact economic indicators or earnings

Phalguni Soni

Economic indicators and earnings shrug off events overseas (Part 1 of 10)

Economic indicators and earnings releases last week

Economic indicators released last week covered most gross domestic product (or GDP) components, including consumption, housing, manufacturing, and investment. This series will discuss the major economic data releases last week and their ramifications for second quarter GDP, financial markets, and exchange-traded fund (or ETF) investors.

Conference Board’s Leading Economic Indicators

The Conference Board’s Leading Economic Indicators (or LEI) Index was released last Friday. It tends to forecast the trend in economic activity based on ten indicators covering a broad portion of the economy.

June marked the sixth consecutive increase in the LEI. It was primarily driven by the spread between ten-year Treasuries and the Fed funds rate, as a result of the Fed’s accommodative monetary policy.

Seven of the ten indicators that were covered showed positive trends. According to the LEI release, economic growth had expanded over the first six months of 2014. It was likely to pick up pace even further in the second half of the year.

One indicator that didn’t trend well were building permits, which fell 4.2% in June. This is one of the ten indicators included in the LEI. As a result of their manifold multiplier effects, building permits and home construction often cause a jump-start in economic recoveries.

Janet Yellen’s semi-annual testimony to Congress covered the housing market

Fed Chair Janet Yellen wasn’t too upbeat about housing market conditions in her semi-annual Congressional testimony on the state of the economy last week. “While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing,” she said.

30-year conventional mortgage rates had risen by ~119 basis points over the course of 2013. Although they have since fallen by ~38 basis points in 2014, they may have dampened some of the resurgence in the housing markets (XHB) seen in late 2012 and over the course of 2013.

We’ll cover the National Association of Homebuilders or Wells Fargo Housing Market Index as well as the housing starts and building permits reports for June in Parts 5 and 6 of this series.

Consumption and retail indicators

Major consumption-related indicators included the monthly retail sales for June, the University of Michigan/Reuters’ Consumer Sentiment Index, and the weekly Redbook and ICSC-Goldman Sachs Store Sales indices. We’ll be covering these in greater detail in Parts 7 and 8 of this series.

Consumer sentiment in July came in lower than last month, primarily due to consumer expectations for future employment and income growth. However, consumers were more positive on current conditions due to the improving labor market.

Manufacturing indicators show a mixed trend

Industrial production figures for June were released on Wednesday, July 16. The results were disappointing, with production rising just 0.2% month-over-month (or MoM), in June, compared to 0.6% in May. Major manufacturing releases last week included the results of the two manufacturing surveys conducted by the Federal Reserve Banks of New York and Philadelphia. We’ll analyze these reports in greater detail in Parts 2 and 3 of this series.

Secondary market impact

Usually, positive economic data is bullish for stocks and bearish for investment-grade bonds. While economic reports last week were mixed, stock markets were up in the week ending July 18. There was a minor plunge in markets on Thursday, due to the crash of a Malaysian airliner over Ukraine. Although both the Dow Jones Industrial Average and the S&P 500 Index fell on Thursday, both indices recovered by Friday due to second quarter earnings releases for companies coming in slightly ahead of market expectations.

The Dow Jones Industrial Average (DIA) and the S&P 500 Index (SPY) were up by 0.9% and 0.5%, respectively, over the week. The tech heavy NASDAQ-100 (QQQ) Index was up by 0.9% over the week, helped by Google’s (GOOG) better than expected second quarter results. Another NASDAQ-100 component, Apple, will declare results on Tuesday, July 22.

The yields on ten-year Treasuries were down by three basis points over the week ending July 18, to 2.50%, on the geopolitical ramifications of the Malaysian airliner crash, as well as Middle East tensions. 30-year Treasury yields were down by five basis points, to 3.29%.

In the next section, we’ll discuss the Philadelphia Fed’s Business Outlook Survey for July, which touched the highest level since March, 2011. Please continue reading the next section in this series.


Continue to Part 2

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