Federal Reserve/Economic Reports

  • In a speech on Monday, Federal Reserve member and noted “dove” Lael Brainard indicated her view that the Fed should not hurry to raise interest rates. The dovish comments from Brainard broke a string of recent hawkish statements from Fed officials, providing near-term relief to those who believe that a hike this month would be a policy mistake.
  • The Fed’s Beige Book, representing activity in July and August, showed the economic expansion continued at a modest pace, and all districts expect a moderate pace of growth in the coming months. Highlights include that consumer spending was little changed, manufacturing was flat to slightly up, the housing market expanded further, demand for credit and nonfinancial services grew moderately and employment and wages grew at a moderate pace.
  • The Consumer Price Index (CPI) rose 0.2% in August, above the consensus of 0.1%, while the core-CPI increased 0.3% – the most in six months and above consensus of 0.2%. CPI rose 1.1% year over year, while core-CPI was up 2.3%. Core CPI services and shelter rose 3.2% and 3.4% over last year.
  • The PPI was unchanged in August, slightly below the consensus of 0.1%, while core-PPI rose 0.1%. PPI was unchanged year over year, while core-PPI was up 1%, indicating limited intermediate inflationary pressures.
  • Industrial production (IP) fell 0.4% in August, the most in five months and below the consensus looking for a decline of 0.2%. Core IP – which excludes energy, high-tech, and vehicles – fell 0.5%, with all five of its components declining. Year over year, both IP and core IP are down 1.1%, reflecting weak momentum. The capacity utilization rate fell 0.4 percentage points to 75.5%, reflecting excess capacity and minimal inflation pressure.
  • The Duke University/CFO Magazine Business Outlook Survey rose 1.2 points in Q3 to 60.6, its highest level in over a year, indicating rising CFO optimism about the economy. However, CFOs’ own company optimism fell 1 point to 65.3, the lowest since the first quarter of 2014. 52% of respondents said they were holding off on spending because of political risk.
  • The NFIB Small Business Optimism Index declined 0.2 points in August to 94.4, its first decline in five months. The index is well below the cycle high of 100.3 reached in December 2014, as businesses remain cautious.
  • The Business Roundtable CEO Economic Outlook Index fell 3.9 points in the third quarter to 69.6, below the average of 80.5 in this expansion, as CEOs grew more cautious in their expectations for the economy. They currently project 2.2% real GDP growth in 2016. The outlook for employment was negative for the third straight quarter, capex plans improved, and sales expectations moderated.
  • The number of job openings increased 4% in July to a record-high 5.87 million, as labor demand strengthened, suggesting labor market conditions continue to tighten and employers are facing more difficulty finding the workers with the right skills.
  • The ISM Non-Manufacturing Index fell 4.1 points in August, down in three of the past four months, to 51.4, below the expected level of 55, as services activity lost momentum in the third quarter. It was the largest drop since November 2008 and to the lowest level since 2010. New orders fell 8.9 points to 51.4, business activity fell 7.5 points, inventories fell 6 points, and export orders dropped 9 points.
  • The ISM Manufacturing Index dropped 3.2 points in August to 49.4, versus expectations of 52, falling into contraction territory for the first time since February. All index components declined, and most were in contraction territory, indicating a broad-based deterioration. The ISM Price Index fell 2 points to 53 as input cost pressures eased.
  • The Conference Board’s Consumer Confidence Index improved by 4.4 points in August to 101.1, above expectations of 97 and its highest level in almost a year. The present situation index rose to 123, its highest level since October 2007, as current business conditions and job availability improved. The expectations index rose to 86.4.
  • The Case-Shiller U.S. National Home Price Index rose 0.2% in June and is up 5.1% year over year. The strongest price gains were outside the largest metro areas.
  • The Atlanta Fed’s latest GDPNow forecast for third quarter economic growth is now 3%, down from a peak of 3.8% in early August but above the Blue Chip Consensus forecast of 2.8%.

Financial Markets

  • Equity markets were generally lower over the latest three-week period, although the NASDAQ Composite bucked the trend and was up 0.55%. The domestic small cap Russell 2000 was down 0.97%, and the large cap S&P 500 was lower by 1.23%. The international markets fared worse, with the developed EAFE down 2.12% and the emerging market benchmark falling by 1.59%. Investors are focused on the next Federal Reserve meeting where monetary policy will be discussed.
  • The yield curve changed little over the period, with the U.S. two-year down 8 basis points to 0.76%, while the 10-year and 30-year Treasury yields rose 12 and 16 basis points to 1.69% and 2.45%. However, the benchmark 10-year Treasury is now up 34 basis points since the lows reached in July, representing a loss of more than 3% (greater than the S&P 500’s 2.11% loss since the mid-August peak).
  • The probability of a Fed funds rate hike in September fell to 12%, while a hike by year’s end has moderated to just above even odds to 54%. Chinese holdings of U.S. Treasuries have dropped to the lowest in more than three years, now at $1.22 trillion.
  • Spreads in the high-yield market narrowed during the early part of September to a low of 4.67% over Treasuries. Spreads then widened in the most recent week to close out the period with an option adjusted spread just over 5%. New issuance remained high as corporations took advantage of lower yields, and investors withdrew the most out of high-yield funds since January. This risk-off selling activity was similar to that in the equity market, with investors remaining concerned about potential Fed action.
  • Oil prices have weakened, falling from $47.64 to $43.03. High inventories continue to weigh on sentiment, although investors will monitor discussions between Saudi Arabia and Russia on potential freeze in output. The International Energy Agency and OPEC indicated that elevated inventories are likely to keep the price of oil near current levels through 2018. On the retail gas front, Alabama, Georgia, and Tennessee declared a state of emergency as the Colonial Pipeline company had a pipeline spill in Alabama, limiting gas supplies in the region.
  • The dollar rose moderately following the stronger CPI report, with markets discounting a potential Fed move in December as inflation moves towards the Fed’s 2% target. The Mexican peso hit record lows against the dollar, while the British pound, at 1.30, is near its Brexit lows.
  • Gold has lost some of its recent luster. After peaking in July at $1,375 per ounce, prices have moderated and closed the period at $1,310. Gold has less appeal as interest rates rise due to the higher borrowing costs.
  • Forward 12-month P/E multiples on the S&P 500, S&P 400 (mid cap) and S&P 600 (small cap) are currently at 16.5x, 17.4x and 18.1x. Forward price to sales multiples for the same indices are 1.42x, 1.23x, and 1.03x, respectively.

2016-09-19

Source: Bloomberg Data as of 9/16/16
Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.

 

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