This week's economic releases showed that the global economy was not deteriorating, but was still not robust. Friday, the stock markets rallied after the release of the May U.S. Employment Report; the rally was not because the numbers were so much better than expected, but because they were better than some had feared. The "Goldilocks" employment report may have been a touch better than expected, but not so strong as to cause the Fed to accelerate the timing of the tapering of quantitative easing. In short, the stock rally was in relief of fears, not in celebration of unexpectedly strong results. In the four weeks since the last Comments, U.S. stocks were higher, but elsewhere stocks were lower. Bond yields and credit spreads were higher and wider causing bond markets to generate negative returns since the last report. Oil prices were little changed, but natural gas and metals commodity prices declined over that period.

Perspective:

In the last four weeks I have had a series of adventures, fly-fishing in northern Maine, sailing our boat from the Chesapeake to Camden and celebrating the wedding of the son of a good friend in Hot Springs, Va. These adventures made it difficult to publish these Comments. In the coming weeks I will share some of the stories that came out of those adventures as they relate to the economy and the capital markets.

In the 1970s my mother became an avid fan of Wall $treet Week with Louis Rukeyser, but lost interest in later years when the host attributed the falling of the markets to his being on vacation. Even my appearance as a special guest on his show in 2001 was not enough to win back her allegiance. To be clear, my being away has no visible impact on the economy or the markets, but only on the Davidson family budget.

The guides from the Maine Guide Fly Shop provided a great service in our fishing trip, the kind of service that we might want from an investment adviser. They showed us where to fish, the best strategy and flies to use, and when to change in response to changing conditions. They made suggestions to improve our technique and tailored their advice to our experience level and needs. They clearly added value in my fishing experience. Isn't that what we would like in an investment adviser?

One difference between fishing and investing is that the capital markets have indices and fishing does not. As a result, I don't know what the average number of fish that are caught, but I do know how the markets have done on any given day. There is no way that I can replicate or guarantee that I could catch the average number of fish in one day, but I can match the market return by buying an index fund. Without the fishing guide, I know that my catch would not be as good, my skills would not improve as fast, and I would have nobody to turn to when I got myself in trouble. On the other hand, studies have found that 85 percent of the investment managers have failed to beat their indices over a long haul. There may be other benefits offered by an investment adviser, but, for pure investment results, an index fund provides a viable alternative for those that may not be able to select one of the 15 percent of investment managers who will beat their indices.

Economic Releases:

The May U.S. Employment Report appeared to move the markets when it was released on Friday. Non-Farm Payrolls (red in the chart) increased 175,000 — better than expectations, but -12,000 in revisions for the prior two months more than offset the upside surprise. Private Payroll (blue in the chart) increases of 178,000 matched the consensus. Manufacturing Payrolls (green in the chart ) fell  -8,000. In other jobs news, an increase in those seeking employment caused the unemployment rate to increase a tick to 7.6 percent. The Average Hourly Earnings was flat and the Average Workweek rose to 34.5 hours in May. Initial Jobless Claims dropped to 346,000 the week of June 1st and the four-week average of claims rose to 352,500. Continuing Claims, reported with a one week lag, dropped to 2.952 million.

The U.S. Purchasing Managers' Indices for May showed the divergence in the manufacturing and services sectors. The Manufacturing PMI (blue in the chart) crossed into the contraction zone to 49.0 while the Services PMI (red in the chart below) rose a half point to 53.7. The weakness in manufacturing mirrors the loss of Manufacturing Payrolls reported above.

Other Economic Releases

Elsewhere PMIs were mixed. The European Union's Manufacturing Index for May rose to 48.3, but remained in the contraction zone below 50. The Markit PMI Composite rose to 47.7 while the PMI for Services rose to 47.2. Germany's PMI for Manufacturing rose a point to 49.4; the German Markit Composite rose to 50.2 and Services PMI ticked up to 49.7. France's PMI for Manufacturing rose to 46.4; France's Markit Composite rose to 44.6 while the Markit Services remained 44.3. The UK's Manufacturing PMI crossed into expansion at 51.3 while its Services PMI rose 2 points to 54.9. China's PMI Composite slipped to 50.9 while its Services PMI ticked up to 51.2. Japan's Composite and Services PMI's rose to 54.1 and 54.8 respectively. Canada's PMI experienced the biggest jump of 20 points to 70.8, showing a significant improvement in economic activity above the U.S.'s northern border.

In the US, April's Construction Spending increased +0.4% and Factory Orders increased 1.0%. For the First Quarter, U.S. Nonfarm Productivity increased +0.5% while Unit Labor Costs fell -4.3%.

The European Central Bank met this week and made change in policy this week having reduced interest rates 25 basis points to +0.50% at the previous meeting. Similarly, the Bank of England met and kept its benchmark rate unchanged at +0.50% and Asset Purchase unchanged at 375 billion Sterling.

Retail Sales in the EU fell -0.5% in April. The EU's 1st quarter GDP fell -0.2% adding to a -1.1% YOY decline. Germany's Industrial Production rose 1.8%, but Manufacturing Orders fell -2.3% in April. The French Unemployment Rate rose to 10.4% in the 1st quarter.

Equities Markets:

U.S. stocks rallied following Friday's release of the U.S. Employment Report for May. That rally saved those stocks from suffering the negative returns of stock markets elsewhere over the last four weeks. Bond markets also suffered negative returns from rising interest rates and widening credit spreads. On a QTD and YTD basis the high coupons from the high yield market managed to keep that sector in positive territory.

Bond Markets:

Government and credit markets suffered from both rising interest rates and widening credit spreads over the last 4 weeks. TIPS yields have almost returned positive. US Mortgage rates have rebounded over the 4-percent handle.

Currencies & Commodities:

The U.S. dollar rose against the Looney, but fell against the Yen, Pound and Euro over the last four weeks. Oil prices were little changed, but metals and natural gas commodity prices declined since the last report.