Monthly Archives: August 2014

Market Insights – Friday – 8/29/2014

Stocks Make Gains Ahead of Labor Day Holiday

On lighter trading volume, the U.S. equity markets closed the session higher as festering Ukraine concerns collided with some upbeat economic data. Treasuries were mixed as the domestic docket showed consumer sentiment and Midwest manufacturing activity topped expectations, while a separate release revealed a softer-than-expected read on personal income and spending. Gold was lower, while crude oil prices and the U.S. dollar were higher.

The Dow Jones Industrial Average increased 19 points (0.1%) to 17,098

The S&P 500 Index was 7 points (0.3%) higher at 2,003

The Nasdaq Composite rose 23 points (0.5%) to 4,580

In moderately-light volume, 615 million shares were traded on the NYSE, and 1.3 billion shares changed hands on the Nasdaq

WTI crude oil increased $1.41 to $94.96 per barrel, wholesale gasoline gained $0.03 to $2.62 per gallon

The Bloomberg gold spot price decreased $2.57 to $1,287.08 per ounce

Markets were higher on the week, as the DJIA increased 0.6%, the S&P 500 Index was 0.8% higher and the Nasdaq Composite Index also rose 0.9%.

Personal income and spending miss, while consumer sentiment and manufacturing data tops

Personal income rose 0.2% month-over-month in July, just below the 0.3% gain that economists surveyed by Bloomberg had projected, but June’s 0.4% rise was revised to a 0.5% increase. Personal spending dipped by 0.1% m/m last month, versus expectations of a 0.2% gain, while June’s 0.4% increase was unrevised. The July savings rate as a percentage of disposable income rose to 5.7%, from June’s upwardly revised rate of 5.4%. The PCE Deflator was up 0.1% m/m in July, matching the gain that was expected, and compared to the unrevised 0.2% increase seen in June. Compared to last year, the deflator was 1.6% higher, inline with expectations. Excluding food and energy, the PCE Core Index was up 0.1%, matching expectations, and was 1.5% higher y/y, inline with forecasts.

The final University of Michigan Consumer Sentiment Index was revised higher to 82.5 for August from the preliminary report of 79.2, and exceeding the 80.0 economist estimate. The index was also above July’s 81.8 figure. The stronger-than-expected report came as a slight upward adjustment to the component pertaining to current economic conditions was accompanied by a solid upward revision to the portion regarding the economic outlook. On inflation, the 1-year expectation was revised to 3.2%, from 3.4%, and compared to July’s 3.3% figure, while the 5-year inflation outlook was adjusted to 2.9% from 2.8%, and versus the 2.7% posted in July.

Treasuries were mixed, with the yield on the 2-year note dipping 1 basis point to 0.49%, while the yield on the 10-year note increased 1 bp to 2.34% and the 30-year bond rate was flat at 3.08%.

Please Note: All U.S. markets will be closed on Monday in observance of the Labor Day holiday.

Stocks keep winning streak alive but geopolitical front keeps bulls on alert

Although volume remained light as the summer headed down the home stretch, the equity markets posted their fourth-straight weekly advance, aided by increased optimism of stimulus measures out of Europe and Japan, while U.S. economic sentiment continued to improve. 2Q GDP growth was unexpectedly revised higher to 4.2% and jobless claims surprisingly remained below the 300,000 mark.

Consumer Confidence rose to the highest level since October 2007, complementing Friday’s sentiment report to paint a favorable picture of the consumer’s psyche. However, gains were kept in check by disappointing sales and guidance out of the retail sector, as well as geopolitical headlines, with early week optimism regarding positive peace talks between Russia and Ukraine fading on reports of increased conflict in the region.

While the most recent stock selling appeared eerily reminiscent of earlier pullbacks this year where some concern, in this case geopolitics combined with Fed tightening worries, caused a selloff, helping to wash out overly optimistic sentiment and moving commentators to question whether it was the long-awaited correction. But then, the selling stopped, buyers stepped in, and the market recovered to new highs again.

The resilience of the market has been impressive, but has renewed worries about a melt-up scenario as investors “capitulate in” to the market. The problem with melt-ups, however good they feel while underway, is that they typically end quite painful and abruptly. We remain optimistic about stocks for the foreseeable future, although we would prefer the kind of grind-higher market we’ve experienced recently over a melt-up. We would also welcome pullbacks and even a correction as it would keep sentiment contained; and could elongate the bull market.

Europe stages late-day rally to close in positive territory, Asia mostly lower

The European equity markets finished higher following a late-session advance, showing some resiliency in the face of flared-up Ukraine tensions and a raised terror threat by the U.K. Meanwhile, some lackluster Eurozone economic data may have helped preserve optimism regarding further stimulus measures from the European Central Bank (ECB). Eurozone inflation in August decelerated to a rise of 0.3% y/y, as expected, from 0.4% in July, registering the lowest level since October 2009 and well below the ECB’s target of below but close to 2.0%. The Eurozone unemployment rate came in at 11.5% as expected, remaining at arm’s length of a record high. Separate reports showed German retail sales unexpectedly fell last month and Italy’s 2Q GDP was unrevised at a 0.2% quarter-over-quarter contraction, matching estimates.

Stocks in Asia finished mostly to the downside amid the flare-up in tensions in Ukraine, while traders sifted through a mixed Japanese economic data for July. Japan reported inline consumer price inflation figures and a jump in construction orders, while its retail sales unexpectedly declined, household spending dropped more than estimated and industrial production rose at a smaller-than-anticipated pace.

South Korea showed manufacturing sentiment deteriorated slightly for September and growth of its leading indicators slowed last month, while industrial production increased much more than anticipated for July. Chinese stocks rebounded from some recent weakness, led by technology and defense-related stocks amid local media reports that the government may inject military-research assets into some listed companies, per Bloomberg. India’s markets were closed for a holiday, but the nation reported 2Q GDP growth of 5.7% y/y, up from the 4.6% expansion in 1Q, and compared to the 5.5% increase in output that economists had projected.

Q2 GDP Revised Up to 4.2%

The United Stated grew at a 4.2% annual pace in the second quarter — a touch faster than previously estimated — as businesses ramped up investment on buildings and equipment and consumers spent more after huddling inside during the winter.

The acceleration in business investment, if it’s sustained, could add to the economy’s momentum in the months ahead. Companies have been reluctant spenders since the U.S. exited the Great Recession five years ago, a chief reason why the economy is growing well below its historical norm. Initially, the government reported last month that gross domestic product expanded at a seasonally adjusted 4% clip from April to June. GDP reflects the value of all goods and services produced by the U.S. economy.

The rebound in growth during the spring eased any lingering concerns after a stunning 2.1% decline in the first quarter, one of the rare times the economy has contracted in the middle of a prolonged expansion. Consumer spending, the main driver of U.S. economic activity, led the way as usual. Outlays rose by an unrevised 2.5% in the second quarter after a tepid 1.2% gain in the first three months of the year. Households were aided by a 4.2% rise in inflation-adjusted income after taxes, the biggest increase in almost two years.

Plus, newly revised figures from the Commerce Department show that businesses invested at an even faster rate. Companies increased investment in structures such as office buildings by 9.4% instead of a prior estimate of 5.3%. And they boosted spending on equipment by 10.7%, rather than 7%.Soft business investment played a key role in the brief but steep first-quarter slump. Many companies suffered closures and delays or put off major projects amid a bout of extremely cold or stormy conditions that also made it hard for employees to get to work.

Q2 GDP

Corporate investment hasn’t slacked off much in the third quarter, recent reports show. Most industries are hiring and manufacturers in particular are boosting production. Economists in a recent poll predict the U.S. will grow at a 3.1% pace in the third quarter.

One reason businesses might have invested more: Corporate profits jumped an estimated 8% in the second quarter after declining by 9.4% in the first quarter. Pretax profits adjusted for depreciation and the value of inventories climbed by $154.9 billion to a $2.1 trillion annual rate.Businesses also heartily restocked their warehouse shelves in the second quarter, though not quite as much as previously reported. The value of inventories climbed $83.9 billion instead of $93.4 billion. Still, that was more than double the increase in the first quarter and a sign that companies expect to sell more goods. Rising inventories boost GDP.

Trade was also less of a drag on the economy in the spring. The rise in exports was revised up to 10.1% from 9.5% and the increase in imports was trimmed to 11% from 11.7%. A smaller trade gap adds to U.S. growth and a larger one subtracts from GDP.

The rest of the updated GDP report showed little change. Inflation as measured by the PCE index, for example, rose at a 2.3% annual rate compared to a 1.4% increase in the first quarter.

Market Insights 8/28/2014

Stocks Lose Steam as Geopolitical Tensions Boil

Though off the worst levels of the day, the U.S. equity markets closed the trading session lower, following developments in Ukraine that fueled geopolitical tensions. Stocks may have found some support from domestic releases that showed an upward revision to 2Q GDP and stronger-than-expected reports on weekly jobless claims and pending home sales.

Treasuries were higher, while a separate release from the U.S. economic calendar showed that manufacturing activity in the Midwest region decelerated more than economists had anticipated. Gold and crude oil prices were higher, while the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average fell 42 points (0.2%) to 17,080

The S&P 500 Index was 3 points (0.2%) lower at 1,997

The Nasdaq Composite declined 12 points (0.3%) to 4,558

In moderately-light volume, 490 million shares were traded on the NYSE, and 1.3 billion shares changed hands on the Nasdaq

WTI crude oil added $0.67 to $94.55 per barrel, wholesale gasoline was unchanged at $2.59 per gallon

The Bloomberg gold spot price increased $6.93 to $1,289.56 per ounce

Jobless claims dip unexpectedly, while 2Q GDP surprisingly revised higher

Weekly initial jobless claims dipped by 1,000 to 298,000 last week, below the 300,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 1,000 to 299,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, declined by 1,250 to 299,750, while continuing claims rose by 25,000 to 2,527,000, north of the forecast of economists, which called for a level of 2,510,000.

The second look (of three) at 2Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 4.2%, revised up from the 4.0% expansion reported in the first report, and compared to the downwardly adjusted 3.9% increase that was forecasted by economists. 1Q GDP contracted by an unrevised 2.1%. Also, personal consumption came in above forecasts, remaining at the 2.5% gain that was previously reported, compared to the 2.4% rise that was projected and following the 1.2% increase recorded in 1Q. The stronger-than-expected rebound in 2Q came amid upturns in exports, private inventory investment, state and local government spending and residential fixed investment, along with accelerations in personal consumption and nonresidential fixed investment, partially offset by an acceleration in imports.

On inflation, the GDP Price Index was upwardly revised to a 2.1% increase from its earlier report of a 2.0% rise, with economists anticipating an unadjusted reading, while the core PCE Index, which excludes food and energy, matched expectations of an unrevised 2.0% gain.

Pending home sales rose 3.3% month-over-month in July versus the projected 0.5% increase that economists had forecasted, and following the downwardly revised 1.3% decrease registered in June. Compared to last year, sales were down 2.7% last month, versus the 3.5% drop that was anticipated, and following June’s negatively revised 4.7% decrease. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly rose in July.

Treasuries were higher, with the yield on the 2-year note losing 1 basis point to 0.50%, the yield on the 10-year note declining 2 bps to 2.34% and the 30-year bond rate dropping 3 bps to 3.08%.

Tomorrow, the U.S. economic calendar will yield reports on personal income, anticipated to increase 0.3% m/m in July, and personal spending, expected to have grown 0.2% m/m. After the opening bell, we will receive the Chicago Purchasing Manager Index, expected to tick higher in August, to a level of 56.5 from the 52.6 posted in July, with a reading above 50 depicting expansion in business activity in the Midwest region. Rounding out the day, the final University of Michigan Consumer Sentiment Index for August will be released, with a reading of 80.0 expected, a slight increase from the preliminary report level of 79.2.

Europe sees pressure on escalated tensions in Ukraine, Asia mostly lower

The European equity markets finished lower, with reports of increased conflict in Ukraine dampening optimism that came earlier this week as Russian and Ukrainian leaders met to discuss a de-escalation of tensions in the region. The European economic calendar offered a host of data for traders to digest, with German consumer price inflation coming in flat for August, matching expectations, ahead of tomorrow’s release of Eurozone inflation data. Also, other reports showed German unemployment unexpectedly rose in this month, Eurozone economic and consumer confidence deteriorated for August, while June Italian retail sales came in stronger than expected and Spain’s unrevised 2Q GDP growth of 0.6% quarter-over-quarter matched forecasts.

Stocks in Asia finished mostly to the downside in subdued action, with volume and data on the light side, while fading hopes toward a de-escalation of tensions in Ukraine also weighed on sentiment. Japanese equities declined with the yen building on recent gains to pressure export-related stocks, while traders may have treaded cautiously ahead of tonight’s plethora of economic releases. Chinese stocks fell, while a report showed growth in the nation’s industrial profits decelerated to 13.5% y/y in July, from the 17.9% increase seen in June. Rounding out the day, stocks in India advanced, moving further into record territory ahead of tomorrow’s holiday.

The international economic docket for tomorrow will be dominated by releases from Japan, as the island nation is set to report on its jobless rate, household spending, national and regional CPIs, retail sales, industrial and vehicle production, housing starts and construction orders. Releases from abroad will include retail sales from Germany, the PPI from France, the unemployment rate and CPI from Italy and the Eurozone, as well as GDP from Canada and Italy.

Market Insights 8/27/2014

Stocks Cool After Record-Breaking Run

After starting the week in full-stride, the U.S. equity markets seemed to take a breather as stocks fluctuated on either side of the flatline, ultimately closing nearly unchanged, on lighter volume and economic data. Treasuries were higher despite the lone release on the economic docket showing a second weekly increase for U.S mortgage applications. Gold and crude oil prices were nearly unchanged, while the U.S. dollar was lower.

The Dow Jones Industrial Average rose 15 points (0.1%) to 17,122

The S&P 500 Index was nearly unchanged at 2,000

The Nasdaq Composite closed 1 point lower at 4,570

In light volume, 497 million shares were traded on the NYSE, and 1.4 billion shares changed hands on the Nasdaq

WTI crude oil added $0.02 to $93.88 per barrel, wholesale gasoline was $0.01 lower at $2.59 per gallon

The Bloomberg gold spot price increased $1.70 to $1,282.90 per ounce

Mortgage applications rise for second-straight week

The MBA Mortgage Application Index rose 2.8% last week, after the index gained 1.4% in the previous week. The second-consecutive weekly increase came as a 2.8% gain for the Refinance Index was accompanied by a 2.6% rise for the Purchase Index. Moreover, the average 30-year mortgage rate ticked lower by 1 basis point to 4.28%.

Treasuries were higher in afternoon action, with the yield on the 2-year note dipping 1 bp to 0.51%, the yield on the 10-year note decreasing 4 bps to 2.36%, and the 30-year bond rate dropping 6 bps to 3.11%.

Tomorrow, the U.S. economic calendar will offer the second look (of three) at 2Q GDP, forecasted to show a 3.9% quarter-over-quarter annualized rate of expansion, down slightly from the 4.0% growth reported in the first release. Additional releases include weekly initial jobless claims, forecasted to increase to a level of 300,000 from the prior week’s 298,000 figure, and pending home sales, with economists expecting the pipeline of existing home sales to increase 0.5% m/m during July, following the 1.1% decrease in June.

Europe mixed, Asia mostly higher

The European equity markets finished mixed, coming off their two-day rally that came courtesy of hopes of further stimulus measures from the European Central Bank. Meanwhile, sentiment was hamstrung by a report showing German consumer confidence declined for the first time since January 2013. The German GfK Consumer Confidence Index declined to 8.6 for September, from the downwardly revised 8.9 in August, where economists had expected it to remain. Elsewhere, the geopolitical front remained in focus with Russian President Putin saying he held positive talks with Ukrainian President Poroshenko.

With the eurozone economy already vulnerable, sanctions between the European Union and Russia could tip Europe back into recession. We are continuing to underweight European stocks, as economic momentum was already stalling before the intensification of the Ukraine crisis, and we are doubtful that a decisive resolution will occur in the near term. Although stocks might experience a bounce if Ukrainian-Russian tensions ease, we prefer to wait for convincing signs of an economic turnaround.

Stocks in Asia finished mostly to the upside on the heels of yesterday’s record high close for the S&P 500, while economic data in the region was light. Japanese equities ticked higher, but gains may have been bove zero denoting expansion. limited by some strength in the yen. Chinese stocks nudged to the upside, snapping a two-session losing streak, though concerns remained about the impact of IPOs hitting the market.

The international economic docket for tomorrow will offer a look at regional and national CPI reads from Germany, retail sales and business confidence from Italy and industrial, consumer and business confidence from the eurozone, while China is expected to release industrial profits.

Market Insights 8/26/2014

S&P 500 Closes Day Above 2,000

The U.S. equity markets closed the trading session higher in the wake of some favorable reports on domestic consumer confidence and regional manufacturing activity, with the Dow and S&P 500 continuing to explore uncharted territory. The uplifting reads may have aided in overshadowing some lingering geopolitical concerns and a softer-than-expected gain for housing prices in June, while investors also deciphered a distorted durable goods orders report. Treasuries were mixed, while gold and crude oil prices were higher and the U.S. dollar was flat.

The Dow Jones Industrial Average rose 30 points (0.2%) to 17,107

The S&P 500 Index was 2 points (0.1%) higher at 2,000

The Nasdaq Composite closed 13 points (0.1%) higher at 4,571

In light volume, 512 million shares were traded on the NYSE, and 1.4 billion shares changed hands on the Nasdaq

WTI crude oil added $0.51 to $93.86 per barrel, wholesale gasoline was unchanged at $2.60 per gallon

The Bloomberg gold spot price increased $5.71 to $1,282.55 per ounce

Durable goods orders mixed, while Consumer Confidence unexpectedly improves

Durable goods orders surged 22.6% month-over-month (m/m) in July, compared to the 8.0% increase expected by economists surveyed by Bloomberg, while June’s 0.7% gain was revised to a 2.7% increase. However, ex-transportation, orders declined 0.8% m/m in July, versus the forecast of a 0.5% gain, while June’s figure was revised to a 3.0% rise, from the originally-reported increase of 0.8%. Finally, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, decreased 0.5% m/m last month, compared to the 0.2% increase that was projected, but the 1.4% increase in June was revised to a 5.4% rise.

Durable goods orders, goods meant to last at least 3 years, can be volatile and today’s headline figure was distorted by a 318% increase in plane orders after an active air trade show, with plane orders rising the most since January 2011. The top line figure was also boosted by increased demand for automobiles, where the 10.2% increase was the most since August 2009. Business spending rose by a 7% annualized rate in the second quarter, a turnaround from the 1% decline in the first quarter.

More and more people are acknowledging the U.S. economy appears to be strengthening, leaving many optimistic on the longer-term outlook for stocks. We believe the market remains in a longer-term bullish trend, as bull markets typically end when a recession is in the offing, which doesn’t appear to be the case currently. The labor market continues to heal and we believe the housing market could get a bit of a rebound in the second half of the year, which should help consumer confidence.

Plus, the energy outlook in the United States is quite encouraging for future growth and US manufacturing competitiveness globally. Especially with the Russian and Iraqi uncertainty, it is particularly heartening to know that the United States is less dependent on foreign sources of energy than it has been in quite some time. While the timing of the first rate hike by the Fed is being debated, the beginning of a rate hike cycle has tended to be quite good for stocks as it has meant a solid economy and a still relatively easy Fed.

The Consumer Confidence Index unexpectedly jumped to 92.4 in August, from a downwardly revised 90.3 in July, and compared to the dip to 89.0 that economists had projected. This was the highest level of consumer confidence since October 2007, as a slight m/m decline in the component pertaining to expectations of business conditions was more than offset by a jump in sentiment regarding the current situation.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 8.1% y/y in June, compared to the 8.3% increase that economists had expected. Moreover, m/m, home prices were lower by 0.2% on a seasonally adjusted basis for the month, versus forecasts calling for a flat pace of growth.

Treasuries were mixed, with the yield on the 2-year note losing 1 basis point to 0.49%, while the yield on the 10-year note ticked 1 bp higher to 2.39% and the 30-year bond rate increased 2 bps to 3.16%.

Europe extends yesterday’s rally, Asia mixed

The European equity markets finished higher, extending yesterday’s strong gains as optimism continued regarding further stimulus measures from the European Central Bank in the wake of President Mario Draghi’s comments over the weekend at the Federal Reserve’s annual Jackson Hole Symposium. The ECB stimulus hopes overshadowed festering tensions in Ukraine as Russian President Putin began a meeting with Ukrainian President Poroshenko.

Stocks in Asia finished mixed despite yesterday’s gains in the U.S. and the rally in Europe on hopes of further stimulus measures from the ECB, as geopolitical tensions came back into focus. Japanese equities declined, with the yen showing some late-day strength to weigh on the markets, while a read on the nation’s small business confidence unexpectedly deteriorated for this month. Elsewhere, IPO concerns and economic uneasiness weighed on Chinese stocks, while Indian equities finished flat, but remained near record highs

Market Insights 8/25/2014

S&P 500 Tops 2,000 Intra-day

The U.S. equity markets began the week higher as stocks closed the trading session nicely higher and the S&P 500 was able to run through the 2,000 mark for the first time during intra-day action. Trading volume was very light during this, the last week of summer. Sentiment received a nice boost from abroad with growing optimism of additional stimulus measures from Europe and Japan.

Treasuries were mixed in the wake of some mixed domestic data which showed new home sales unexpectedly declined and regional manufacturing activity decelerated, while a separate read showed services sector activity slowed but remained in expansion territory. The U.S. dollar was higher and gold was lower, while crude oil prices were mixed.

The Dow Jones Industrial Average rose 76 points (0.4%) to 17,077

The S&P 500 Index was 10 points (0.5%) higher at 1,998

The Nasdaq Composite closed 19 points (0.4%) higher at 4,557

In light volume, 493 million shares were traded on the NYSE, and 1.4 billion shares changed hands on the Nasdaq

WTI crude oil lost $0.30 to $93.35 per barrel, wholesale gasoline gained $0.01 to $2.60 per gallon

The Bloomberg gold spot price declined $4.84 to $1,276.26 per ounce

New home sales miss forecasts, while business activity data comes in mixed

New home sales decreased 2.4% month-over-month in July, to an annual rate of 412,000 units, from June’s upwardly revised 422,000 unit pace, and compared to the 430,000 rate that economists surveyed by Bloomberg had expected. Within the report, the median home price rose 2.9% year-over-year but fell 3.7% m/m to $269,800. The 205,000 units of new home inventory was 19.9% higher y/y and 4.1% above last month, representing a rate of 6.0 months of supply at the current sales pace, from 5.6 months posted for both the previous month and the same period a year ago. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings. Regionally, m/m and y/y sales were lower across the nation, except for the South, which showed gains for both periods.

The preliminary Markit U.S. Services PMI Index declined to 58.5 in August from 60.8 in July, and compared to the drop to 58.0 that economists had expected, with a reading above 50 denoting expansion. The release is independent and differs from the Institute for Supply Management’s (ISM) non-Manufacturing Index, as it has less historic value and Markit weights its index components differently. Markit’s services sector gauge is the companion to its manufacturing index, which last week unexpectedly improved to 58.0 for this month.

The Dallas Fed Manufacturing Index showed growth in activity for the region unexpectedly decelerated, as it declined to 7.1 in August from 12.7 in July and compared to the 12.8 figure that was forecasted, though readings above zero denote expansion for the sector.

Treasuries were mixed, with the yield on the 2-year note ticking 1 basis point higher to 0.50%, while the yields on the 10-year note and the 30-year bond dipped 2 bps to 2.39% and 3.14%, respectively.

Tomorrow’s US economic calendar will be headlined by the release of durable goods orders, forecasted to rise 8.0% month-over-month (m/m) in July, after gaining 0.7% in June. Excluding transportation, orders are expected to increase 0.5%, after gaining 0.8% in June, and orders for nondefense capital goods excluding aircraft, considered a good proxy for business spending, are anticipated to gain 0.7% on the heels of falling 1.0% in June.

The economic docket will also offer more housing data tomorrow with the release of the S&P/Case-Shiller Home Price Index, expected to show an 8.3% y/y increase during June. Additionally, the Consumer Confidence Index will be reported, forecasted to show a slight decrease in August to a level of 89.0 from the 90.9 posted the month prior.

Europe finds a boost from European Central Bank stimulus optimism, Asia mixed

The European equity markets finished higher amid growing optimism of further stimulus measures from the European Central Bank (ECB) after President Mario Draghi sounded a dovish tone at the Fed’s Jackson Hole Symposium on Friday after the markets were closed. The comments contrasted those from U.S. Federal Reserve Chairwoman Janet Yellen, who appeared to toe the line between being overly dovish and shifting to a hawkish stance.

The euro traded lower on diverging monetary policy expectations for the Fed and ECB. Meanwhile, in economic news in the region, the German Ifo Business Climate Index declined for a fourth-straight month to 106.3 in August, from 108.0 in July and compared to the 107.0 level that economists had projected for the gauge of business confidence.

Elsewhere, the French political front garnered some attention, as the nation’s prime minister gave notice of the government’s resignation amid disagreement over policy with the country’s economy minister as the nation faces stagnant growth. A new government is expected to be appointed tomorrow. Finally, the U.K. markets were closed for a holiday.

Stocks in Asia finished mixed with traders digesting comments on Friday from central bank leaders out of the U.S., Europe and Japan at the Federal Reserve’s annual gathering in Wyoming. Bank of Japan Governor Kuroda noted at the Fed’s event that the nation may need to deploy new stimulus measures. The comments pressured the yen, which hit a seven-month low versus the U.S. dollar, helping the Nikkei 225 Index outperform the markets in the region. Chinese stocks were mixed amid some diverging earnings reports in the region, while Australian equities declined following some weakness in mining stocks.

Market Insights 8/22/2014

Stocks End Week Mixed

The U.S. equity markets closed the trading session in mixed fashion, though stocks were nicely higher for the week, as traders may have been contemplating possible consequences from an increase in tensions between Ukraine and Russia, while Fed Chairwoman Janet Yellen delivered her speech during the Central Bank’s annual Symposium that appeared to placate, at least to some degree, both hawkish and dovish views.

The domestic economic calendar was void of any major releases today, leaving Treasuries mixed in the wake of Yellen’s speech, while crude oil prices were lower and gold and the U.S. dollar were higher.

The Dow Jones Industrial Average decreased 38 points (0.2%) to 17,001

The S&P 500 Index was 4 points (0.2%) lower at 1,988

The Nasdaq Composite rose 6 points (0.1%) to 4,539

In light volume, 457 million shares were traded on the NYSE, and 1.3 billion shares changed hands on the Nasdaq

WTI crude oil slipped $0.31 to $93.65 per barrel, wholesale gasoline inched $0.01 lower to $2.59 per gallon

The Bloomberg gold spot price increased $3.67 to $1,280.45 per ounce

Markets were up on the week, as the DJIA increased 2.0%, the S&P 500 Index was 1.7% higher and the Nasdaq Composite Index also rose 1.7%.

Economic calendar empty, but Fed Chair Yellen’s speech in focus

Although the domestic economic docket was quiet today, traders focused on Federal Reserve Chairwoman Janet Yellen’s keynote speech at the Central Bank’s annual Jackson Hole Symposium on the labor markets. Yellen noted that, “with the economy getting closer to our objectives, the Federal Open Market Committee’s emphasis is naturally shifting to questions about the degree of remaining slack, how quickly that slack is likely to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation.”

The Fed Chair’s comments suggested more attention is being given to ensuring the labor market’s full recovery rather than inflation risks—the other side of the Fed’s dual mandate—as she pointed out the “familiar challenge of distinguishing transitory price changes from persistent price pressures.” Finally, she concluded that increases in the fed funds rate target could come sooner than expected if there is a faster convergence toward its dual objectives, while also pointing out that slower-than-expected progress toward its goals could result in the future path of interest rates “being more accommodative that we currently anticipate.”

Yellen appeared to walk the tight rope between being overly dovish and shifting to a hawkish stance. Traders had been looking to see if Yellen changes her dovish tone as this week’s minutes from the Fed’s July policy meeting showed the debate regarding the timing of the first interest rate hike heated up. This week’s U.S. economic data was broadly positive, helping the equity markets post their third-straight weekly gain, with consumer price inflation relatively benign, jobless claims dropping more than expected, manufacturing reports showing accelerated growth, and Leading Indicators rising more than projected. The housing front, which has been an economic sore spot as of late, offered a ton of positive reports, with existing home sales unexpectedly rising, housing starts and building permits jumping, and homebuilder sentiment surprisingly improving to a seven-month high.

Treasuries were mixed while the U.S. dollar and gold prices were higher. The yield on the 2-year note ticked 2 basis points higher to 0.49%, while the yield on the 10-year note was 1 bp lower at 2.40% and the 30-year bond rate decreased 3 bps to 3.16%.

The dog days of summer have set in, resulting in exacerbated market moves due to the thinner trading volumes. Additionally, the conflict in Russia and the adjustment by investors to the idea of the Fed tightening sooner than expected have also increased volatility in the market. While there could be the possibility of more selling in the stock market, we don’t believe this is the beginning of a sustainable downturn. Traditionally, the beginning of a rate hike cycle has been quite good for stocks as it has meant a solid economy and a still relatively easy Fed. It’s not until policy is perceived as tight that the stock market tends to suffer, and we still seem to be quite a ways from that.

Europe lower on flared-up Ukraine uneasiness, Asia mostly higher

The European equity markets finished mostly lower following U.S. Fed Chairwoman Janet Yellen’s speech at the Jackson Hole Symposium, while there were no major economic reports released today. However, caution may have remained ahead of European Central Bank (ECB) President Mario Draghi’s speech today at the Fed’s Wyoming gathering where he stated the ECB is ready to adjust its policy stance further and called on fiscal policies to play a greater role alongside monetary policy.

Meanwhile, flared-up Ukraine concerns also weighed on sentiment, with a Russian aid convoy reportedly crossing the Ukrainian border without permission. Further east, stocks in Asia finished mostly to the upside on the heels of yesterday’s plethora of upbeat economic reports out of the U.S., while caution was likely exercised prior to Yellen’s speech. However, Japanese equities finished lower, snapping a nine-session winning streak as the yen, which has sold off as of late to help boost export-related issues, gained some modest ground during the equity market session.

Market Insights 8/21/2014

Stocks Run Higher as Jackson Hole Symposium Begins

The U.S. equity markets were able to continue their recent advance as optimism may have been aided by a flood of upbeat economic reports ahead of tomorrow’s speech from Fed Chairwoman Janet Yellen, where she will address developments in the labor market.

Treasuries were mostly higher despite reports that showed a larger-than-forecasted drop in jobless claims, existing home sales increased more than expected and manufacturing activity accelerated. Gold was lower and crude oil prices were slightly higher, while the U.S. dollar was flat.

The Dow Jones Industrial Average rose 60 points (0.4%) to 17,040

The S&P 500 Index was 6 points (0.3%) higher at 1,992

The Nasdaq Composite also closed 6 points (0.1%) higher at 4,532

In moderately-light volume, 565 million shares were traded on the NYSE, and 1.4 billion shares changed hands on the Nasdaq

WTI crude oil climbed $0.51 to $93.96 per barrel, wholesale gasoline gained $0.04 to $2.75 per gallon

The Bloomberg gold spot price declined $15.12 to $1,276.82 per ounce

U.S. economic data broadly positive as the Fed begins its annual gathering

Existing-home sales unexpectedly rose in July, gaining 2.4% month-over-month to a 5.15 million annual rate, while the median forecast by economists surveyed by Bloomberg was for a decline to 5.02 million. June’s figure was revised slightly lower to a 5.03 million unit pace from the initially reported 5.04 million pace. The median existing-home price rose 4.9% from a year ago to $222,900. Single-family home sales gained 2.7%, while multi-family sales were flat on the month. The supply of homes available for sale rose to 2.37 million units, the most since August 2012, equating to 5.5 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one-to-two months earlier.

The housing market has improved recently due to stronger job growth and improved selection, with gains in inventory available for sale. Additionally, the National Association of Realtors (NAR) said that the new FICO credit scoring calculation will improve access to homeownership, especially for those who “have been shut out of the housing market or forced to pay higher interest rates because of flawed credit scores.” Lawrence Yun, chief economist at the NAR, said that prospective buyers have less hesitation about entering the market, but that median family incomes are still lagging behind price gains, and “mortgage rates will inevitably rise with the upcoming changes in monetary policy.”

Observers are watching labor market data and the Fed’s annual meeting in Jackson Hole, Wyoming for clues to the timing of the Federal Reserve’s next interest rate increase. The question of the timing of the rate hike cycle is important since it can affect both the level of interest rates and the shape of the yield curve. If the Fed waits too long to raise rates, inflation risks increase and that could cause bond yields to rise steeply. If the Fed moves too quickly, then the economy could slow down and bond yields would most likely fall. For now, Fed Chair Janet Yellen, Vice Chair Stanley Fischer and a number of other voting members still seem more worried about the downside risks to the economy than the potential for inflation.

Weekly initial jobless claims fell by 14,000 to 298,000 last week, below economists’ 303,000 expectation, as the prior week’s figure was upwardly revised by 1,000 to 312,000. However, the four-week moving average, considered a smoother look at the trend in claims, rose by 4,750 to 300,750, while continuing claims dropped by 49,000 to 2,500,000, south of the forecast calling for a level of 2,520,000.

The Philly Fed Manufacturing Index showed growth for the mid-Atlantic region surprisingly accelerated in August to the highest level since March 2011, rising to 28.0 from 23.9 in July and compared to the decrease to 19.7 that was forecasted. Readings above zero denote expansion.

Treasuries were mostly higher, with the yield on the 2-year note nearly unchanged at 0.47%, while the yield on the 10-year note declined 2 basis points to 2.41% and the 30-year bond rate declined 3 bps to 3.19%.

The Federal Reserve kicked off its annual multi-day Jackson Hole Symposium today, with the theme titled “Re-Evaluating Labor Market Dynamics,” while tomorrow, Fed Chairwoman Janet Yellen will deliver the keynote speech titled “Labor Markets.”

Europe higher, Asia mixed

The European equity markets closed higher, with traders digesting yesterday’s July meeting minutes from the U.S. Federal Reserve, which showed the discussion regarding the timing of the first rate hike heated up, but most viewed that more data was needed before deciding to raise the target fed funds rate. Traders sifted through the plethora of favorable U.S. data as the U.S. Fed begins its multi-day annual Jackson Hole Symposium.

Meanwhile, a host of Eurozone business activity reports garnered attention, with the preliminary Eurozone Composite PMI Index—a gauge of activity in both the services and manufacturing sectors—declining to 52.8 for August, from 53.8 in July, and compared to the 53.4 level that economists had anticipated, but a reading above 50 denotes expansion. Although the level of Eurozone business activity came in below expectations, French services sector growth accelerated, taking its composite index to the key level of 50, while German activity grew at higher rates than expected.

Stocks in Asia finished mixed amid some caution as China reported a disappointing read on manufacturing activity. Japanese equities advanced as the yen continued to weaken to help export-related issues, with losses exacerbated by yesterday’s July meeting minutes from the U.S. Fed, which showed the discussion regarding the first rate hike heated up. Japanese economic sentiment may have been bolstered by a preliminary report showing the nation’s manufacturing growth accelerated more than expected for August. However, Chinese stocks finished lower on the heels of the preliminary HSBC China Manufacturing PMI Index, which declined to 50.3 this month from 51.7 in July, and compared to the 51.5 level that economists had projected.

Market Insights 8/20/2014

Markets Battle Back, Post Gains

U.S equities were able to recoup most of the lost ground that came following the release of the minutes from the Federal Reserve’s July meeting that roused the possibility that monetary policy stimulus may end sooner than some had expected. The report came on the eve of the Federal Reserve’s multi-day Jackson Hole Symposium, which could draw even more attention for any clues to the timing of the first rate hike given the backdrop of the Fed minutes.

Treasuries drifted lower following the release of the Fed minutes, while a separate report showed mortgage applications rose last week. Gold was lower, whereas crude oil prices and the U.S. dollar were higher.

The Dow Jones Industrial Average rose 60 points (0.4%) to 16,979

The S&P 500 Index was 5 points (0.5%) higher at 1,987

The Nasdaq Composite closed 1 point lower at 4,526

In moderately-light volume, 540 million shares were traded on the NYSE, and 1.5 billion shares changed hands on the Nasdaq

WTI crude oil climbed $0.59 higher to $93.45 per barrel, wholesale gasoline gained $0.01 to $2.71 per gallon

The Bloomberg gold spot price declined $4.44 to $1,291.29 per ounce

Fed meeting minutes show increased talk of rate hike timing

The Federal Reserve released the minutes from the Federal Open Market Committee’s (FOMC) July monetary policy meeting, which showed the discussion surrounding the timing of the first rate hike heated up.

There was a general agreement that labor market conditions and inflation had moved closer to the Central Bank’s longer-run objectives in recent months, with most anticipating that progress toward those goals would continue. Many participants noted that a quicker-than-expected convergence toward the FOMC’s objectives may warrant removing monetary policy accommodation sooner than currently anticipated, with some viewing “the actual and expected progress as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium term.”

However, the report showed, “most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation.”

It still appears the Fed is on course for the first rate hike of this cycle in mid-2015, with its bond buying program likely to end in October or November. We expect the yield curve to flatten as the first Fed rate increase approaches, meaning that short-term yields will rise more than long-term yields, as was the pattern in the past three Fed rate hike cycles. We believe this similar pattern will unfold as short-term interest rates are still near zero, inflation and inflation expectations are relatively stable, and the yield curve is already quite steep by historical standards.

The MBA Mortgage Application Index rose 1.4% last week, after the index declined 2.7% in the previous week. The increase came as a 2.7% gain for the Refinance Index more than offset a 0.4% decline for the Purchase Index. Moreover, the average 30-year mortgage rate fell 6 basis points (bps) to 4.29%.

Treasuries moved lower following the release of the minutes, as the yield on the 2-year note rose 4 basis points to 0.48%, the 10-year note advanced 3 bps to 2.43%, and the 30-year bond rate ticked 1 bp higher to 3.22%.

In addition to the start of the Federal Reserve’s Jackson Hole Symposium, a number of economic reports are slated for release tomorrow, including existing home sales, forecasted to fall 0.4% month-over-month for July to an annual rate of 5.02 million units, as well as the preliminary Markit U.S. Manufacturing PMI Index for August, expected to show a reading of 55.7, with a level above 50 denoting expansion in activity. Also on tap will be July’s Leading Index, with economists forecasting a 0.6% m/m increase following June’s 0.3% gain, and finally, weekly initial jobless claims, anticipated to have fallen to a level of 303,000 last week from the 311,000 level registered in the week prior.

Europe mostly lower, Asia mixed on caution ahead of Fed events

The European equity markets finished mostly lower, amid some caution ahead of today’s release of the U.S. Federal Reserve’s July meeting minutes and tomorrow’s beginning of the Fed’s multi-day Jackson Hole Symposium. The minutes from the Bank of England’s monetary policy meeting earlier this month showed two members –of nine on the committee– voted to raise its benchmark interest rate by 25 bps from the record low of 0.50%. The remaining members voted to leave the rate unchanged, noting that early tightening could leave the economy “vulnerable to shocks,” and jeopardize indebted households, per Bloomberg. In other economic news, German wholesale price inflation unexpectedly dipped in July, while Eurozone construction output decreased last month.

Stocks in Asia finished mixed, with traders awaiting the release of the Fed July meeting minutes in the U.S. later today, while a read on manufacturing activity in China is set to be released tonight. In economic news in the region, Japan’s trade deficit came in much wider than expected for July. The report showed Japan’s exports rose slightly more than anticipated, while imports unexpectedly grew. Elsewhere, Chinese equities were mixed ahead of the release of the preliminary HSBC China Manufacturing PMI Index, expected to decline to 51.5 in August from 51.7 in July, with a reading above 50 denoting expansion.

Market Insights 8/19/2014

Markets Continue Higher

U.S. equities added to yesterday’s solid advance amid waning geopolitical concerns and some upbeat reports out of the housing and retail sectors. July domestic housing starts and building permits both rose well above expectations and Dow member Home Depot pleased investors with its stronger-than-expected quarterly results, while the home improvement retailer upped its full-year profit outlook.

Meanwhile, other releases from the retail sector showed that Dick’s Sporting Goods and TJX Companies bested the Street’s forecasts for earnings and same-store sales.

Treasuries finished mostly lower following the housing data, while a separate report showed domestic consumer price inflation met economists’ expectations. Elsewhere, the U.S. dollar was higher, crude oil prices were mixed, while gold lost ground.

The Dow Jones Industrial Average rose 81 points (0.5%) to 16,920

The S&P 500 Index was 10 points (0.5%) higher at 1,982

The Nasdaq Composite increased 19 points (0.4%) to 4,523

In moderately-light volume, 554 million shares were traded on the NYSE, and 1.5 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.89 to $92.86 per barrel, wholesale gasoline gained $0.04 to $2.70 per gallon

The Bloomberg gold spot price declined $2.21 to $1,296.19 per ounce

Housing construction report tops forecasts, while consumer price inflation mostly inline

Housing starts for July came in above forecasts, jumping 15.7% month-over-month to an annual pace of 1,093,000 units, compared to the 965,000 unit rate that economists surveyed by Bloomberg had called for. June’s starts were upwardly revised to an annual pace of 945,000, from the 893,000 rate initially reported. Meanwhile, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, also came in north of expectations, increasing 8.1% m/m in July to an annual rate of 1,052,000, after June’s upward revision to a 973,000 rate—from a pace of 963,000 that was originally reported. Economists had expected permits for July to come in at an annual pace of 1,000,000 units.

Construction and authorizations for single units and multi-family structures both posted solid gains m/m and y/y in July, with housing starts reaching the highest level in eight months. The report reflects the recent improvement in homebuilder sentiment reported yesterday by the National Association of Home Builders (NAHB). The NAHB noted that as the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market.

The labor market also continues to heal, with over 200,000 jobs being added for six straight months; and jobless claims indicating a rapidly improving job market. Although housing remains lackluster, affordability is still in a good range and a Fed survey showed banks’ willingness to lend for residential mortgages spiked to its highest reading since the early 1990’s. This leads us to believe that the housing market could get a bit of a rebound in the second half of the year, which should help consumer confidence.

The Consumer Price Index (CPI) showed prices at the consumer level were up 0.1% m/m in July, matching the increase that economists had forecasted, while June’s 0.3% increase was unrevised. Plus, the core rate, which strips out food and energy, rose 0.1% m/m in July, compared to the 0.2% gain that was projected, and June’s 0.1% rise was unadjusted. On a y/y basis, consumer prices were 2.0% higher, inline with forecasts, and the core CPI was up 1.9%, also matching expectations. June’s y/y figures showed unrevised gains of 2.1% and 1.9% for the headline and core rates, respectively.

Treasuries were modestly lower, as the yield on the 2-year note and the 30-year bond rose 1 basis point to 0.43% and 3.21 %, respectively, while the yield on the 10-year note was flat at 2.40%.

On the eve of the Federal Reserve’s Jackson Hole Symposium, the Central Bank will release the minutes from its July monetary policy meeting, in which it expectedly trimmed another $10 billion from their monthly asset purchase program to a pace of $25 billion, putting it on track to end in late-October. Traders will likely be looking for any clues to the timing of the Fed’s first rate hike given the backdrop of an improving labor market, while the discussion among policymakers regarding the inflation outlook could also garner attention.

In our opinion, the economy is making clear progress and the Fed is moving toward rate hikes and monetary policy normalization. This, by the way, is a good thing. It is common to experience some volatility and initial pullbacks when moving toward the initial rate hike. In looking at the past five rate hike cycles, the average pullback—nearly always having concluded before the actual first hike—was less than 6%, therefore not even qualifying as a “correction,” which is -10%. The magnitude of the pullback was directly tied to the magnitude of the back-up in two-year Treasury yields. So we’ll keep an eye on those as we approach the initial rate hike. Overall, the stock market fares pretty well in the six months before and after the initial hike.

The only other report on tomorrow’s domestic economic front will be the release of MBA Mortgage Applications.

Europe and Asia higher as geopolitical concerns continue to ease

Stocks in Europe and Asia finished mostly to the upside, aided by continued easing of Ukraine concerns and some upbeat earnings reports. In light economic news overseas, U.K. consumer and wholesale price inflation declined more than expected in July, while the minutes from the Reserve Bank of Australia’s August meeting suggesting that interest rates in the nation will likely stay at record lows for some time yet, due to significant uncertainties surrounding the economic outlook.