By Ovunc Kutlu & Gulbin Yildirim
The U.S. letter for the week beginning May 16

The U.S. letter for the week beginning May 16

One of last week's most important economic releases was for April’s retail sales.

According to U.S. Commerce Department data, retail sales increased by 1.3 percent in April relative to the previous month, marking its highest jump since March 2015.

Strong sales beat the market expectation of a 0.8 percent rise stemmed from the gains spread throughout most of the sectors.

Auto sales were up a sharp 3.2 percent, reversing the prior month's decline. Sales at gas stations, boosted by higher prices, also contributed strongly, up 2.2 percent in the month. 

The data signaled that U.S. consumers may support the sluggish growth spending in the upcoming months and was backed by the University of Michigan Consumer Sentiment Index (UMICH) which rose to 95.8 in early May from 89.0 in April. UMICH was also well above the 89.5 market consensus.

On the other hand, the weekly unemployment claims unexpectedly rose to 294K, according to data announced by the U.S. Labor Department. While claims stayed under 300K for the last 62 weeks, breaking a record since 1974, the sharp increase dull ed the momentum in the job market. However, there were signs that the rise might be due to seasonal adjustment issues, particularly in New York.

Wholesale trade data showed that March was a healthy month for the sector. Inventories were up only 0.1 percent while sales jumped 0.7 percent.

Moreover, the U.S. producer price index was up by 0.2 percent in April while markets expected a 0.3 percent rise. The core measure excluding volatile food and energy items was up 0.1 percent month to month, matching expectations.

Lastly, crude oil inventories fell by 3.4 million barrels in the May 6 week to 540 million barrels, and product inventories also decreased, with gasoline falling 1.2 million barrels and distillates by 1.6 million, according to the Energy Information Administration report. 

What did Fed officials say?

Boston Fed President Eric Rosengren, Cleveland Fed President Loretta Mester, and Kansas City Fed President Esther George commented on the Fed's rate hike last week.

George, a voting member of the Federal Open Market Committee (FOMC), who supported a 25 basis point rate hike at its April and March meetings, warned that interest rates are too low for the current U.S. economy.

"I support a gradual adjustment of short-term interest rates toward a more normal level, but I view the current level as too low for today's economic conditions. The economy is at or near full employment, and inflation is close to the FOMC's target of 2 percent, yet short-term interest rates remain near historic lows," she explained.

Rosengren, who also votes on the Fed's rate-setting committee, said markets are underestimating the pace of potential hikes on Thursday.

On the same day, Mester suggested that uncertainty should not prevent the Fed from acting on policy changes in her remarks at a monetary policy conference held on Reichenau Island in Germany.

What happened in the markets?

U.S. stocks finished the week marginally lower. Driving stocks lower was a combination of poor earnings reports by companies in the retail, airline, and energy sectors as well as the fall in oil prices.

It was the third straight weekly decline for the Dow Jones and S&P 500 and a fourth consecutive fall for the Nasdaq. 

The week ahead

The highlights of this week will be the Federal Reserve's meeting minutes, along with inflation data. Both of these reports will be monitored closely as they will give the market more insight into the timing and pace of future short-term interest rate hikes.

The investors will also keep a close eye on oil prices. Due to wildfires in Canada, pipeline attacks in Nigeria, lower oil investment in Venezuela in addition to falling U.S. crude inventories and production, the glut of supply in the global market continues its contraction and has pushed oil prices to their highest level this year. 

Furthermore, Goldman Sachs revised up its crude price forecast on Monday in its report. The global investment banking giant expects West Texas International to average $45 a barrel for the second quarter this year, from $35 per barrel projected in March. It projects WTI to average $50 per barrel in the second half of this year, from $45 a barrel projected in March.

The upward revision in oil prices by one of the world's biggest financial banks have also created the bullish sentiment in the oil market on Monday when International benchmark Brent crude almost touched $50 a barrel, while American benchmark WTI climbed to almost $48 per barrel -- their highest since November 2015.

17 May,2016