Market Commentary by Scott J. Brown, Ph.D., Chief Economist
The economic data held few surprises. Retail sales rose 0.5% in April, boosted by higher gasoline prices (ex-gasoline, retail sales rose just 0.2%). Weekly claims for unemployment insurance benefits fell back following a spike in the previous week, but the underlying trend is higher. The monthly inflation reports reflected higher gasoline prices (no surprise), but the impact was tempered by the seasonal adjustment (which expects increases in gasoline prices in the spring). An increase in motor vehicle prices, which could reflect difficulties in the seasonal adjustment, but seem unlikely to re-occur, added to both the CPI and PPI. The CPI rose 0.4% in April (+3.2% y/y), with gasoline accounting for about half of the monthly increase (and more than half of the year-over-year increase). Ex-food & energy, the CPI rose 0.2% (+0.1854% before rounding), a 2.1% annual rate in the first four months of 2011 (vs. a +0.8% pace in the last six months of 2010) – that’s not “runaway” inflation.
The financial markets seemed to take the economic figures in stride. Stock, bond, commodity, and currency markets all exhibited a greater degree of intraday volatility. The underlying fundamentals weren’t in flux day to day, so much of the volatility appears to be due to shifting sentiment amongst speculators. An increase in bank reserve requirements in China (the fifth this year) to clamp down on inflation sent stock and commodity prices down on Thursday, but these markets reversed by the end of the day. The economic picture is likely to remain clouded in the near term, so get used to market volatility.
Next week, the economic data could generate some minor reactions in the financial markets, but the reports won’t do much to clarify the economic picture. Residential construction figures are expected to be a little better in April, but still relatively weak. The April LEI should be about flat as components were mixed – it’s only one month, but you may start to hear talk of a “slow patch” in economic growth.
Indices
| Â | Last | Last Week | YTD return % |
| DJIA | 12695.92 | 12584.17 | 9.66% |
| NASDAQ | 2863.04 | 2814.72 | 7.92% |
| S&P 500 | 1348.65 | 1335.10 | 7.24% |
| MSCI EAFE | 1725.10 | 1755.56 | 4.03% |
| Russell 2000 | 847.53 | 829.24 | 8.15% |
Consumer Money Rates
| Â | Last | 1-year ago |
| Prime Rate | 3.25 | 3.25 |
| Fed Funds | 0.10 | 0.22 |
| 30-year mortgage | 4.59 | 5.01 |
Currencies
| Â | Last | 1-year ago |
| Dollars per British Pound | 1.629 | 1.488 |
| Dollars per Euro | 1.423 | 1.266 |
| Japanese Yen per Dollar | 80.820 | 93.160 |
| Canadian Dollars per Dollar | 0.964 | 1.019 |
| Mexican Peso per Dollar | 11.661 | 12.400 |
Commodities
| Â | Last | 1-year ago |
| Crude Oil | 98.97 | 75.65 |
| Gold | 1497.73 | 1242.13 |
Bond Rates
| Â | Last | 1-month ago |
| 2-year treasury | 0.54 | 0.71 |
| 10-year treasury | 3.19 | 3.42 |
| 10-year municipal (TEY) | 4.14 | 5.31 |
Treasury Yield Curve – 5/13/2011Â
S&P Sector Performance (YTD) – 5/13/2011Â
Economic Calendar
| May 16th |  — | Empire State Manufacturing Index (May) Homebuilder Sentiment (May) |
| May 17th |  — | Building Permits, Housing Starts (April) Industrial Production (April) |
| May 18th |  — | FOMC Minutes (April 26th-27th) |
| May 19th |  — | Jobless Claims (week ending May 14th) Philadelphia Fed Index (May) Existing Home Sales (April) Leading Economic Indicators (April) |
| May 24th |  — | New Home Sales (April) |
| May 25th |  — | Durable Goods Orders (April) |
| May 26th |  — | Real GDP (1Q11, 2nd estimate) |
| May 30th |  — | Memorial Day Holiday (markets closed) |
| June 3rd |  — | Employment Report (May) |
| June 21st-22nd |  — | FOMC Meeting Bernanke Press Conference |
Important Disclosures
Past performance is not a guarantee of future results. There are special risks involved with global investing related to market and currency fluctuations, economic and political instability, and different financial accounting standards. The above material has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. There is no assurance that any trends mentioned will continue in the future. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Investing involves risk and investors may incur a profit or a loss.
US government bonds and treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. US government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the US government.
Commodities trading is generally considered speculative because of the significant potential for investment loss. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Specific sector investing can be subject to different and greater risks than more diversified investments.
Tax Equiv Muni yields (TEY) assume a 35% tax rate on triple-A rated, tax-exempt insured revenue bonds.
Material prepared by Raymond James for use by its financial advisors.
The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Data source: Bloomberg, as of close of business May 12th, 2011.
©2011 Raymond James Financial Services, Inc. member FINRA / SIPC.
