Federal Reserve/Economic Reports

  • At the Jackson Hole Economic Policy Symposium, Federal Reserve Chair Janet Yellen said, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.” Her comments leave the door open for a rate increase at the Fed’s September 21 meeting. However, Vice Chair Stanley Fischer was more hawkish in his views.
  • Second quarter real GDP was revised down to 1.1% annual rate from 1.2%, influenced by weaker state and local government spending, inventory investment, residential investment and net exports. Upward revisions to personal consumption expenditures (PCE) and investment spending partially offset the decline. The Atlanta Fed’s GDPNow model currently forecasts a 3.4% annual growth rate for the third quarter.
  • The Reuters/University of Michigan Consumer Sentiment Index fell in August to 89.8, contrary to expectations looking for a gain. The index has fallen in seven of the past eight months. The assessment of current conditions declined 2 points for the full month, to 107, while expectations increased 0.9 points for the full month, to 78.7.
  • Durable goods orders in July increased 4.4%, the most in nine months and above estimates of a 3.2% increase. Excluding transportation, orders rose 1.5%, and core business orders rose 1.6%, the most since January. The core book-to-bill ratio rose to 100.1%, indicating some improvement.
  • Existing home sales fell 3.2% in July, as single-family sales declined 2%, its first decline in five months, while condo/co-op sales fell 12.3%. Limited inventory and its influence on affordability influenced the reported weakness. Supply rose to 4.7 months’ worth, below the 6-month supply the National Association of Realtors considers consistent with a balanced market. The median existing home price rose 5.3% year over year.
  • New home sales rose 12.4% in July, versus an expected 2% decline. It was the largest increase since May 2014 and to the highest level since October 2007. The months’ available supply fell to 4.9 months, reflecting tight inventory, while new home prices have increased 4.6% over last year.
  • The Conference Board’s Coincident Index and Leading Economic Index (LEI) rose 0.4% in July. It was the LEIs third gain in the past four months; eight of its 10 components made positive contributions, indicating some upside momentum for growth. The LEI is up 1.2% on the year, which indicates growth for the economy remains weak compared to historical trends.
  • Industrial production (IP) improved by 0.7% in July, more than twice expectations of 0.3%, although June was revised down to 0.4%. Utilities gained 2.1% because of warm weather. Mining improved, led by oil well drilling and servicing and coal production. Manufacturing output increased 0.5%. Industrial production is down 0.5% versus last year on weak energy production, and the capacity utilization rate rose 0.5% to 75.9%, remaining 4.1% below its 1972 – 2015 average.
  • The Consumer Price Index (CPI) remained flat in July. Food prices also did not change. Energy prices fell 1.6%. Core CPI was up 0.1%. Year over year, the CPI has increased 0.8% and core CPI 2.2%. Core CPI services are up 3.1% over last year, led by shelter.
  • E-commerce sales rose 15.8% year over year in the second quarter and now represent a record-high 8.1% market share, reflecting a continued shift in shopping preferences toward online and away from traditional physical stores.

Financial Markets

  • Equity markets were mixed over the latest two-week period, although with a downward bias. On the domestic front, the large cap Russell 1000 and broad NASDAQ Composite indices declined 0.65% and 0.27%. However, the small cap Russell 2000 increased 0.67%. In international markets, the developed EAFE was down 0.49%, while the developing (emerging) markets were lower by 0.95%. Federal Reserve comments on a potential rate hike took some wind out of the market’s sails.
  • With increased Fed discussing about raising rates, the yield curve shifted upward over the two-week period. The U.S. two-year increased 14 basis points to 0.84%, the 10-year increased 12 basis points to 1.63%, and the 30-year gained 6 basis points to 2.29%. The probability of a Fed rate hike in September is 33%, and the likelihood of a hike by year’s end is now 59%.
  • The high-yield market continues to perform well, with spreads narrowing further, reflecting investors’ view of decent fundamentals. Equity investors tend to view the high-yield market as a leading indicator for equities. Spreads moved to a new 52-week low to 4.86% over Treasuries, from 5.12%. While defaults have risen, especially in the challenged energy sector, the high-yield market continues to benefit from investor inflows.
  • The dollar floated downward for much of the period, although it spiked on Friday after Fed member comments regarding the desire to raise rates by year’s end. The hawkish tone came despite weaker-than-expected economic reports.
  • The Citigroup Economic Surprise Index, after reaching 43 at the end of July, is now at 11, reflecting economic reports above expectations but at a declining rate.
  • Gold prices slipped moderately, closing the period at $1,321, down $14. The precious metal benefitted from declining equity markets and a search for safe haven assets, but was offset by the higher probability of a Fed funds rate hike.
  • Energy prices, which had dipped below $40 a barrel in the beginning of August, have moved higher, reaching $47.64 at the week’s end. Despite higher-than-normal supply keeping downward pressure on prices, OPEC members have sought to stabilize the market, and the International Energy Agency (IEA) predicted the market may experience short supply in the third quarter. Investors have also eyed storms that could disrupt drilling activity in the gulf.
  • The Volatility Index (VIX) moved lower during the period, hitting a low of 11.34 before market uncertainty began to elevate, causing the Index to close at 13.65. The value remains well below levels that reflect heightened concern. Futures market bets wagering on an increase in volatility over the next several months are near a four-year high, primarily focused on politics in the U.S. and Europe and Fed policy.
  • The CNN Fear and Greed Index, an investor sentiment tool, fell to 63, down from an elevated 82 just one month ago, while the American Association of Individual Investors Bull-Bear ratio is at 2.81, below the contrary indicator level of 3.
  • With 98% of the companies in the S&P 500 reporting second quarter earnings, 71% have reported earnings above the mean estimate. The technology, industrials and consumer discretionary sectors have led in reported positive surprises, while energy, telecommunications and materials have lagged.

Source: Bloomberg Data as of 8/26/16
Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.

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