Despite significant volatility, stocks ended last week higher after a finalized Greek bailout deal and some upbeat domestic economic data. For the week, the S&P 500 gained 0.67%, the Dow grew 0.60%, and the NASDAQ added 0.09%.
Greece finally clinched a third bailout from creditors when its parliament approved the deal and Germany backed off its opposition to the terms. The deal isn’t perfect and the International Monetary Fund is refusing to participate until there is an agreement on debt relief from Greece’s Eurozone creditors. However, U.S. investors greeted the news that Greece will remain in the monetary union with a sigh of relief. Is the Greek drama finally over? Probably not for long.
China added significant uncertainty last week when the Chinese government unexpectedly devalued the yuan against the dollar by the largest amount in two decades. While China claims that the move isn’t designed to lower export prices and boost demand, the move came after a series of depressing export reports that suggest China’s economy is in trouble. At any rate, China has been under immense pressure to devalue its currency as part of market reforms. Investors are worried that a currency war could put pressure on the dollar and hurt U.S. manufacturers.
Despite panicky media headlines that claimed that the sky is falling, the devaluation really isn’t a big deal. Here’s why:
The Chinese yuan dropped about 3.5% against the dollar in the past year. However, the Euro is down 16.4%, the Canadian dollar is down 15.8%, and the Japanese yen is down 17.0%. All told, the U.S. dollar has gained significant ground against the currencies of most of our trading partners. A stronger U.S. dollar means that Americans can afford to buy more foreign products. As First Trust’s chief economist says, “The idea that the Chinese devaluation is going to send ripples of catastrophe across the world is nothing more than a Chicken Little story.”
A cheaper yuan is like a sale on Chinese goods. Right now, the Chinese economy is showing weakness, and a cheaper currency will hopefully help stoke growth in the world’s second-largest economy. If the move is successful in boosting growth, it will be a big help to the global economy. A more expensive dollar relative to the yuan means that Chinese consumers might end up importing fewer U.S. goods (potentially causing some U.S. firms to suffer in the short term). However, if it’s a sign that China may be allowing the market (instead of its central bank) to set the value of its currency, it’s a net win for global consumers in the long term.
Looking at the week ahead, all eyes will be on China to see whether last week’s currency devaluation will continue. Analysts will also be digging through the official minutes from the latest Federal Reserve Open Market Committee meeting for more hints about how the Fed plans to handle potential threats to economic growth.
P.S. You may have seen Chinese currency called the yuan or the renminbi in media reports and wondered if there was a difference. They are essentially interchangeable terms. Renminbi (meaning “people’s currency” in Mandarin) is the formal term used by Chinese officials, while the yuan is the actual unit of the currency.
Monday: Empire State Mfg. Survey, Housing Market Index, Treasury International Capital
Tuesday: Housing Starts
Wednesday: Consumer Price Index, EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales
Friday: PMI Manufacturing Index Flash
Consumer sentiment flags in August. Though American consumers don’t seem to be concerned about inflation or current economic conditions, the latest survey indicates some concerns about their future finances. Dips in consumer sentiment could translate into lower spending this quarter.
Nationwide home rental prices are sky high. The cost of renting a home has risen to record highs. A study found that renters can now expect to pay about 30% of their income in rent, as compared to the 15% buyers pay toward a mortgage. Hopefully, unaffordable rents will contribute to housing market activity.
Weekly jobless claims rise again. The number of Americans filing new claims for unemployment benefits rose unexpectedly last week. Though claims have risen for three straight weeks, they are still below the 300,000 mark and still support a strengthening job market.
Business inventories rise. U.S. businesses increased their stockpiles of goods by the most in two years, indicating that they expect demand to increase in the coming months. Analysts hope that a stronger job market will boost consumer spending.
Markets finally broke the losing streak, closing up for the week as worries about Greece and China faded. For the week, the S&P 500 gained 0.88%, the Dow rose 1.11%, and the NASDAQ grew 0.69%.1
Though a deal with Greece wasn’t reached on Sunday, both sides of the debt overhaul debate appear committed to finding a solution. Top-level officials from around Europe met to put together a deal that would be acceptable to creditors as well as Greece’s wary parliament. With Greek banks shut since June 28 and unlikely to reopen without additional funds, damage is already being done to the Greek economy.2 As of Monday morning, an “Agreement” was finally reached between the two sides; now, attention turns to Greek’s parliament, which must ratify the deal.3
China’s stock market, which has been experiencing a bear market correction, stabilized last week. Is the free-fall over? Hard to say, but we’re not worried. China’s stock market and investing culture is immature, and the recent 30% drop in the Shanghai Composite Index came after a run-up of 150%.4 Many analysts felt that Chinese markets were frothy and overpriced, so the correction isn’t unexpected. However, the stock meltdown does lower the expectation that China’s economy will reignite global growth.5
On the domestic side, the largest stock exchange in the U.S. experienced an outage last week that caused some to worry about the effects of software on markets. The technical fault that caused the New York Stock Exchange to halt trading for four hours on Wednesday gave investors pause but didn’t result in too much disruption to U.S. equity markets because orders were routed through other exchanges. While rumors of a malicious attack flourished, NYSE officials claimed a software glitch was to blame.6
In today’s software-reliant world, technical faults can and do happen. While other institutional traders who measure positions in microseconds can suffer serious losses when orders don’t go through in time, long-term investors aren’t usually affected by small glitches. Why? When you’re investing for long-term time horizons, the timing of individual trades doesn’t matter as much, and little ripples in the market generally won’t affect your long-term financial picture.
In the week ahead, Federal Reserve Chair Janet Yellen will be speaking about monetary policy to the House and Senate. Remarks that Yellen made on Friday suggest that she will probably reiterate the Fed’s intention to raise rates later this year as long as economic activity continues apace.7 Earnings season will ramp up with many banks reporting this week as well. We’ll have more for you on earnings next week.
Monday: Treasury Budget
Tuesday: Retail Sales, Business Inventories
Wednesday: PPI-FD, Empire State Mfg. Survey, Industrial Production, Janet Yellen Speaks 10:00 AM ET, EIA Petroleum Status Report, Beige Book
Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Housing Market Index, Janet Yellen Speaks 10:00 AM ET
Friday: Consumer Price Index, Housing Starts, Consumer Sentiment
Jobless claims rise to highest level since February. The number of Americans filing new claims for jobless benefits rose last week, though underlying trends remain stable. Seasonal factors may be to blame.8
Job openings soar. The number of available jobs rose again in May, showing that the economy had 5.4 million jobs to offer. Despite the increase, hiring remained flat, indicating that employers may be having trouble finding jobseekers with the right skills.9
Fed meeting minutes shows split. Meeting minutes from the June Federal Open Market Committee meeting show that economists were split, with some ready to vote for a rate increase. However, uncertainty around global risks won out, and officials chose to wait for more information.10
Consumer confidence rises more than expected in June. A gauge of how optimistic Americans feel about their economic prospects soared last month, stoking hopes that spending may boost economic growth.11
International Monetary Fund trims global growth expectations. Citing weaker-than-expected economic activity, weak inflation, and other factors, the IMF lowered its global growth projection to 3.3% from 3.5%.12
Markets ended lower last week as investors balanced an optimistic jobs report against renewed concerns about a Greek debt default. For the week, the S&P 500 lost 0.69%, the Dow fell 0.90%, and the NASDAQ slid 0.03%.[i]
On Friday, we got a look at how the labor market did in May. After jobs growth stuttered in the first quarter, investors were looking for reassurance that the economy can still support hiring. Here are three good things and two not-so-good things that we learned:
- The economy created 280,000 new jobs in May, beating expectations and leaving economists feeling optimistic about growth this quarter.[ii]
- The unemployment rate ticked upward to 5.5%, but that’s mostly a result of an increase in the number of people looking for jobs. A higher labor force participation rate is a good sign because it means people are feeling confident enough in job opportunities to go looking, so we’ll count this one as a positive.[iii]
- Lagging wage growth, which has concerned economists, appears to be reversing with U.S. workers adding $0.08/hour to their paychecks last month. Wage growth over the last three months is much closer to the 3.0% we’ve seen in past economic recoveries.[iv] Since economic growth depends heavily on consumer spending, we can hope that bigger paychecks will translate into a greater willingness to spend.
- In the not-so-great category, we learned that the majority of the new jobs created were in low-paying industries like retail, hospitality, temp work, home health services, etc.[v] Though we’re seeing an uptick in full-time work, many Americans are still struggling to find good-paying jobs, which may limit their ability to qualify for a mortgage and make big-ticket purchases.
- Productivity, measured in output per worker hour, registered a dismal 0.3% increase last month. Productivity is a major factor in long-term economic growth, and low labor productivity could be a warning sign. Is it cause for worry?
Probably not. Productivity is often tied to wages – higher wages have been seen to boost worker productivity – so we can hope that wage increases will boost output. There are also some economists who argue that the way productivity is estimated doesn’t account for technological improvements and shifts in the ways Americans work today.[vi]
Looking ahead, investors will be watching Greek debt negotiations closely to see whether creditors will bow to hardline Greek demands for loans without austerity measures, or whether they will allow debt-laden Greece to slide into default. We’ll also get a look at the latest retail sales and business inventories data, which will show us how consumers and businesses are spending this quarter.
Wednesday: EIA Petroleum Status Report, Treasury Budget
Thursday: Jobless Claims, Retail Sales, Import and Export Prices, Business Inventories
Friday: PPI-FD, Consumer Sentiment
Greece delays debt payment to International Monetary Fund. Greece postponed a payment due Friday until the end of June. A government leader declared that Greece might hold snap elections to choose a new government.[vii]
American Pharoah wins Triple Crown at Belmont Stakes. The horse previously won the Kentucky Derby and Preakness races, bringing home the elusive Triple Crown for the first time since 1978.[viii]
Oil settles up on lower rig count. Oil prices jumped Friday, sending domestic prices close to $60/barrel when an industry report showed that the number of U.S. drilling rigs fell for the 26th week in a row.[ix]
Mortgage rates remain high. Interest rates on 30-year fixed mortgages remained at 3.87% for the second week in a row, reaching the highest level since late 2014. High rates may curb housing market activity this season.[x]