Archives for August 2016

LIBOR Surge May Rule Out September Fed Rate Hike – Weekly Update for August 29, 2016

LIBOR Surge May Rule Out A Fed Rate Hike

After rallying for weeks, the major indexes fell last week ahead of key remarks by Federal Reserve officials and turbulence in money markets.[i] For the week, the S&P 500 lost 0.68%, the Dow fell 0.85%, the NASDAQ dropped 0.37%, while the MSCI EAFE gained 0.16%.[ii]

Even as the Fed has kept interest rates flat, an unexpected surge in short-term interest rates triggered by an industry rule change is potentially doing some of the Fed’s work for it. If you ever tune in to the financial news, you may have heard the term LIBOR (pronounced LIE-bor) mentioned in reference to money markets (what we call the trade of short-term loans between banks and other financial institutions).

LIBOR, the London Interbank Offered Rate, is a benchmark used for a vast range of debt, including mortgages and corporate loans. Recently, the three-month LIBOR (the rate charged for lending dollars for three months) has reached multi-year highs (rising more than 30% since this June), tightening credit conditions without any action by the Fed.[iii]

Why should you care about LIBOR? Well, since you’re not a bank, LIBOR may not directly impact your life. However, since it’s tied to an estimated $300 trillion in global financial securities like corporate bonds and mortgages, it definitely affects your personal bottom line.[iv]

Even when the Fed holds rates steady, other events can impact the interest rates we see. Restructuring related to a money market rule change is causing interest rates to rise, making it more expensive for institutions to lend to each other (and to borrowers like us).

In terms of overall impact, LIBOR’s recent spike has the equivalent impact of a small (25 basis point) rate hike by the Fed.[v] While there’s no telling how long the surge in rates will last, some analysts think that the money market turbulence will be enough to rule out an interest rate increase when the Fed meets in September.[vi]

However, there are also larger stability issues the Fed has to consider. Even if a short-term rise in interest rates reduces the immediate need to raise rates, the Fed is charged with maintaining long-term stability, and may choose to act anyway.

The latest data on economic growth proved to be a disappointment. The second estimate of Gross Domestic Product growth showed that the economy grew a tepid 1.1%, trimming the previous estimate of 1.2%. While consumer spending was revised upward, businesses pulled back their spending significantly, putting the brakes on growth.[vii] Will the disappointing economic growth stave off a September rate increase? Probably, but we can’t be certain.

Investors are reacting predictably to the uncertainty by holding back and waiting for more information. When trading volume is low, even minor headlines can have an outsized effect on market movements. With the next Federal Open Market Committee Meeting three weeks away, we expect to see additional volatility as investors consider the odds of a new rate hike.

ECONOMIC CALENDAR:

Monday: Personal Income and Outlays, Dallas Fed Manufacturing Survey

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

Wednesday: ADP Employment Report, Chicago PMI, Pending Home Sales Index, EIA Petroleum Status Report

Thursday: Motor Vehicle Sales, Jobless Claims, Productivity and Costs, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Friday: Employment Situation, International Trade, Factory Orders

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HEADLINES:

New home sales skyrocket. Sales of new single-family homes rose unexpectedly in July, reaching their highest level in almost nine years as demand for houses rose.[viii]

Existing home sales tumble. Home resales fell last month for the first time since February as shrinking inventory limited buyer activity. However, as wages and home prices rise, resales will likely pick up later this year.[ix]

Durable goods orders bounce in July. Orders for long-lasting factory goods rebounded last month, indicating the manufacturing sector may be strengthening.[x]

Consumer sentiment slips in August. A gauge of how Americans feel about the economy and their financial prospects fell. A drop in optimism could foretell weaker consumer spending this quarter.[xi]

[i] http://www.cnbc.com/2016/08/26/us-markets.html

[ii] http://finance.yahoo.com/quote/%5EGSPC/history?period1=1471586400&period2=1472191200&interval=1d&filter=history&frequency=1d

http://finance.yahoo.com/quote/%5EDJI/history?period1=1471586400&period2=1472191200&interval=1d&filter=history&frequency=1d

http://finance.yahoo.com/quote/%5EIXIC/history?period1=1471586400&period2=1472191200&interval=1d&filter=history&frequency=1d

https://www.msci.com/end-of-day-data-search

[iii] http://www.marketwatch.com/story/money-markets-deliver-stealth-tightening-even-as-fed-stands-pat-2016-08-19

http://www.reuters.com/article/usa-moneymarkets-idUSL1N1B70CG

[iv] http://www.federalreserve.gov/newsevents/speech/powell20160621a.htm

[v] http://www.marketwatch.com/story/money-markets-deliver-stealth-tightening-even-as-fed-stands-pat-2016-08-19

[vi] http://www.marketwatch.com/story/money-markets-deliver-stealth-tightening-even-as-fed-stands-pat-2016-08-19

[vii] http://www.cnbc.com/2016/08/26/us-q2-gross-domestic-product.html

[viii] http://www.foxbusiness.com/markets/2016/08/23/july-new-home-sales-leap-12-4.html

[ix] http://www.foxbusiness.com/markets/2016/08/24/existing-home-sales-fall-3-2-in-july.html

[x] http://www.foxbusiness.com/markets/2016/08/25/durable-goods-orders-rebound-in-july.html

[xi] http://www.foxbusiness.com/markets/2016/08/26/consumer-sentiment-slips-in-august.html

Stocks Going Strong – Weekly Update for August 22, 2016

What is the Fed thinking now-Last week, the NASDAQ posted an eighth straight week of gains for the first time since 2010. Though late last week we saw minor losses in the other major indices, the market has held on strong since its post-Brexit boom. For the week, the S&P 500 lost 0.01%, the Dow fell 0.13%, the NASDAQ gained 0.10%, and the MSCI EAFE lost 0.64%.

With the market’s stellar performance as of late, we can’t help but ask, what is the Fed thinking? Minutes from the July Federal Reserve Open Market Committee meeting showed that officials are split about the economic outlook and when to raise interest rates. Hawkish rhetoric from Fed members who favor a rate hike soon could push the central bank into raising rates as early as September. More dovish officials aren’t convinced that tepid inflation will rise to the Fed’s 2.0% objective and favor a wait-and-see approach to raising interest rates.

After several months of strong labor market gains, some economists think the economy is close to full employment and central bankers should move soon to put on the brakes by raising interest rates. If the economy gets overheated, prices could rise too much and push the economy into a boom/bust cycle that federal officials are anxious to avoid.

While a few years of outsized growth sounds nice after the years of slow expansion we’ve experienced, the economic consequences that might follow wouldn’t be pleasant at all. That’s why central banks like the Fed act to smooth out these economic cycles by lowering interest rates when times are tough (boosting investment through cheap credit) and raising them when growth picks up again (curbing excessive optimism by making credit more expensive).

The timing of rate increases is tricky, and the macroeconomic relationships that govern these decisions are complex and open to interpretation. This explains why some of the best economists in the world can’t agree on when to pull the trigger.

Which group will win out? Since the Fed has been reluctant to jump the gun on interest rates, we don’t see a rate hike coming next month. However, the Fed might decide to surprise us.

Currently, Wall Street traders judge the odds of a September hike at just 18.0%. However, traders think the Fed is likely to raise interest rates in 2016, judging by December’s rate probabilities. Will the Fed move soon? We’ll keep you informed.

Stocks Going Strong - Weekly Update for August 22, 2016

This week is packed with economic data that will show us how the housing and manufacturing sectors are doing. We’ll also get a second look at second-quarter economic growth in Friday’s Gross Domestic Product report. Stay tuned for next week’s update.

ECONOMIC CALENDAR:

Tuesday: New Home Sales

Wednesday: PMI Manufacturing Index Flash, Existing Home Sales, EIA Petroleum Status Report

Thursday: Durable Goods Orders, Jobless Claims

Friday: GDP, International Trade in Goods, Corporate Profits, PMI Services Flash, Consumer Sentiment

Stocks Going Strong - Weekly Update for August 22, 2016

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, S&P Dow Jones Indices and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the SPUSCIG. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.


HEADLINES:

Inflation remains flat.
Consumer prices remained unchanged in July as gasoline prices fell for the first time in months. Modest inflation may reduce the chances of future interest rate increases by the Fed.

Housing starts surge to five-month high. Groundbreaking on new residential projects rose in July, potentially boosting second-quarter economic growth numbers.

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits dropped last week, suggesting the labor market continues to strengthen and approach full employment.

Industrial production rises more than expected. A measure of industrial sector production (including hard industries like mining, manufacturing, and utilities) increased by 0.7% versus the 0.3% rise expected.

Earnings Drive Record High Close – Weekly Update for August 15, 2016

Earnings Drive Record High Close - Weekly Update for August 15, 2016

Stocks rallied late last week as the S&P 500, Dow, and NASDAQ all closed at record highs on Thursday for the first time since New Year’s Eve 1999. The NASDAQ also notched a seventh week of gains, its longest winning streak since 2012. For the week, the S&P 500 gained 0.05%, the Dow grew 0.18%, the NASDAQ added 0.23%, and the MSCI EAFE grew 2.73%.

Earnings season is mostly behind us, and, with nearly all of the S&P 500 companies having reported in, we have a good overall picture of last quarter’s performance. Total earnings for the index so far were down 3.7% on -0.7% lower revenues relative to Q2 2015. However, 71.1% have managed to beat profit expectations, which has given stocks a boost in recent weeks.

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Here’s what we can take away from the second quarter:

Though earnings growth is still negative, it’s a vast improvement over what we saw in the first quarter from the same group of companies. Results are also better than the 4-quarter moving average. Revenue growth is also negative, showing that many companies are still (seven-plus years into the economic recovery) struggling with slow demand.

The energy sector is still bringing down overall earnings. Excluding Energy, earnings for remaining S&P 500 companies would be slightly up 0.1% on 2.4% higher revenues.

Third quarter earnings growth estimates are steadily coming down, indicating that business leaders are not expecting standout performance. Are companies sandbagging expectations to improve the odds of a positive surprise? That’s highly possible. However, we’re not expecting to see meaningful growth pick up this quarter.

Next week, we’ll get a look at notes from the last Federal Reserve Open Market Committee meeting. We’ll analyze these meeting minutes to get a sense of what the Fed is thinking about the economy and see how different members of the committee are voting. The rest of the week is also full of important economic releases, which could stoke volatility if we see any surprises. When markets experience a sustained rally over a period of weeks, it’s not surprising when investors pause for a breather to reevaluate the data.

Have questions about how all of this data impacts your portfolio as an investor? We’d love to chat with you. Feel free to leave a comment below or reach out to us at hello@hzcapital.com if there is anything you’re curious about. As always, our goal is to make sure you’re informed on the latest economic updates.

ECONOMIC CALENDAR:

Monday: Empire State Manufacturing Survey, Housing Market Index, Treasury International Capital

Tuesday: Consumer Price Index, Housing Starts, Industrial Production

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey

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HEADLINES:

Consumer sentiment increases in August. A measure of American optimism about the economy increased this month, hopefully supporting future consumer spending.

Retail sales remain flat in July. Sales of retail goods remained surprisingly unchanged last month as Americans cut back on purchases, moderating expectations of a surge in consumer spending this quarter.

Business inventories rise slightly in June. Business stockpiles edged higher in June as sales surged, suggesting U.S. firms are having an easier time moving products off shelves.

Job openings edge higher in June. The number of available jobs rose slightly over May, suggesting moderate growth. An increased number of factory job postings could indicate movement in the manufacturing sector.

“Why Does Britain Love Tea So Much?” – August 2016 Market Update Video

In this video, I discuss major events that occurred in July and their impact on the economy and investors. We also discovered that Josh is the king of dad jokes.

When it comes to investing, you are better off ignoring politics and paying attention to the business activity around you. I am grateful to be living in a great country where the future is always better than the past. It’s important for investors to remember that the White House does not drive the direction of the markets over the long term. It’s the great companies of the United States, like Marathon Petroleum Corporation, that drive business activity and, ultimately, stock prices higher over the long term.

Send us an email or give us a call if you have any questions or concerns you would like to discuss with us.

Stocks Bounce After Jobs Blowout – Weekly Update for August 8, 2016

S&P 500 at (1)

Stocks bounced last week, ending sharply higher after a better-than-expected jobs report. For the week, the S&P 500 gained 0.43%, the Dow rose 0.60%, the NASDAQ added 1.14%, but the MSCI EAFE lost 1.41%.

Among last week’s major events was a shockingly good July jobs report. Last month, the economy added 255,000 new jobs, blowing away expectations of 180,000 jobs. Even better, the gains were broad-based and the labor force participation rate (an area of concern because fewer people in our population were actively participating in the labor force) ticked upward. Overall, not too shabby.

Headline unemployment remained stable at 4.9%, but that single number hides a lot of complexity. We’d like to dig a little deeper. The chart below shows six different measures of unemployment, each slicing the data in a different way.

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The U-6 unemployment rate is the most comprehensive, showing total unemployed, marginally attached workers (discouraged workers and those considered barely employed), and those total employed part time for economic reasons.

You can see that all measures rose during the recession and have been steadily dropping ever since. While headline unemployment (U-3 unemployment in official parlance) stands at 4.9%, U-6 is still at 9.7%, almost two percentage points higher than the pre-recession low of 7.9% achieved in 2006. This indicates that there are many people who haven’t participated fully in the labor market recovery; however, the rate has fallen significantly from the 17.1% high it reached in 2009. All told, most areas of the labor market are still making gains.

Britain’s central bank moved to lower interest rates to fight the Brexit blues. The Bank of England cut interest rates for the first time in nearly seven years and announced an aggressive round of bond purchases to stimulate economic activity. The bank is moving quickly to head off a possible economic blowback from Britain’s vote to exit the European Union.

Will the Federal Reserve raise rates while one of our major trading partners is going the other way? We’ll be sure to keep you updated.

 

ECONOMIC CALENDAR:

Tuesday: Productivity and Costs
Wednesday: JOLTS, EIA Petroleum Status Report, Treasury Budget
Thursday: Jobless Claims, Import and Export Prices
Friday: Retail Sales, PPI-FD, Business Inventories, Consumer Sentiment

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HEADLINES:

Motor vehicle sales miss expectations. July sales of cars and trucks by major U.S. automakers slipped as pent-up demand slackened.

Consumer spending increases more than expected. Spending by American consumers rose more than expected in June, suggesting consumption remained strong throughout the second quarter.

Factory orders fall. New orders for manufactured goods fell in June for the second month in a row, though stabilizing business spending offers some hope.

Construction spending falls to one-year low. Spending on construction projects fell in June, suggesting a downward revision to second-quarter economic growth may come.

Q2 GDP Estimate: Present & Future Impact – Weekly Update for August 1, 2016

 

Q2 GDP Estimate: Present & Future Impact - Weekly Update for August 1, 2016

Stocks broke their four-week winning streak, closing mixed after the release of a surprisingly low estimate of second-quarter economic growth. For the week, the S&P 500 lost 0.07%, the Dow fell 0.75%, the NASDAQ grew 1.22%, and the MSCI EAFE added 2.36%.

The preliminary estimate of Q2 Gross Domestic Product (GDP) growth showed that the economy only grew 1.2% last quarter versus the 2.6% growth expected. Investors were understandably disappointed as they had hoped for a resurgence after a slow first quarter, but professional economists were surprised as well. The New York Fed had forecasted GDP growth of 2.1% and the Atlanta Fed had predicted 2.3% growth. Why the shock?

Digging deeper into the data, we find that the disappointment came from an unexpected fall in business inventories. On the positive side, the drop may boost future economic growth as businesses rebuild their stockpiles. Consumer spending was strong, growing 4.2% over the previous 12 months, and accounting for nearly all the GDP growth we saw.

So, though the headline number wasn’t thrilling, the underlying trends in consumer spending, labor market growth, and higher savings rates could set up a banner third and fourth quarter.

During last week’s Federal Open Market Committee meeting, the Federal Reserve’s monetary policy makers voted to hold rates steady, which was not a surprise. Citing recent economic data, the central bank said that “near-term risks to the economic outlook have diminished,” setting the stage for the next rate hike.

Will rates increase in September? December? Or will the Fed wait until 2017? We don’t know. Wall Street bets on future rate hikes suggest that most traders don’t think the Fed will move until December if they don’t wait until 2017.

The good new is the Fed seems confident enough in economic growth to cut back on stimulus. On the other hand, speculation around the timing of future rate hikes will continue to be a major market theme this year and may stoke additional volatility.

This week, investors will be watching Friday’s July labor market release and digesting more corporate earnings reports. We look forward to keeping you informed.

 

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Tuesday: Motor Vehicle Sales, Personal Income and Outlays

Wednesday: ADP Employment Report, ISM Non-Manufacturing Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Factory Orders

Friday: Employment Situation, International Trade

 

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HEADLINES:

Weekly jobless claims rise. The number of Americans filing claims for new unemployment benefits rose by 14,000, but the underlying trend still shows strength in the labor market.

Consumer sentiment drops in July. A measure of how consumers feel about the U.S. economy slipped as worries about the Brexit and the presidential election weighed on Americans.

June new home sales surge. Sales of new single-family homes rose to the highest levels in nearly 8-1/2 years. Sales were up 25.4% over June 2015, indicating that the housing market may be gaining momentum.

Durable goods plunge in June. Orders for long-lasting manufactured goods dropped, indicating weak overseas demand is affecting U.S. factories. Economists had predicted a 1.4% decline over June, but orders for goods like aircraft, appliances, and machinery actually fell 4.0%.