Archives for September 2015

Markets Fall Amid Additional Turmoil Weekly Update – September 28, 2015

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Stocks continued their rollercoaster ride last week, dogged by worries from Washington and a plunge in biotechs that pushed the major indexes lower. For the week, the S&P 500 lost 1.36%, the Dow fell 0.43%, and the NASDAQ dropped 2.92%.

Government Roadblocks Ahead?

Amid concerns about an October government shutdown, House Speaker John Boehner announced that he would resign his position next month to avoid leadership turmoil. While many analysts believe that his departure reduces the risk of an October shutdown, it could increase the risk of an end-of-year standoff. Republicans and Democrats are squaring off again over fiscal policy and the added drama of next year’s elections could cause the fight to drag out to the end of the year. Will the Fed have to consider Washington politics in its rate decision? We’ll see.

Fed Clarifies Rate Thinking (Somewhat)

Federal Reserve Chairwoman Janet Yellen clarified the Fed’s position on rate hikes in a speech on Thursday. She emphasized that the Fed is likely to raise rates this year, and that she is personally committed to that strategy. However, the decision will continue to rely on economic data and a rate hike is not yet certain. Her statement adds much-needed context to the Fed’s decision to keep rates steady and will hopefully give investors more certainty this week.

Q2 Growth Accelerated to 3.9%

We also got our final report on second-quarter economic growth, which showed that Gross Domestic Product (GDP) grew faster than originally expected. The revised data shows that the economy grew at an accelerated rate of 3.9% last quarter, driven by stronger consumer spending and construction. Hopefully, the increased pace of consumer spending – which drives two-thirds of economic activity – held into the third quarter.

Week Ahead Packed with Data

Looking at the week ahead, analysts will be closely watching the September jobs report, which could sway the debate on interest rate hikes one way or the other. Investors will also be watching Washington to see how Boehner’s resignation will affect the budget battle. With several Fed officials giving speeches that could shed additional light on their internal debates, this week promises plenty of headlines for markets to digest.

ECONOMIC CALENDAR:

Monday: Personal Income and Outlays, Pending Home Sales Index, Dallas Fed Mfg. Survey

Tuesday: International Trade, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: ADP Employment Report, Chicago PMI, EIA Petroleum Status Report, Janet Yellen Speaks 2:00 PM ET

Thursday: Motor Vehicle Sales, Jobless Claims, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Friday: Employment Situation, Factory Orders

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HEADLINES:

Durable goods orders drop in August. The latest data shows that orders for long-lasting manufactured goods dropped by 2% last month. However, exclusive of the volatile transportation category, durable goods orders remained flat, indicating that the drop might be temporary.

Consumer sentiment falls to lowest level since October 2014. A survey of how Americans feel about the economy found that consumers lost confidence in September amid worries about China and the global economy. Since consumer spending makes up a large part of economic activity, a drop in confidence could affect growth this quarter.

Weekly jobless claims rise slightly. The number of Americans filing new claims for unemployment benefits rose slightly by 3,000 claims last week, though the underlying trend still shows the economy adding jobs.

Existing home sales drop in August. After previous months of gains, existing home sales dropped sharply last month, falling 4.8%. However, monthly data can be volatile and sales are still up 6.2% from one year ago.

Fed Cites These 3 Factors Behind Last Week’s Decision Weekly Update – September 21, 2015

Image Courtesy of FreeDigitalPhotos.net/Stuart Miles

Image Courtesy of FreeDigitalPhotos.net/Stuart Miles

Uncertainty about the Federal Reserve’s decision on interest rates weighed on markets last week, pushing the Dow and the S&P lower. For the week, the S&P 500 lost 0.15%, the Dow fell 0.29%, while the NASDAQ gained 0.10%.

On Thursday, the Federal Reserve voted to hold interest rates steady at near zero for at least another month. Did the Fed choke or are officials just being cautious? It’s hard to say, but we now know that recent global economic events are an official problem for the U.S. Though the Fed economists believe the labor market and other sectors of the U.S. economy are doing well, they cited three factors in their decision to keep rates low:

  1. Weakening inflation pressure because of falling oil and gasoline prices, as well as a stronger dollar.
  2. Recent global events like China’s surprise Yuan devaluation and recent economic reports that raise concerns about slowing worldwide.
  3. Financial developments like the recent stock market correction.

Investors read the decision as a vote of no confidence in the economy on the part of the Fed and reacted with another selloff. However, much like the run-up to Y2K or the panic surrounding the tapering of quantitative easing, we think that a lot of the recent headlines are simply hyperbole.

The Fed doesn’t feel a lot of pressure to raise interest rates because inflation is still quite tame, and the risk of an overheated economy is low. Right now, the Fed’s main concern is risk management; central bankers don’t want to risk tightening too soon in an environment of slowing global growth. Instead, they’d rather commit to a slow, gradual approach that gives them plenty of wiggle room to adjust to changing conditions.

Relax. A rate hike is coming. Some think it will happen in December while others think the Fed will hold off until early 2016. What’s important is that our domestic economy is looking solid, and the Fed doesn’t want to act hastily. Realistically, we can expect market volatility to continue for the near future as investors price in the uncertainty.

The week ahead will be highlighted by a speech by Fed chair Janet Yellen as well as another report on second-quarter GDP. Analysts will be looking for more clarity about the Fed’s path to higher interest rates. Chinese President Xi Jinping will also be visiting the U.S. and analysts hope that he’ll provide some insight into how China plans to tackle their growth problem.

ECONOMIC CALENDAR:

Monday: Existing Home Sales

Wednesday: PMI Manufacturing Index Flash, EIA Petroleum Status Report

Thursday: Durable Goods Orders, Jobless Claims, New Home Sales, Janet Yellen Speaks 5:00 PM ET

Friday: GDP, Consumer Sentiment

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Greek exit polls show left-wing win. Projections suggest that the left-wing Syriza party responsible for the debt showdown likely won Sunday’s elections. The win could mean that further austerity fights are in store for Greece’s creditors.

Housing starts fall more than expected.  Groundbreaking on new houses dropped more than projected in August, though permits for new construction rebounded, pointing to underlying strength in the housing market.

Weekly jobless claims fall to multi-month low. The number of Americans filing new claims for unemployment benefits fell to the lowest level since mid-July, suggesting that the labor market continues to improve, though the data may be volatile due to the Labor Day holiday.

Consumer prices fall. Prices on a range of U.S. goods and services fell last month as gasoline prices dropped again and the U.S. dollar gained strength. Falling inflation complicates the Fed’s decision on interest rate raises.

Will Interest Rates Go Up for the First Time in Nearly a Decade? Weekly Update – September 14, 2015

Image courtesy of FreeDigitalPhotos.net/ddpavumba

Image courtesy of
FreeDigitalPhotos.net/ddpavumba

Stocks rebounded during the holiday-shortened week as gains in overseas stock markets spurred buying activity, giving the Dow its best week since March. Despite the buying pressure, investors curbed their enthusiasm ahead of the Federal Reserve meeting next week. For the week, the S&P 500 gained 2.07%, the Dow grew 2.05%, and the NASDAQ gained 2.96%.

China’s Growth Sputters

Fresh data out of China showed that factory output missed expectations, supporting the view that China’s economic growth may dip below 7% for the first time since the global recession. Infrastructure investment also fell, leading many experts to believe that China’s central government may be forced to roll out new measures to boost economic growth.

All Eyes on the Fed

This week, the eyes of the world will be on the Federal Reserve as the Open Market Committee votes on whether to raise interest rates for the first time in nearly a decade. The FOMC meets Wednesday and Thursday and will issue their official statement Thursday afternoon. The most recent Wall Street Journal survey of private economists shows that experts are split. Last month, a whopping 82% of economists thought that the Fed would pull the trigger this week; now, just 46% think the Fed will act this month.

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There are strong arguments to make on both sides of the issues. On the pro-rate-hike side are the opinions that too much easy money may fuel asset bubbles. Near-zero-rates also leave the Fed without ammunition in the event of another downturn.

On the hold-rates-steady side is the opinion that recent market volatility and ongoing concerns about global economic growth could spark another spate of selling if the Fed moves to raise rates now.

Realistically, if the Fed moves this week to raise rates, they will likely announce a quarter-point raise to target interest rates in the 0.25%-0.50% range. How will markets react to a rate decision? It’s hard to say. Investors might view an increase as a vote of confidence in the economy and rally. Alternately, sentiment might sour on fears of a new economic downturn. As always, we’re keeping an eye on the situation and will update you as necessary.

ECONOMIC CALENDAR:

Tuesday: Retail Sales, Empire State Mfg. Survey, Industrial Production, Business Inventories

Wednesday: Consumer Price Index, Housing Market Index, EIA Petroleum Status Report, Treasury International Capital

Thursday: Housing Starts, Jobless Claims, Philadelphia Fed Business Outlook Survey, FOMC Meeting Announcement, FOMC Forecasts, Fed Chair Press Conference

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HEADLINES:

Jobless claims drop by 6,000. The number of Americans filing new claims for unemployment benefits fell last week in the latest sign of health in the labor market. Though weekly claims are notoriously volatile, they have held at historic lows for months now.

Consumer sentiment falls to one-year low. A gauge of Americans’ opinions about the economy fell to the lowest level since last September. Americans are concerned about both current and future conditions.

Import-export prices plummet. The prices of U.S. imports fell by the largest amount in seven years as falling gasoline prices and a strong dollar chipped away at import costs. Export prices also fell, possibly because of weaker global demand.

Job openings hit new record high. July job openings hit a new record high of 5.29 million. The rate of voluntary job separations (‘quits’), held steady, indicating that Americans feel confident enough to leave their jobs in search of greener pastures.

What Choice Could Signal Fed Faith in Economy? Weekly Update – September 8, 2015

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Stocks slid after another turbulent week, buffeted by more worries about China. Investors chose to remain cautious ahead of the long Labor Day weekend and a raft of fresh data out of China. For the week, the S&P 500 lost 3.40%, the Dow fell 3.25%, and the NASDAQ dropped 2.99%.

Markets stayed pessimistic last week as traders decided to stay cautious during a four-day Chinese holiday and ahead of the U.S. Labor Day market holiday. This week is packed with more economic data out of China that may shed more light on the current situation. China’s central bank governor hinted at possible stimulus measures designed to help boost economic activity, suggesting that Chinese leaders are ready to get aggressive about their economic woes.

On the domestic side, the August jobs report showed that the economy added 173,000 new jobs last month, pushing the unemployment rate to 5.1%. While the job creation number is lower than expected, the silver lining is that wage growth is increasing. After posting tepid gains earlier this year, wages increased by 2.4% in August, suggesting that employers are nudging paychecks higher to attract workers. If the trend persists, it could indicate that the labor market recovery is on track.

Next week’s Federal Reserve Open Market Committee meeting could kick the market out of its volatile pattern. The big question everyone is asking is: Will the Fed make a move on interest rates when markets are so uncertain? Even with all the recent volatility, a recent survey of economists shows that the vast majority think the Fed will hike rates at next week’s meeting. Last week’s jobs report could give the Fed the ammunition it needs to raise interest rates. On the other hand, Fed officials could wait longer to give markets more time. If a rate move happens, it will signal that the Fed believes the U.S. economy is on the right path, regardless of what may be happening overseas.

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Right now, markets are in turmoil because of uncertainty. Investors hate uncertainty and tend to react by selling first and asking questions later. Hopefully, once the dust around China settles, investors will see that the U.S. economy has legs and will start making decisions that are based on logic and not fear. While we can hope that a decision by the Fed will give investors the certainty they seek, it’s possible that markets could be in for more turbulence. As always, we’ll be keeping a very close watch on market movements.

 ECONOMIC CALENDAR:

Monday: U.S. Markets Closed for Labor Day Holiday

Wednesday: JOLTS

Thursday: Jobless Claims, Import and Export Prices, EIA Petroleum Status Report

Friday: PPI-FD, Consumer Sentiment, Treasury Budget

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HEADLINES:

Motor vehicle sales surge in August. Despite a late Labor Day (cutting into August sales numbers), U.S. automakers posted big gains, achieving the strongest results since July 2005.

 Construction spending booms in July. Spending on construction activity reached a seven-year high in July, increasing by 13.7% as compared to July 2014.

 Factory orders increase in July. New orders for U.S. manufactured goods rose for a second straight month in July, indicating that demand remains strong despite a higher dollar and soft global demand.

 Mortgage applications soar on rate dip. The broad selloff in the stock market briefly pushed interest rates lower, sparking a surge in mortgage applications. Application volume surged 11.3% as compared to the week prior, putting applications up by 30% as compared to the same time last year.

Hixon Zuercher September 2015 Monthly Market Update