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Clarksville, TN – The economic data were mixed. The estimate of real GDP growth for the first quarter was revised down to a -1.0% annual rate (vs. +0.1% in the advance estimate). Most of the revision was due to a slower pace of inventory growth, which ought to pave the way for increased production in 2Q14.
Slower inventory growth subtracted 1.6 percentage points from overall GDP growth (vs. -0.6 ppt in the advance estimate), while a wider trade deficit subtracted 1.0 percentage point (vs. -0.8 ppt in the advance estimate.Domestic Final Sales (GDP less net exports and the change in inventories), a measure of underlying domestic demand, rose at a 1.6% pace, the same as in 4Q13.
Personal income rose 0.3% in April, as expected, but spending slipped 0.1% (-0.3% adjusting for inflation, offset by upward revisions to February and March). However, while the estimate of 1Q14 GDP growth was revised lower, estimates of 2Q14 GDP growth are likely to be raised (to 4% or more).
Bond yield fell further, with the 10-year Treasury note yield pushing below 2.5%. The drop in bond yields appears to be due to a number of factors. Soft growth and low inflation in Europe has fueled expectations that the European Central Bank will ease monetary policy, pushing global bond yields lower.
In the U.S., while the tapering of the Fed’s pace of asset purchases is set to continue, policymakers are expected to be in less of a hurry to raise short-term interest rates. Inflation is still low and the government is borrowing less. For the stock market, this appears to be the sweet spot – the economic expansion is set to continue, but not so fast that the Fed will take the punchbowl away anytime soon.
Next week, the calendar is packed. The ISM surveys for May have some potential to surprise and we could see the financial markets react accordingly. The ADP estimate is not seen as a good predictor of the official BLS payroll figures, but a large enough surprise could generate some reaction in the markets.
The ECB is widely expected to do something on Thursday, but it’s not exactly clear what that will be. An ECB rate cut, including a negative deposit rate and other efforts to boost the flow of credit are factored in. The ECB has a history of disappointing the markets and that may be the case again next week, but in his press conference, ECB President Draghi could throw out some hope by suggesting the possibility of further action.
Nonfarm payrolls jumped in April (+288,000 in the initial estimate), but some of that strength may have reflected a rebound from adverse weather and the late Easter holiday. Payrolls should rise more moderately in May (still strong, the median forecast is likely to be about +215,000), but watch for possible revisions.
Consumer Money Rates
Treasury Yield Curve – 5/30/2014
S&P Sector Performance (YTD) – 5/30/2014
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Tax Equiv Muni yields (TEY) assume a 35% tax rate on triple-A rated, tax-exempt insured revenue bonds.
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 29th, 2014.
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