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Federal Reserve/Economic Reports

  • The Fed’s latest Beige Book, measuring the period between late August and early October, indicated economic activity continued to expand at a “modest to moderate pace” as labor market conditions remained tight and wage pressures were moderate. Manufacturing activity and capex were mixed, consumer spending was mixed, and nonfinancial services expanded, led by health care. Residential real estate activity grew, and loan demand increased.
  • Real GDP rose at a 2.9% annual rate in the third quarter, above the consensus estimate of 2.5% and the most in two years. An increase in net exports, primarily soybeans (adding 0.83%) and an increase in inventory investment (adding 0.61%) led the upside surprise. Services spending rose at a 2.1% rate (housing, utilities and healthcare). Real personal consumption expenditures (PCE) rose at a 2.1% rate, down from 4.3% in the second quarter. Nondurable goods spending fell, and durable goods spending rose (vehicles). Capex rose at a slow 1.2% rate. Real final sales to domestic purchasers rose at a 1.4% annual rate, and nominal GDP rose at a 4.4% annual rate. The PCE Price Index rose at a 1.4% annual rate.
  • The Consumer Price Index was up 0.3% in September, the most in five months. Energy prices rose 2.9%, led by gasoline, and accounted for more than half of the CPI increase. Core CPI rose just 0.1%. Year over year, CPI rose 1.5%, and core CPI increased 2.2%. The core CPI services index rose 3.2% year over year because of increasing shelter costs.
  • The Reuters/University of Michigan Consumer Sentiment Index fell to 87.2, down 4 points for the month, its lowest level since 2014, indicating that consumers are worried about the future of the economy. For the month, the current conditions index decreased 1 point and expectations 5.9 points.
  • Durable goods orders were down 0.1% in September, above estimates of -0.6%. Transportation led the decline, down 0.8% (defense aircraft). Excluding transportation, orders rose 0.2%. Nondefense capital goods orders, ex-aircraft, declined 1.2%.
  • Industrial production increased 0.1% in September, below the 0.2% consensus. The previous two months were revised down by 0.1 percentage point each to -0.5% in August and 0.5% in July. Industrial production rose at a 1.8% annual rate in the third quarter, up for the first time in a year. Year over year, IP was down 1%. The capacity utilization rate was reported at 75.4%, below the consensus of 75.6%.
  • The Conference Board’s Consumer Confidence Index declined 4.9 points in October to 98.6, a three-month low. This compares to an expected 2.9-point pullback to 101.2. September was revised down by 0.6 points to 103.5. This suggests a probably near-term slowdown in consumer spending growth.
  • The S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 0.6% in August, the most in nine months, reaching its highest level since April 2007. Prices rose 6.4% year over year.
  • The homeownership rate increased 0.3 percentage points in the third quarter to 63.4%, the second-lowest level since 1967. Rental properties represented 24.9% of all year-round vacant inventory, while for-sale units represented 10.4% of inventory. Inventories remain tight, indicating a housing shortage.
  • The Conference Board’s Leading Economic Index rose 0.2% in September. Both the Coincident and Lagging Indicators also rose 0.2%. On a year over year basis, the LEI is up 1.5%, below the 2.2% historical annual gain. The Conference Board believes “the expansion in economic activity will continue at a moderate pace into early 2017.”
  • Existing home sales rose 3.2% in September, a three-month high and above the consensus for a 0.4% gain. More first-time homebuyers, representing 34% of all sales and the highest since July 2012, led the increase. Supply fell to 4.5 months, indicating tight inventories. Distressed properties fell to 4% of total sales, the smallest share since data began in October 2008.
  • The Cass Freight Shipments Index declined 0.4% in September, its first fall in eight months, falling 3.1% year over year. The index has been declining since March 2015, indicating weakening momentum in freight activity. In a similar report, the ATA For-Hire Truck Tonnage Index fell 5.8% last month, the most since March 2000. This reflects weak industrial production and businesses still rationalizing inventories.
  • The federal government ended the fiscal year with a total deficit of $587.4 billion. The deficit represented 3.2% of GDP, up from 2.5% in 2015. The 12-month total federal outlays rose at a faster rate than receipts, up 4.5% on the year, led by a rise in net interest payments.

Financial Markets

  • Equity markets to move downward in the second half of October, as investors preferred to de-risk ahead of the U.S. presidential election and with greater probability of a Fed rate hike in December. Small-cap stocks again showed the weakest results. The Russell 2000 fell 2.05%. The NASDAQ Composite was down by 0.46%, and the large cap S&P 500 benchmark was down 0.31%.
  • Within international markets, the developed EAFE declined by 0.46%, and the emerging market benchmark was down -0.26%.
  • The yield curve changed little yet saw a modest upward move in rates. The two-year was up 2 basis points to 0.85%, and the 10-year up 4 basis points to 1.84%. The 10-year is up 48 basis points from its low on July 8, representing a loss of roughly 4.2%. While payment of principal and interest is guaranteed, there is no guarantee of market value loss on changes in rates.
  • High-yield spreads hit a one-year low this week, reaching 4.53% over Treasuries before selling off and finishing the week with a spread of 4.67% on an option-adjusted spread basis, 2 basis points higher than last reported. The global hunt for yield has caused foreign investors to now hold 39% of funds allocated to the high-yield space, with European investors representing 80% of this amount.
  • Oil prices reversed course, closing down by $1.65 a barrel to $48.70 after reaching an interim high of $51.60. Oil producers appear unwilling to come to agreement on a freeze or cut in production, despite the OPEC secretary general’s warning of the consequences. Money managers reduced their net exposure to oil futures and options for the first time in five weeks.
  • The dollar moved higher over the period, reaching 98.35 based on the trade-weighted dollar index. The index has rallied 3.1% since its mid-August lows, mostly caused by rising expectations for a rate hike before year’s end.
  • Gold rallied by $24.44 over the two-week period on safe haven demand following the FBI’s further probe into Hillary Clinton’s emails. The strong upward move was despite the expectation for a Fed funds rate hike in December.
  • 58% of the S&P 500 companies have reporting earnings for the third quarter. 74% have reported earnings above the mean estimate, and 58% have reported sales above the mean estimate. All sectors have contributed to the increase in earnings, with the financial sector the largest contributor, and the energy, real estate and utilities generating the largest surprise.

2016-10-31

Source: Bloomberg Data as of 10/28/16
Numbers in red reflect deteriorating estimates since last report while numbers in green represent improving.