Federal Reserve/Economic Reports

  • In one of the most closely watched reports, July nonfarm payrolls rose 255,000, well above the consensus looking for an increase of 179,000. The average workweek exceeded expectations moderately, increasing 0.1 hour to 34.5 hours. Average hourly earnings rose 0.3%, and the unemployment rate stayed at 4.9%.
  • Retail sales disappointed in the July report, remaining unchanged versus estimates of 0.5%, causing many to moderately reduce their third-quarter GDP forecast. Vehicle sales rose 1.1%, while sales excluding vehicles fell 0.3%, versus expectations for a 0.1% gain.
  • For the first time in four months, the Producer Price Index (PPI) fell 0.4% in July, below consensus estimates looking for an increase of 0.1%. Goods PPI fell 0.4%, led by food. Energy prices fell 1%, and services PPI fell 0.3%. PPI ex-food and energy fell 0.3%. Year over year, PPI fell 0.2%, and core PPI was up 0.7%.
  • Business inventories rose 0.2% in June, and retail inventories rose 0.5%. Business sales increased 1.2%, the most since 2013, led by wholesalers. The inventory-to-sales ratio fell to 1.39 from 1.40, its lowest in seven months.
  • Wholesale inventories rose 0.3% in June, above the consensus of 0.1%. Nondurable goods, mostly drugs and farm products, led the increase. Wholesale sales rose 1.9%, also led by nondurables, causing the wholesale inventory-to-sales ratio to fall to 1.33 from January’s peak of 1.37.
  • Nonfarm labor productivity fell for the third time in a row, down to a 0.5% annual rate in the second quarter, below estimates of a 0.4% increase. Productivity fell 0.4% year over year, well below the historical average of a 2.1% gain. Unit labor costs rose at a 2% annual rate, as hourly compensation rose at a 1.5% rate. Real hourly compensation fell at a 1.1% annual rate, the most in two years, a sign of weak growth in consumer purchasing power.
  • The July ISM Non-Manufacturing Index (NMI) fell 1 point to 55.5, lower than the consensus of a 0.7-point decline, reflecting moderating services activity. The net number of expanding services industries remained at 12, the highest level since October. Respondents’ comments reflected a “positive outlook on the economy.” The Prices Index fell 3.6 points as inflation pressures eased, although labor market conditions remain tight.
  • The ISM Manufacturing Index in July fell 0.6 points to 52.6. Eleven of the 18 ISM manufacturing industries expanded. The ISM Price Index fell 5.5 points to 55, as input price pressures softened.
  • July light vehicle sales rose 6.4%, the most since 2014, to a 17.8 million unit annual rate, the highest in eight months, helped by Independence Day promotions, lower prices and incentives.
  • Personal income rose 0.2% in June, below the consensus of 0.3%, led by proprietors’ income (+0.6%) and rent (+0.4%). Wage and salary compensation rose 0.3%. Personal consumption expenditures (PCE) increased 0.4%, above the consensus of 0.3%, led by nondurables and services. The personal saving rate fell to 5.3%.

Financial Markets

  • The upward breakout move in equities continued during the first two weeks of August, with a continuation of the “risk on” trade as higher risk asset classes again generated the most favorable returns. For the two-week period, emerging markets led the advance, up 4.3%. The international developed EAFE index followed, up 1.46%. The Russell 2000 and S&P 500 increased 0.87% and 0.61% on a total return basis, respectively.
  • Year-to-date, all major indices are in positive territory. On a total return basis, the small cap Russell 2000 is up 9.25%, the S&P 500 up 8.32% and the EAFE up 2.31%.
  • The yield curve shifted up moderately over the two-week period, with the U.S. two-year Treasury up five basis points to 0.71%, the 10-year up six basis points to 1.51% and the 30-year up five basis points to 2.23%. The probability of a fed rate hike by year’s end remains 41%. Low rates and modest spreads continue to pressure financial company earnings, including insurance companies and banks, while benefitting borrowers.
  • “Risk on” can be seen in the high-yield indices as well. Spreads narrowed further over the course of the month, reaching a low of 5.1% over Treasuries before finishing the week at a 5.12%. Spreads reached a recent peak of 8.4% in February. Strong investor inflows gave issuers the opportunity to offer new bonds, with the credit quality of new issues having deteriorated.
  • The dollar changed little on the period, rising the first week before falling in the second to reach its lowest levels since June. Weaker-than-expected economic reports reduced the likelihood of a Fed rate hike.
  • After hitting a high of $1,367, gold settled down $16, posting the first back-to-back weekly losses in more than two months. While benefitting from the expectation of the Fed on hold, investors showed preference for equities.
  • After reaching almost $52 a barrel in early June, energy prices have been on a downward price trend on rising rig counts; rising Saudi, Russian and Iranian output; and excess global supply. Prices almost reached $39 a barrel at the beginning of August, although talk of an informal OPEC meeting in September improved investor sentiment.
  • The Investors Intelligence Bull/Bear ratio finished the week continuing its upward trend at 2.6, roughly the 80th percentile within the contrarian bullish reading of 1 and bearish level of 3.
  • The Volatility Index (VIX) continues to trend lower. After spiking around the Brexit vote to levels above 26, the index closed at 11.55 on Friday, in the lowest decile of closing values since 1990. The low value reflects that investors anticipate low equity market volatility.
  • For the month of July, mutual fund flows continue to move into the bond market, with positive flow of $33 billion, primarily in taxable bond funds. For equity funds, outflows were slightly higher for domestic funds, showing -$2.3 billion and world equity funds at -2 billion. Commodity funds have shown inflows of $2 billion during the same period.

Source: Bloomberg Data as of 8/12/16
Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.

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