Federal Reserve/Economic Reports

  • As expected, The Federal Reserve left short-term interest rates unchanged. The 7 to 3 vote to keep the benchmark federal funds rate steady showed growing divisions within the FOMC about whether the economy can handle a small rate increase. The post meeting statement indicated, “The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” and that “near-term risks to the economic outlook appear roughly balanced.” Members also signaled the rate would rise more slowly over the next few years than they had forecast in June.
  • The Reuters/University of Michigan Consumer Sentiment Index rose 1.4 points in September to 91.2, above estimates looking for a 0.2-point improvement. The current conditions index was down 2.8 points for the month, the largest decline in a year, while the expectation index rose 4 points for the month, indicating that consumers felt better about the economic outlook.
  • Personal income rose 0.2% in August, matching estimates. Rental income led the increase, up 0.7%, and receipts on assets rose 0.5%, led by dividends. Employee compensation rose just 0.1%. Personal consumption expenditures (PCE) were flat. Services spending rose 0.3%, durable goods spending fell 1.3%, and nondurables fell 0.2%. The personal saving rate increased to 5.7%. Year over year, the PCE Price Index rose 1%, and the core climbed to 1.7%, slightly below the Fed’s target of 2%.
  • Second quarter annualized real GDP was revised up to a 1.4% from 1.1% in the previous estimate, due to stronger capex (+1% vs. -0.9%), exports (+1.8% vs. +1.2%) and inventory investment. The Atlanta Fed’s GDP Now Model currently estimates an improvement in growth for the third quarter to a 2.8% rate. Final sales were revised upward to 2.4%. Nominal GDP was revised upward to a 3.7% annual rate.
  • The durable goods orders report was mixed as orders were flat in August. This was better than the consensus of -1.5%, but July was revised down to 3.6% from 4.4%. Excluding transportation, orders fell 0.4%, while orders fell 1% excluding defense. Nondefense capital goods orders ex-aircraft, or core business orders, rose 0.6%, with vehicles showing the largest improvement. The core book-to-bill ratio improved to 101% from 99.9%, reflecting improving business conditions.
  • The Conference Board’s Consumer Confidence Index rose 2.3 points in September to 104.1, well above estimates of 99.1 and its highest level since August 2007. Consumers are more upbeat about both current and expected conditions. The present situation index improved to 3.2 points to 128.5, and the expectations index rose 1.7 points to 87.8. The employment outlook improved, although the outlook for income and business conditions were neutral to slightly lower.
  • The Case-Shiller U.S. National Home Price Index rose 0.4% in July to its highest level since 2007. Year over year, national home prices are up 5.1%, just 2.2% away from their record highs.
  • The Conference Board’s Leading Economic Index (LEI) declined 0.2% in August versus the unchanged estimate. Six of its 10 components declined. The LEI is up 1.1% year over year, half its historical annual gain. The Conference Board stated that “underlying weaknesses in the LEI may pose a risk to growth in the months ahead.”
  • Existing home sales fell 0.9% in August. The NAR attributed the decline to tight inventory and fast-rising home prices, which are locking first-time home buyers out of the market. Single-family sales declined 2.3%, and condo/co-ops rose 10.5%. Housing inventory fell 3.3%, down 10.1% from a year ago.

Financial Markets

  • Equity markets were favorable over the second half of September, with Friday’s rally helping results. The international markets fared best: the developed EAFE was up 2.5% and the emerging market benchmark up by 2.1%. The small cap Russell 2000 led the domestic markets, up 2.3%. The S&P 500 and NASDAQ Composite were up 1.4% and 1.3%, respectively. The energy and financial sectors witnessed improvement.
  • Year to date, the small cap Russell 2000 Index is up 11.45%, and the S&P 500 is up 7.84% including dividends. Internationally, the emerging markets are up 16.3% and the EAFE is up 2.2%, also on a total return basis. Emerging markets have seen strong investor inflows throughout the quarter.
  • The yield curve changed little over the period, with the U.S. two-year unchanged at 0.76%. The 10-year and 30-year Treasury yields were lower by 10 and 13 basis points, to 1.59% and 2.31%. S. rates remain pressured by low or negative international rates, such as the German 10-year at -0.12% and the Japanese 10-year at -0.08%.
  • The probability of a Fed funds rate by year end has increased to 61%. The probability of a rate hike by June of 2017 is 71%, reflecting the market has little expectation of further rate action for the first half of next year, even if the Fed should hike in December.
  • Spreads in the high-yield market narrowed moderately during the period, from 5% to 4.8%, as inflows into high-yield funds returned ($2 billion in the latest week). Higher-risk junk outperformed lower-risk junk, and improvements in the energy sector were favorable for the broad market.
  • Oil prices spiked over $5.20 a barrel, from $43 to $48.24, as OPEC agreed to a framework for potentially reducing production. Member output cuts, if successful, could see oil stockpiles reduced by 1 million barrels per day over the next year.
  • Gold rose modestly for the two-week period, up $5.5, ending the month at $1,316 per ounce. Silver, platinum and copper prices have also risen, up 2%, 1% and 1.6% over the same period.
  • During the third quarter of 2016, analysts lowered earnings estimates for companies in the S&P 500. The estimated earnings decline for the S&P 500 is -2.1%, which would represent six consecutive quarters of year-over-year declines in earnings. Eighty S&P 500 companies have issued negative EPS guidance, and 34 S&P 500 companies have issued positive EPS guidance.

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Source: Bloomberg Data as of 10/3/16
Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.

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