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Week in Review: Stocks gain in calm trading

For the week ended 22 May 2015

  • US housing starts soar, but home resales fall
  • US consumer prices mixed
  • Japan’s economy grows 2.4% on inventories
  • UK reports annual deflation through April
  • China’s manufacturing contracts further

Global stocks rose broadly but modestly as investors reacted favorably to the US Federal Reserve’s release of its April policy meeting minutes, which indicate a reluctance to raise interest rates until the US economy strengthens further. Japan reported a pickup in first-quarter economic growth, but China showed continued weakness.

Yields on 10-year US Treasury notes remained around 2.2%. The euro fell in value versus the US dollar, ending close to $1.10 on Friday. Brent crude oil futures traded below $66 per barrel, while West Texas Intermediate hovered under $60.

US and global economic news

US housing starts soar, existing sales drop
US housing starts soared 20.2% in April to a seasonally adjusted annual pace of 1.4 million units — nearly a 7 ½-year high — and permits for home construction rose 10.1%. However, sales of existing homes fell 3.3% in April and prices rose 8.9% annually, limiting affordability for some buyers.

US jobless claims increase but remain near 15-year low
Initial jobless claims rose 10,000 to 274,000. The four-week moving average fell 5,500 to 266,250, and continuing claims were down 12,000 to 2.21 million — both at lows since 2000.

US CPI rises 0.1%, falls 0.2% for year
US consumer prices rose 0.1% in April but fell 0.2% for the 12 months through April. Core prices excluding food and energy climbed 0.3% for the month and 1.8% for the year.

Greece’s debt negotiations go down to wire
Greek, German and French heads of state held talks late Thursday in an effort to speed resolution of Greece’s debt crisis. A Greek government spokesperson expressed optimism Friday that a cash-for-reforms deal could be reached with creditors within 10 days.

 Japan’s economy grows at 2.4% pace
Japan’s real gross domestic product grew at an annualized 2.4% pace in the first quarter, up from the 1.1% pace in the previous quarter. However, an inventory buildup contributed heavily and could lead to a second-quarter slowdown. Nevertheless, corporate capital spending rose 0.4%, the first increase in a year.

UK prices fall for first time in 55 years
UK consumer prices dropped 0.1% on an annual basis in April — the first decline since 1960. With core inflation at 0.8%, the lowest level in 14 years, the Bank of England is under little pressure to raise the bank rate from the current record low of 0.5%.

Eurozone, German data shows loss of economic momentum
The Markit eurozone purchasing managers’ index slipped from 53.9 to 53.4 in May, the 23rd month of expansion, albeit at a slower pace. Germany’s economic growth also slowed in May, with its composite PMI falling from 54.1 to 52.8, the second straight monthly decline. The business climate index of Germany's Ifo Institute edged down from 108.6 in April to 108.5 in May, the first decline in seven months.

China’s PMI weakens further
The HSBC China flash manufacturing PMI fell to 49.1 in May from 49.3 in April, the third straight monthly contraction and the fifth in six months. Export orders dropped to a 23-month low.

US and global corporate news

Big banks fined $5.7 billion for rate rigging
Five of the world’s largest banks were fined about $5.7 billion for manipulating foreign exchange rates, and four of the banks also pleaded guilty to US criminal charges. J.P. Morgan Chase and Citigroup will pay $550 million and $925 million, respectively, in criminal fines, while Barclays and Royal Bank of Scotland are liable for $650 million and $395 million.

CVS eyes seniors market in Omnicare bid
CVS Health, the second largest US drugstore operator, will buy nursing home pharmacy Omnicare, adding a focus on seniors to its position as the largest US prescription drug retailer. The deal is valued at $12.7 billion: about $10 billion in cash and $2.3 billion in debt.

Home Depot beats sales estimates, Lowe’s misses
Home Depot, the world’s largest home improvement chain, posted a 14.5% rise in quarterly profit as North American customers spent more on home repairs after a harsh winter, and comparable sales rose 6.1%. Rival Lowe’s reported 5.2% growth in same-store sales, below an expected 6.1% increase, while net income and net sales also missed estimates.

Wal-Mart sales, earnings disappoint
Wal-Mart reported a lower-than-expected 1.1% rise in quarterly same-store sales and also missed second-quarter earnings estimates as net profit fell 9%. There is evidence that tax refunds and savings from lower gasoline prices have gone to pay off debt rather than add to discretionary spending.

Deere profit plunges 30%
Deere & Company reported a 30% drop in quarterly profit, hurt by weak conditions in the global farm economy. The company expects equipment sales to fall about 19% this year and another 17% in the current quarter.

The week ahead

  • US durable goods orders, new home sales and consumer confidence are reported on Tuesday, 26 May.
  • Japan releases its consumer price index, unemployment rate and industrial production on Thursday, 28 May.
  • The first revision of US Q1 GDP is reported on Friday, 29 May.
  • Italy, France, India and Canada report Q1 GDP on Friday, 29 May.
  • China and Japan release manufacturing PMIs on Sunday, 31 May.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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