Market and Economic Signals Remained Mixed

April 20, 2015

Market and Economic Signals Remained Mixed Photo

Overall economic indicators remain mixed in the U.S., while concern continues for the performance of the global economy. Last week's U.S. economic data added to the difficulty in determining the direction of the U.S. economy, with a few indicators pointing to stronger growth and others showing continuing signs of sluggishness.

On the stronger side, the University of Michigan Sentiment data showed an increase from 93 to 95.9 -- the second highest reading since 2007. The Consumer Price Index (CPI) was also a modest positive, with CPI excluding food and energy up to 1.8% year over year versus an expectation of 1.7%.

On the weak side, retail sales were lower than expected -- up only 0.9% versus 1.1% -- and retail sales excluding autos was 0.4% versus the expected 0.7%. Industrial Production was also below expectation, with a decline of 0.6% month over month versus an expected decline of 0.3%.

I think the underlying economic data (leading indicators) supports a pickup in the economy in the second and third quarters, and that the U.S. will grow approximately 3% this year due to easy global monetary policies, strong employment, wage gains and lower commodity prices.

This week, we should receive more news on the Greek debt crisis and what type of solution, if any, has been agreed upon with creditors. The time is running out on coming up with a, at a minimum, temporary solution, as Greece's available cash continues to decline. I believe the brinksmanship between Greece and the Euro-zone economies -- mainly Germany -- will result in at least a temporary deal, but both sides have very entrenched positions. The market is priced for this expectation, so any outcome that makes it more likely that Greece exits the euro -- which is not priced into current expectations -- could add significant volatility. Last week, Greek bond yields increased by more than 150 basis points (bps) to 12.70%, while German yields fell by 8 bps to 0.08%.

The trading ranges in both the bond and stock markets continue to hold. The market tested the upper end of the range on the S&P 500 Index but was not able to close above the 2109 level. The 10-year Treasury is trading near the low end of its tight trading range at around 1.86%. I expect that the longer we stay in this type of tight range bound market, the greater the speed and magnitude of the eventual breakout. I like to visualize the market as a spring, and time is the pressure used to compress the spring. The more time that goes by, the more the spring is compressed, and the greater the recoil when the spring eventually snaps back. We may see more volatility in the coming weeks.

Tags: Monday Morning O'Malley | Bonds | U.S. economy | Inflation | S&P 500 | Euro | Leading indicators | Greece | Global economy | Retail sales

< Go to Monday Morning O'Malley

This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client.  Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications