The economic releases were mixed this week, allowing consideration of a longer time frame for tapering of QE. Equity markets were higher, but bond markets were not convinced; bond yields were little changed; credit spreads widened. Oil prices rose, but metal commodity prices declined. The dollar was stronger again this week. U.S. equities finished the quarter with positive returns, but elsewhere the QTD results were mixed. Bond yields and credit spreads were higher and wider for the quarter. Commodity prices declined over the quarter. The U.S. dollar did better than the Looney and Yen, but declined against the Pound and the Euro QTD.

Perspective:

Softer economic data eased concerns about the immediacy of tapering quantitative easing this week. Yet, the past two weeks have given the markets a taste of what is likely to happen when the Government announces that it will no longer purchase assets in their QE program. As we approach that point, bond yields will rise and bond prices will decline. And, everybody already knows that!

In the past few weeks investors have withdrawn funds from bond fund mutual funds and their net asset values have declined. I have friends that argue that they are better off holding individual bonds than bond funds. Rising interest rate affect the prices of bonds in your portfolio the same way they affect the bonds in a mutual fund portfolio. Large sales of bonds affect bond prices both in your portfolio and in the mutual fund; they depress prices of both. One difference may be that the bonds in a mutual fund are priced every day; on the other hand, individual bonds held in your portfolio may not be priced so you don't know that they are worth less money. In fact, with the exception of the expense ratio of the fund, bond funds and individual bond portfolios with similar exposures to interest rates, credit, pre-payment and structure bond risks will experience similar declines as the Fed removes quantitative easing.

Economic Releases:

This week's employment and housing data in the U.S. was firm, but not robust. The weekly Jobless Claims report rose to 354,000. The four-week average of Claims (blue in the chart below) rose to 348,250. Continuing Claims (red in the chart below) fell to a post-Great-Recession low of 2.979 million. The chart shows that the trend is improving, but we have not reached pre-Great-Recession levels.

U.S. housing has definitely been the caboose on the recovery train. May's New Home Sales (blue in the chart below) rose to 476,000, above the range of expectations. May's Pending Home Sales Index increased 6.7% from the prior month. The Case/Shiller Home Price Index for 20 Cities in the US gained 2.5% in April from the previous month (1.7% seasonally adjusted) and 12.1% from the previous year; these increases were well above the range of expectations. Housing statistics have not been any where near the pre-Great-Recession level, but the housing caboose has made its move to return to the front of the recovery train as an engine of growth for the U.S. economy.

Other Economic Releases

Personal Income and Consumer Spending rose +0.5% and +0.3% respectively in May. Durable Goods rose +3.6% in May; ex-transportation, Goods Orders rose +0.7%. The Conference Board's Consumer Confidence Index rose five points to 81.4 in June. The University of Michigan's Consumer Sentiment Index rose over a point to 84.1 in June. On the softer side, the US reduced its estimate of first quarter GDP growth six ticks to 1.8% due to a reduction in personal consumption. The Chicago PMI slipped seven points to 51.6, but remained in expansion in June.

In the European Union, Economic, Industrial, and Consumer Sentiment all showed improvement in June. Germany's Ifo Survey showed slight improvement in Economic Sentiment and Business Expectations, but slipped in its assessment of the Current Conditions in June. Germany's Retail Sales increased +0;8% in May. Germany's Unemployment Rate remained 6.8% in June. France's GDP fell -0.2% in the 1st quarter. The UK's first quarter GPD was confirmed at +0.3%.

China's CFLP Manufacturing PMI eased seven ticks to 50.1, but managed to remain in the expansion zone. The Markit Manufacturing PMI fell a point to 48.2. Japan's Markit Manufacturing PMI rose to 52.3, a two and a half year high.

Equities Markets:

Equity markets recovered some of what they lost last week from the tapering of quantitative easing talk. Bond credit markets turned in another negative week; widening credit spreads overwhelmed slight declines in government bond yields.

Bond Markets:

Government bond yields were slightly lower this week with the exception of the TIP Yield which rose 23 basis points. Credit spreads widened again this week.

Currencies & Commodities:

The U.S. dollar rose against the other currencies again this week as the Fed's talk of ending QE led to higher interest rates on U.S. securities. Oil prices rose, but metals commodity prices declined.

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Who is John Davidson?

John W. Davidson, CFA, started writing these Comments over a decade ago as a personal discipline when he was promoted to chief investment officer from portfolio manager.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts, and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income, and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he has appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services often quote his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and courses at the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a Naval Officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserves, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is treasurer of the Maine Conference of the United Church of Christ, serving on the executive committee and the coordinating council, the governing board of the conference. He is also on the investment committee of the Pen Bay Health Foundation.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.