June 15, 2016

The major stock market averages opened higher this morning (Dow +39 pts; SPX +.27%). Financials (esp. banks) are the clear leaders in early trading (+.9%). Consumer staples and industrials are also in the green. Stocks have moved lower over the last few trading sessions after coming very close to touching all-time highs. The SPX is down about 2% over the last week. The VIX Index, which spiked yesterday to 21 (considered high), is back down to 19 today. European markets are poised to close up over 1% and most of Asia was positive overnight. The dollar is a bit weaker and commodities are mostly higher. Copper is up 2.6%. WTI crude oil is trading down, however, to $48/barrel. Bonds continue to gain in price, with yields moving lower. The 5-year Treasury yield is down to 1.11% and the 10-year is trading at 1.59%. So the 10-year yield is the lowest it’s been going back to November 2012. The bond market just doesn’t see inflation accelerating any time soon. By the way, German bond yields just fell negative for the first time ever, and that’s the other reason US bond yields are so low. Global investors are rushing to buy Treasuries because of their relatively higher yield. Huge demand for Treasuries is driving our rates lower.  

The Producer Price Index (PPI), which measures wholesale inflation, edged down .1% y/y in May. That’s in line with economists’ consensus forecast. Energy-related prices rose 2.8% from the prior month. However, if you strip out food and energy, PPI rose 1.2% y/y. So there is some inflation at the core and it is accelerating a bit. Here’s what Barron’s had to say: “The deflationary effects of last year's strength in the dollar and collapse in oil prices may now finally be clearing, providing a new floor from which prices will hopefully begin to rise.”

US industrial production disappointed, falling .4% m/m in May and mostly reversing April’s .6% gain. A decline in auto production was the culprit and that’s a bit of a relief because autos tend to jump around a lot month-to-month. Still though, we know that factory output has really been struggling. On a year-over-year basis industrial production is down about 1.4%. Production is made up of utility output, mining production, and manufacturing output. Without autos, manufacturing production is flat year-over-year. But the biggest drag on total industrial production is oil & gas drilling, which is down 51% y/y. So what categories are up year-over-year? Production of computers and peripheral equipment is up 4.4%; communications equipment is up 9.9; semiconductors +3.2%; consumer goods +.5%; construction supplies +1.1%.

The world’s largest emerging markets stock index (MSCI Emerging Markets Index) has decided not to include mainland China stocks. So no change to its current policy. MSCI cited Chinese government rules that limit foreign investments in China’s stock market, as well as erratic rule changes such as selling bans, trading halts, etc. So it seems like MSCI still values transparency and liquidity. Only shares of Chinese stocks listed in Hong Kong and the US will be included. Even so, these Chinese stocks account for nearly one-quarter of MSCI’s Emerging Markets Index. 


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