Monthly Archives: August 2016

Here’s how Americans are spending their money

Americans are spending more to eat out, replace old cars and trucks and entertain themselves. They also have to devote a bigger share of their budgets to rents and health care, however.

Those are some of the nuggets in the government’s latest report on how households spent their incomes in 2015. Consumer spending rose 3.2% last year to mark the fastest rate since 2005, two years before the onset of the Great Recession.

**Click to Enlarge**

MW-EV088_consum_20160831131208_ZH

Americans were able to spend more because of strong employment gains, a falling unemployment rate and slowly rising wages. Households have also sharply whittled down their debt since the end of the recession in 2009, helped by low interest rates that have cut the cost of mortgages.

In 2015, the average “consumer unit” (see the bottom of this page for a complete definition of consumer unit) earned $69,629, or a little over $60,000 after taxes, according to the Bureau of Labor Statistics. Consumers spent nearly $56,000 of their take-home pay and they saved the rest.

People who’ve owned their own homes for at least a few years have especially been helped by low interest rates. Mortgage interest and other payments as a percentage of household spending slipped to 5.1% in 2015 from 6% in 2013.

Renters faced with an escalation in costs haven’t fared as well. Rent represented 6.8% of household spending last year, up from 6.5% in 2013. Or an increase of about $500.

Higher health care costs are a reality for most Americans. The share of spending by the average American on health care — doctor visits, hospital stays, prescriptions and the like— totaled 7.8% in 2015, little changed from 2014. That was up from 7.1% two years ago.

Lower gasoline prices have offered some relief. Fueling up accounted for 3.7% of household spending last year, down from 5.1% two years ago.

Put another way, the typical household spent $2,090 on gasoline and motor oil in 2015, compared to $2,611 in 2013. That’s more than $500 in savings.

Gas savings could also be helped by millions of Americans upgrading to newer and more fuel efficient vehicles. Consumers boosted their share of spending on new autos to 7.1% in 2015 from 6.2% in 2014. Auto sales hit a record high last year.

Reflecting an improved jobs market, Americans are also eating more takeout and going out to eat more frequently, a trend that emerged several years ago. Lower food costs have also helped families cut their grocery bills.

In 2015, groceries represented 7.2% of household spending. That was down from 7.8% in 2013. Dining out or buying other food prepared outside the home accounted for 5.4% of consumer spending last year. That was up from 5.1% two years ago.

.
.
.
.
.
.
.

What is a consumer unit?

A consumer unit consists of any of the following: (1) All members of a particular household who are related by blood, marriage, adoption, or other legal arrangements; (2) a person living alone or sharing a household with others or living as a roomer in a private home or lodging house or in permanent living quarters in a hotel or motel, but who is financially independent; or (3) two or more persons living together who use their incomes to make joint expenditure decisions. Financial independence is determined by spending behavior with regard to the three major expense categories: Housing, food, and other living expenses. To be considered financially independent, the respondent must provide at least two of the three major expenditure categories, either entirely or in part.

The terms consumer unit, family, and household are often used interchangeably for convenience. However, the proper technical term for purposes of the Consumer Expenditure Survey is consumer unit.

Market Insights 8/31/2016

Energy leads equities lower

U.S. stocks traded lower, with the energy sector leading the decline as crude oil prices fell following a bearish government inventory report. Around the world caution remained heightened amid Fed rate hike concerns as traders await Friday’s key August labor report.

Treasuries ticked lower following reads on employment, regional manufacturing and housing. The U.S. dollar was flat and gold was lower.

The Markets…

The Dow Jones Industrial Average declined 53 points (0.3%) to 18,401

The S&P 500 Index shed 5 points (0.2%) to 2,171

The Nasdaq Composite decreased 10 points (0.2%) to 5,213

In moderately-heavy volume, 1.1 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil lost $1.65 to $44.70 per barrel, wholesale gasoline declined $0.04 to $1.33 per gallon

The Bloomberg gold spot price decreased $2.47 to $1,308.64 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.04

ADP’s private sector employment report roughly matches forecasts

The ADP Employment Change Report showed private sector payrolls rose by 177,000 jobs in August, modestly above forecasts of 175,000, while July’s gain of 179,000 jobs was revised higher to a 194,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader August non-farm payroll report, expected to show an increase of 180,000 jobs, while private sector payrolls are projected to rise by the same amount. The unemployment rate is forecasted to dip to 4.8% from 4.9% and average hourly earnings are projected to rise 0.2% month-over-month.

The Chicago Purchasing Managers Index fell more than expected but remained in expansion territory (above 50), after dropping to 51.5 in August from 55.8 in July and versus expectations of a decline to 54.0. New orders fell amid some widespread weakness, though the lone component that saw a rise was employment.

Pending home sales grew 1.3% m/m in July, versus projections of a 0.7% gain and following the downwardly revised 0.8% drop registered in June. Compared to last year, sales were 2.2% lower, versus forecasts of a 2.2% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which fell for the first time since February in July.

The MBA Mortgage Application Index rose 2.8% last week, after declining 2.1% in the previous week. The increase came as a 3.7% gain for the Refinance Index was accompanied by a 1.3% rise for the Purchase Index. The average 30-year mortgage rate remained at 3.67%.

Treasuries inched lower, with the yields on the 2-year and 10-year notes gaining 1 basis point to 0.81% and 1.58%, respectively, while the 30-year bond rate was flat at 2.23%.

Tomorrow, the U.S. economic calendar will bring the tail end of a global look at August manufacturing activity, in the form of the ISM Manufacturing Index and the final Markit Manufacturing PMI Index. ISM’s index is projected to dip to 52.0 from 52.6 in July, while Markit’s report is expected to be unrevised at 52.1, down slightly from July’s 52.9 reading. Readings above 50 for both indexes depict expansion in manufacturing output. The latest batch of U.S. economic data doesn’t appear to presage an imminent recession, which would typically lead to a bear market. However, it will be difficult to get the U.S. economy rolling without an improvement in productivity, which is undoubtedly being constrained by ongoing tepid capital spending.

Europe mostly lower, Asia mixed

European equities gave up early gains and finished mostly lower, led by oil & gas issues as crude oil prices extended a recent pullback on a bearish oil inventory report. Also, basic materials stocks continued to see pressure amid the recent weakness in metals prices. Global caution remained a drag on conviction amid heightened U.S. Fed rate hike expectations as Friday’s key August nonfarm payroll report looms on the horizon. However, financials were the lone bright spot, continuing their recent rally on the Fed rate hike expectations and eased global growth uneasiness, bolstered by some M&A chatter toward the German banking sector. A much stronger-than-expected German retail sales report failed to boost stocks, with separate reports showing eurozone consumer price inflation came in cooler than expected in August and the region’s unemployment rate remained at 10.1%, versus projections of a dip to 10.0%. The data comes ahead of tomorrow’s manufacturing PMI reports for August.

The euro overcame early weakness and ticked higher and the British pound gained ground versus the U.S. dollar, while bond yields in the region finished higher. With the markets choppy and poised for increased volatility amid the diverging global monetary policy landscape and Brexit uncertainty.

Stocks in Asia finished mixed, with the global markets awaiting Friday’s key August employment report in the U.S. as Fed rate hike expectations remain elevated, along with tonight’s Chinese business activity reports. Japanese equities gained ground, with the yen extending its weakness to boost export-heavy issues on the U.S. rate hike expectations and as recent commentary from Bank of Japan officials continues to bolster optimism of further stimulus measures on the heels of a preliminary report showing the nation’s industrial production came in flat m/m for July, compared to estimates of a 0.8% gain.

Mainland Chinese stocks rose, while those traded in Hong Kong declined amid some caution ahead of tonight’s releases of the nation’s Manufacturing and non-Manufacturing PMI Indexes and as some banking sector earnings were mostly favorable. Australian equities were bogged down by basic materials and oil & gas issues amid the pressure on metals and crude oil prices as of late, while South Korean listings also closed to the downside. Finally, Indian securities moved higher, buoyed by recent data showing foreign investment into the nation continued. After the closing bell, India reported Q2 GDP growth of 7.1% y/y, down from the 7.9% expansion seen in Q1 and below the expected growth of 7.6%.

In addition to the aforementioned Chinese reports, the international economic docket for tomorrow will include a plethora of manufacturing PMI reads from Japan, India, Germany, France, Italy, the Eurozone and the U.K. Japan will also release reports on capital spending, company profits and vehicle sales.

Market Insights 8/30/2016

Stocks Trim Early Losses but Finish Lower

Domestic stocks finished lower amid heightened monetary policy uncertainty ahead of Friday’s highly anticipated labor report, with expectations of a possible one or two rate hike before year end giving a boost to the U.S. dollar to pressure crude oil prices.

Gold was lower and Treasuries were mixed, though a better-than-expected read on consumer confidence may have bolstered rate hike expectations.

The Markets….

The Dow Jones Industrial Average declined 49 points (0.3%) to 18,454

The S&P 500 Index shed 4 points (0.2%) to 2,176,

The Nasdaq Composite decreased 9 points (0.2%) to 5,223

In moderate volume, 743 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil lost $0.63 to $46.35 per barrel, wholesale gasoline declined $0.03 to $1.37 per gallon

The Bloomberg gold spot price decreased $12.03 to $1,311.35 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 96.07

Company News….

Hershey Co is falling after Mondelez International Inc. announced it has ended discussions with the company regarding a possible combination of the two companies. MDLZ said it determined that there is no actionable path forward toward an agreement following discussions and taking into account recent shareholder developments at HSY.

Dow member Apple Inc was in focus after the European Union (EU) Commission ruled that Apple was granted undue tax benefits in Ireland of up to 13 billion euros ($14.5 billion). The EU Commission said Ireland must recover from Apple the unpaid tax for the period since 2003 and through 2014, but noted that the amount that Irish authorities should recover could be reduced if other countries were to require Apple to pay more taxes on profits for this period. AAPL and the Irish government both said they will fight the decision.

Abercrombie & Fitch Co reported a 2Q loss ex-items of $0.25 per share, compared to the expected $0.20 per share shortfall, as revenues declined 4.0% year-over-year to $783 million, roughly in line with forecasts. Q2 same-store sales declined 4.0% y/y, versus the expected 4.2% decrease. Shares traded sharply lower after the company said same-store sales are expected to remain challenging through the second half of the year, with a disproportionate effect from flagship and tourist locations.

Consumer confidence tops forecasts

The Consumer Confidence Index rose to 101.1 in August—the highest since September 2015—from the downwardly revised 96.7 level in July and compared to the Bloomberg estimate of 97.0. Sentiment towards the present situation and expectations of business conditions both improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—grew to 2.6 from the 0.9 posted in July.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a rise in home prices of 5.1% y/y in June, in line with expectations. Month/month (m/m), home prices were lower by 0.1% on a seasonally adjusted basis for June, matching forecasts.

Treasuries finished mixed, with the yield on the 2-year note losing 1 basis point to 0.80%, while the yield on the 10-year note ticked 1 bp higher to 1.57% and the 30-year bond rate rose 2 bps to 2.23%.

Ahead of the opening bell tomorrow, the U.S. economic calendar will offer the ADP Employment Change report, forecasted to show private sector payrolls added 175,000 jobs during August, as well as MBA Mortgage Applications. Shortly after trading commences, we will receive the Chicago Purchasing Managers Index, with economists expecting a reading of 54.0 for August, down from the 55.8 registered in July, which will be followed by pending home sales, expected to have increased 0.7% m/m in July.

Europe and Asia higher higher

European equities traded higher, with financials and technology issues leading the way in the wake of the recently boosted U.S. Fed rate hike expectations and eased concerns about the health of the global economy, bolstered by today’s upbeat read on U.S. consumer confidence. Also, the euro continued its recent weakness versus the U.S. dollar to aid sentiment, though the global markets remained cautious ahead of Friday’s key August non-farm payroll report in the U.S. However, mining issues saw some pressure, hamstringing the U.K. markets in a return to action following yesterday’s holiday, as metal prices were lower and Citigroup offered a bearish outlook for the sector. The British pound dipped versus the greenback, while bond yields in the region finished mixed. In economic news, German consumer price inflation came in cooler than expected for August, while Eurozone business and economic confidence slipped for this month. In the U.K. consumer credit decelerated more than expected and mortgage approvals missed forecasts for last month. With global uncertainty remaining elevated to open the door for some possible increased volatility.

Stocks in Asia finished mostly to the upside though conviction remained subdued as the global markets tread lightly amid the recently heightened rate hike expectations in the U.S. ahead of Friday’s employment report. Japanese equities dipped following yesterday’s rally that was fueled by Bank of Japan’s Governor Kuroda’s reiterated pledge to deploy further stimulus measures if needed. The downside pressure was pared as Japan reported some relatively better-than-expected July economic data and the yen saw late-day weakness. Japan’s overall household spending fell for the fifth-straight month, but by a smaller amount than anticipated, along with retail sales, while the nation’s jobless rate unexpectedly dipped. Chinese stocks rose with banking stocks finding support ahead of the sector’s earnings releases. Australian securities traded higher, with basic materials and oil & gas issues rebounding from yesterday’s declines. Equities in India rallied on optimism that the nation’s planned issuance of a new benchmark 10-year bond will boost demand for the nation’s debt, per Bloomberg. Finally, South Korean stocks finished higher.

Market Insights 8/29/2016

U.S. equities bucked the global trend to finish solidly in the green, showing some resiliency in the face of the continued pressure on crude oil prices, as well as weakness overseas on increased Fed rate hike expectations.

Favorable economic data likely lent some support, despite the global markets treading cautiously ahead of Friday’s key August non-farm payroll report.

Treasuries and gold were higher, while the U.S. dollar was flat.

Company News…

Mylan announced that it will launch the first generic EpiPen Auto-Injector at a list price of $300 for a two-pack carton, representing a discount of more than 50% to its branded EpiPen. The drugmaker came under scrutiny last week for its pricing of its branded EpiPen shots at $600, which it said today that it will continue to sell.

The Markets….

The Dow Jones Industrial Average rose 108 points (0.6%) to 18,504

The S&P 500 Index gained 11 points (0.5%) to 2,180 and now stands 6.7% higher for the year and over 19% higher since the February 11th low of 1,810.

The Nasdaq Composite increased 13 points (0.3%) to 5,232

In light volume, 647 million shares were traded on the NYSE and 1.4 billion shares changed hands on the Nasdaq

WTI crude oil lost $0.66 to $46.98 per barrel, wholesale gasoline declined $0.03 to $1.40 per gallon

The Bloomberg gold spot price increased $2.35 to $1,323.53 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was unchanged at 95.58

Personal income and spending rise as expected

Personal income was 0.4% higher month-over-month (m/m) in July, matching the Bloomberg forecast and compared to June’s upwardly revised 0.3% increase. Personal spending came in 0.3% higher m/m last month—the fourth-straight monthly gain—in line with expectations and versus June’s favorably revised 0.5% rise. The July savings rate as a percentage of disposable income was 5.7%. The PCE Deflator came in flat, as expected. Compared to last year, the deflator was 0.8% higher, matching estimates. Excluding food and energy, the PCE Core Index ticked 0.1% higher m/m, in line with expectations, and the index was up 1.6% y/y, above estimates of a 1.5% rise.

The Dallas Fed Manufacturing Index fell to -6.2 for August from July’s unrevised -1.3 level with economists forecasting a decrease to -3.9. A reading below zero denotes contraction in manufacturing activity.

Treasuries finished higher, with yields ticking down, as the yield on the 2-year note declined 4 basis points (bps) to 0.81%, while the yields on the 10-year note and the 30-year bond dropped 7 bps to 1.57% and 2.22%, respectively.

On the heels of last week’s comments from Federal Reserve Chairwoman Janet Yellen and Vice Chair Stanley Fischer that suggested a September rate hike remains a possibility, this Friday’s August non-farm payroll report is poised to be a key focus for the global markets. The report will also be preceded by key reads on Manufacturing Purchasing Managers Indexes (PMIs) from ISM and Markit, the trade balance, Consumer Confidence, and August vehicle sales. Tomorrow will bring the Consumer Confidence Index, which economists expect to fall slightly to a level of 97.0 for August from July’s 97.3, and the S&P CoreLogic Case-Shiller Home Price Index, forecasted to show prices in the 20-city composite rose 5.12% y/y in June, but ticked 0.1% lower m/m on a seasonally-adjusted basis.

Europe lower on oil and Fed rate hike uneasiness, Asia mixed

European equities traded to the downside, amid lighter-than-usual volume as the U.K. markets were closed for a holiday. Fed rate hike expectations got a boost from Friday’s comments from Federal Reserve Chairwoman Janet Yellen, which was followed by Fed Vice Chair Stanley Fischer’s remarks that suggested rate hikes next month and in December could be possibilities. The euro and British pound finished lower versus the U.S. dollar, while bond yields in the region mostly dipped. Amid the elevated Fed rate hike expectations, utilities led to the downside, along with oil & gas issues, which saw pressure as crude oil prices declined on supply concerns and a stronger U.S. dollar. Political uncertainty lingered in the region as Spain’s Prime Minister Rajoy is set to face a confidence vote tomorrow, per Bloomberg.

Stocks in Asia finished mixed on the heels of Friday’s comments from the Fed’s Yellen and Fischer that kept the possibility of a September rate hike in play. Mainland Chinese equities finished flat and those traded in Hong Kong declined, while the nation reported a year-over-year acceleration in July industrial profits. Australian securities dropped amid weakness in basic materials and oil & gas stocks, while South Korean listings also declined. However, India’s markets advanced, and stocks in Japan rallied as the yen weakened amid a rise in the U.S. dollar on the aforementioned Fed comments, as well as Bank of Japan Governor Kuroda’s reiterated pledge to deploy further stimulus measures if needed.

A host of economic reports from Japan will dominate tomorrow’s international economic calendar, including labor data, personal income and consumption, retail sales and trade figures. From across the pond will come Germany’s Import Price Index, housing prices from the U.K., CPI from Spain, retail sales from Italy, and confidence gauges from the Eurozone.

Spark Needed For Rally to Continue

U.S. stocks have surprised many this year but future gains are dependent on a so-far missing spark: stronger economic growth.

Against many expectations, U.S. stocks are turning in a respectable performance this year. The S&P 500 is now up 6.7% year-to-date, recovering from what would charitably be described as a shaky start to the year.

That’s the good news. The bad news is that the gains, which are coming against the backdrop of a prolonged earnings recession, have been entirely driven on multiple expansion. In other words, investors are willing to pay more per dollar of earnings. From the lows earlier this year, the trailing multiple on the S&P 500 has risen by roughly 22%.

The rapid ascent in the market multiple has left stocks expensive. The S&P 500 is now trading at 20.5x trailing price-to-earnings (P/E), well above the historical average of 16.5-17x, according to Bloomberg data.

While investors can partially justify this on the basis of a lower discount rate, i.e. low interest rates, it is worth highlighting that even in the context of low rates, valuations are elevated. Yields have been consistently low, averaging 3.25% for the 10-year Treasury bond, since 2003 (source: Bloomberg). Yet, during this same period valuations have still only averaged 17x trailing earnings.

Look for faster earnings and economic growth

In our opinion, if stocks are to advance further, sustainable gains need to be seen in regards to earnings growth. That, in turn, is a function of nominal GDP (NGDP), real growth plus inflation. Looking back over the past 60 years, the level of NGDP has been strongly correlated with non-financial profit growth. During this period NGDP growth has explained roughly 20% of the variation in profit growth.

The relationship is not hard to understand. While individual companies can take market share from rivals, that can’t sustain growth across the broader market. At the aggregate market level, faster economic growth is necessary to drive faster revenue growth. Although it is true that international sales have grown for most large-cap companies, making the U.S. dollar another critical variable, nominal domestic economic growth is still the primary driver of corporate earnings.

One can argue that markets can advance as valuations press higher, even in the absence of faster growth. For example, the chart below shows the trailing P/E on the S&P 500 pushing above 20 in the spring of 1997, and investors who remained in the market enjoyed another three years of spectacular gains. Of course, the tech bubble ultimately ended badly.

**Click to Enlarge**

chart-pe

That was then, this is now

Fortunately, the factors that fueled the latter part of the 90s bubble are not likely to be repeated. From the spring of 1997 until the end of 1998, yields on both the 2- and 10-year Treasury notes fell roughly 200 basis points (2%), while inflation continued its multi-year decline. At the same time, growth surged on the back of stellar productivity. Today, productivity is at multi-year lows, demographics are working against growth and any further drop in inflation or rates would likely come in the context of deflation, not a supportive environment for stocks.

The best hope for the market lies in faster growth. In the absence of faster NGDP, investors are making a different bet: that a combination of paltry bond yields, buybacks and elevated margins make equities the “least bad” bet and a substantially “better bet” than bonds. We couldn’t agree more.

Market Insights 8/26/2016

Stocks Seek Direction After Fed Comments

U.S. stocks erased early session gains and finished mixed on the heels of Fed Chair Janet Yellen’s highly anticipated speech which was followed by comments from Vice Chair Stanley Fischer alluding to the possibility of two rate hikes before year end.

Treasuries, gold and crude oil prices were lower and the U.S. dollar was higher. In economic news, Q2 GDP was revised slightly lower, as expected.

The Markets…

The Dow Jones Industrial Average declined 53 points (0.3%) to 18,395

The S&P 500 Index lost 3 points (0.2%) to 2,169

The Nasdaq Composite increased 7 points (0.1%) to 5,219

In moderate volume, 808 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.31 to $47.64 per barrel, wholesale gasoline added $0.01 to $1.43 per gallon

The Bloomberg gold spot price decreased $1.08 to $1,320.90 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% higher at 95.47

Markets were down for the week, as the DJIA ticked 0.9% lower, the S&P 500 Index declined 0.7%, and the Nasdaq decreased 0.4%

Company News….

GameStop Corp reported Q2 earnings-per-share ex-items of $0.27, one penny north of the FactSet estimate, as revenues declined 7.4% year-over-year to $1.6 billion, below the projected $1.7 billion. Q2 same-store sales fell 10.6% y/y, versus the expected 5.9% decline. GME issued Q3 and full-year guidance that was roughly in line with forecasts. Shares were lower.

Ulta Salon posted Q2 EPS of $1.43, above the projected $1.40, as revenues rose 21.9% y/y to $1.1 billion, roughly in line with expectations. Quarterly same-store sales rose 14.4% y/y, above the estimated 12.9% gain. ULTA issued softer-than-expected Q3 earnings guidance, while raising its full-year outlook. ULTA is seeing solid pressure

Yellen’s speaks, Q2 GDP revised slightly lower as expected

Federal Reserve Chairwoman Janet Yellen spoke at the Central Bank’s annual policy symposium in Jackson Hole, Wyoming on the subject of the Fed’s monetary policy toolkit. Yellen noted that the U.S. economy is now nearing the Central Bank’s goals of maximum employment and price stability. Looking ahead, Yellen noted that the Federal Open Market Committee (FOMC) expects moderate GDP growth, additional strengthening in the labor market and inflation rising to 2.0% over the next few years.

In light of this outlook, she believes the case for an increase in the fed funds rate “has strengthened in recent months.” She did reiterate that the FOMC’s decisions always depend on the degree to which incoming data continues to confirm its outlook, and that the FOMC continues to anticipate that gradual rate increases will be appropriate.

Stocks and Treasuries gained ground on the speech and the U.S. dollar remained lower. However, the markets reversed course as Fed Vice Chairman Stanley Fischer spoke on CNBC after the speech suggesting that a September rate hike may be on the table and next week’s August nonfarm payroll report will probably weigh on the decision. Fischer added that Yellen’s comments were consistent with the possibility of as many as two rate hikes this year

The second look (of three) at Q2 Gross Domestic Product (chart), the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 1.1%, revised slightly from the 1.2% expansion reported in the first report. This matched the Bloomberg forecast. Q1 GDP expanded by an unrevised 0.8% rate. Personal consumption came in at a 4.4% gain for Q2, up from the preliminary estimate of a 4.2% increase, where it was expected to remain. Personal consumption grew by an unrevised 1.6% in Q1. On inflation, the GDP Price Index was revised to a 2.3% gain, versus forecasts of an unrevised 2.2% increase, while the core PCE Index, which excludes food and energy, was adjusted at a 1.8% rise, versus expectations of an unadjusted 1.7% increase.

The final August University of Michigan Consumer Sentiment Index was revised to 89.8 from the preliminary level of 90.4, and compared to expectations of a slight rise to 90.8. The index was down compared to July’s level of 90.0. The expectations component of the report was revised lower but remained above July’s level, while current conditions were adjusted higher but below the prior month’s level. The 1-year inflation outlook held steady at 2.5% but was down from July’s 2.7% rate.

Treasuries finished lower , with the yields on the 2-year and 10-year notes rising 5 basis points (bps) to 0.84% and 1.62%, respectively, while the yield on the 30-year bond was 2 bps higher at 2.29%.

Europe higher following Yellen’s speech

European equities gained ground amid an initial positive reaction to Fed Chairwoman Janet Yellen’s speech that mirrored recent comments from Central Bank officials that the U.S. economy is now nearing goals of maximum employment and price stability, and the case for a rate hike has strengthened in recent months. However, healthcare stocks remained hamstrung by festering concerns about a pricing crackdown following the presidential election in the U.S. France’s Q2 GDP growth was up 1.4% y/y as expected and matching Q1′s growth, while Q2 U.K. GDP growth increased 2.2% to match forecasts and following the 2.0% y/y expansion seen in Q1.

The British pound dipped versus the U.S. dollar, following its recent rally that has been fueled by a string of upbeat data suggesting the economy is seeing a limited impact from the late-June vote in the U.K. to leave the European Union, known as a Brexit. The euro lost ground on the U.S. dollar, while bond yields in the region finished mixed.

The U.K. FTSE 100 Index and Switzerland’s Swiss Market Index were up 0.3%, Germany’s DAX Index rose 0.6%, France’s CAC-40 Index and Italy’s FTSE MIB Index gained 0.8%, and Spain’s IBEX 35 Index advanced 0.7%.

Stocks in Asia finished mixed as today’s speech by U.S. Fed Chair Yellen kept conviction in check, while some disappointing inflation data out of Japan weighed on sentiment. Japan reported that core consumer inflation for July declined more than expected y/y, exacerbating deflationary concerns and sending equities in the region lower, while the yen reversed to the upside. However, Chinese stocks bucked the trend, rebounding modestly from yesterday’s slide that came courtesy of resurfacing liquidity concerns and as reports fostered uneasiness about a government crackdown aimed at cooling the real estate markets. The cautious mood ahead of Yellen’s speech resulted in a decline for securities in South Korea and India. Finally, weakness in financials and oil & gas issues helped pull Australian stocks to the downside.

Second-quarter GDP still weak: 1.1%

The U.S. economy grew at a lackluster 1.1% pace in the second quarter, a touch slower than previously reported. By and large, the government’s second recalculation of gross domestic product in the April to June period showed few major changes. Initially GDP was estimate to have expanded at a 1.2% annual rate.

**CLICK TO ENLARGE**

BN-PE228_201606_TAB_20160729100505

The big news: corporate profits fell again. Adjusted pretax earnings dropped 1.2% to mark the fifth decline in the past six quarters, the Commerce Department reported. Unless profits turn up again, the economy is unlikely to grow much faster.

Fresh evidence shows that imports rose instead of falling, consumer spending was even better than initially reported and government outlays fell more sharply. Business investment remained weak.

Early signs in the third quarter with a little over a month to go point to somewhat faster but not breakneck growth. Economists in a recent pollpredict GDP will rise to 2.2%.

Hiring accelerated during the summer, manufacturers have shown some improvement and the slumping U.S. energy industry appears to have stabilized.

Against that backdrop, the Federal Reserve could raise interest rates before the end of the year. Fed Chairwoman Janet Yellen is slated to give a major speech today that could outline the path the central bank is likely to take.

In the spring, the economy got a jolt from consumers whose spending rose a revised 4.4%, the biggest gain in two years. Americans spent more on new autos and an array of goods and services.

Consumers account for 70% of U.S. economic activity and they are likely to continue to spend at a rate that keeps the economy churning forward. Wages are creeping higher and unemployment is the lowest since before the Great Recession.

The big question is whether businesses pull the reins on hiring amid a downturn in profits. Yet the weakness in earnings has largely been confined to energy and manufacturing, especially export-intensive businesses. Financial and service-oriented companies that employ the vast majority of Americans are doing better.

Businesses cut fixed investment by 2.5% in the second quarter. Inventories fell by a revised $12.4 billion, the first decline since 2011.

One good sign: outlays on intellectual property tied to research and development was revised to show a 8.6% increase instead of 3.5%.

Investment in new housing also fell sharply in the spring — down a revised 7.7% vs. an initial 6.1% — but that appeared to reflect a seasonal swing. Sales of new homes keep rising and builders plan to ramp up construction.

Exports rose 0.4% in the second quarter. Imports were revised to show a 0.3% increase vs. an earlier estimate of a 0.4% decline.

Government spending, meanwhile, fell a stiffer 1.5% instead of 0.9%, mostly because of lower state and local outlays.

Inflation as measured by the PCE price index rose at a 2% annual rate. “Core” inflation climbed at a 1.8% rate when the volatile food and energy categories are stripped out.

Market Insights 8/25/2016

Stocks Quiet Ahead of Yellen’s Speech

U.S. stocks closed mildly lower and European equities snapped a winning streak as caution prevailed ahead of tomorrow’s speech from Federal Reserve Chairwoman Janet Yellen.

Some upbeat domestic data included better-than-expected reads on weekly jobless claims and durable goods orders, while a preliminary report on services sector activity unexpectedly declined but remained in expansion territory.

Treasuries and gold were lower, the U.S. dollar was little changed and crude oil prices were higher.

The Markets….

The Dow Jones Industrial Average declined 33 points (0.2%) to 18,448

The S&P 500 Index lost 3 points (0.1%) to 2,173

The Nasdaq Composite decreased 5 points (0.1%) to 5,212

In moderately light volume, 705 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.56 to $47.33 per barrel, wholesale gasoline added $0.01 to $1.42 per gallon

The Bloomberg gold spot price declined $1.64 to $1,322.64 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.76

Earnings and Company News…

HP Inc reported fiscal 3Q earnings-per-share (EPS) ex-items of $0.48, above the $0.44 FactSet estimate, as revenues declined 4.0% year-over-year (y/y) to $11.9 billion, versus the projected $11.5 billion. HPQ issued softer-than-expected 4Q EPS guidance, while lowering the high end of its full-year profit outlook. Shares pared early losses.

Tiffany & Co posted 2Q profits of $0.84 per share, north of the forecasted $0.72, with revenues declining 6.0% y/y to $932 million, compared to the expected $933 million. Q2 same-store sales decreased 8.0% y/y, compared to the expected 7.8% drop. TIF maintained its full-year EPS outlook and shares rallied.

PVH Corp announced 2Q EPS ex-items of $1.47, well above the projected $1.28, as revenues increased 4.0% y/y to $1.9 billion, roughly in line with forecasts. The parent of Calvin Klein and Tommy Hilfiger issued mixed Q3 guidance, while raising its full-year profit forecast and reaffirming its revenue outlook. Shares gave up early gains and finished lower.

Dollar General Corp reported Q2 earnings of $1.08, one penny below forecasts, with revenues growing 5.8% y/y to $5.4 billion, just shy of the expected $5.5 billion. Q2 same-store sales increased 0.7% y/y, versus the estimated 2.7% gain. DG confirmed its full-year EPS outlook, while announcing an additional $1.0 billion in share repurchases. DG closed sharply lower.

Dollar Tree Inc posted Q2 EPS of $0.72, one cent south of expectations, as revenues rose 66% y/y to $5.0 billion—reflecting results from its acquisition of Family Dollar—compared to the projected $5.1 billion. 2Q same-store sales rose 1.2% y/y, compared to the 2.4% gain that was anticipated. DLTR issued stronger-than-expected 3Q earnings guidance, though it raised and lowered its full-year EPS and revenue forecasts, respectively. Shares were lower.

Durable goods orders easily top forecasts, jobless claims unexpectedly dip

July preliminary durable goods orders jumped 4.4% month-over-month, compared to Bloomberg’s estimate of a 3.4% gain and June’s downwardly revised 4.2% drop. Ex-transportation, orders gained 1.5% m/m, easily topping the 0.4% forecasted increase, and June’s favorably revised 0.3% decline. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, increased 1.6%, well above projections of a 0.2% increase, and following the upwardly revised 0.5% rise in the month prior. Gains were widespread, notably surges in the volatile aircraft and parts and a sharp jump in computers and related products, though motor vehicles were flat and communications declined.

The business spending component of the report has posted back-to-back monthly gains, and a continuation of this trend could give the U.S. economy a needed boost to escape this prolonged period of stagnant growth. As noted, consumer confidence has firmed, with the labor market continuing to improve, housing is looking good, and wages are finally starting to rise. Additionally, we’ve seen signs that consumers may be more comfortable taking on debt. However, it will be difficult to get the U.S. economy rolling without an improvement in productivity, which is undoubtedly being constrained by ongoing tepid capital spending.

Weekly initial jobless claims dipped 1,000 to 261,000 last week, versus estimates of a rise to 265,000, with the prior week’s figure unrevised at 262,000. The four-week moving average declined 1,250 to 264,000, while continuing claims fell 30,000 to 2,145,000, south of the estimated level of 2,155,000.

Treasuries were lower, with the yields on the 2-year note and the 30-year bond ticking 2 basis points (bps) higher to 0.79% and 2.27%, respectively, while the yield on the 10-year note increased 1 bp to 1.58%.

The preliminary Markit U.S. Services PMI Index for August unexpectedly declined to 50.9 from July’s final reading of 51.4, compared to forecasts of a modest rise to 51.8, though a reading above 50 indicates expansion. The release is independent and differs from the Institute for Supply Management’s (ISM) report, as it has less historic value and its index components are weighted differently.

Tomorrow, the U.S. economic calendar will close out the week with the first revision (of two) of Q2 GDP, projected to be adjusted slightly lower to a 1.1% quarter-over-quarter annualized rate of growth, after Q1′s 0.8% expansion. The University of Michigan Consumer Sentiment Index will follow, expected to be revised modestly higher to 90.8 from 90.4, and an improvement from July’s 90.0 figure, while wholesale inventories will close out the day, projected to tick 0.1% higher m/m in July following June’s 0.3% gain. The highlight of the morning will be the 10:00 a.m. ET speech from Federal Reserve Chairwoman Janet Yellen at the Central Bank’s annual policy symposium in Jackson Hole, Wyoming.

Europe and Asia lower as global markets eye Yellen’s speech

European equities finished lower, declining for the first time in four days, with basic materials stocks lower on the continued pressure on the mining sector and as the markets digested some mixed economic data in the region, headlined by a disappointing read on August German business sentiment. Global caution persisted ahead of tomorrow’s key speech from U.S. Federal Reserve Chairwoman Yellen at the Central Bank’s annual policy symposium in Jackson Hole, Wyoming. Healthcare issues came under pressure amid concerns about a potential pricing crackdown following comments from U.S. Democratic nominee Hillary Clinton. In other economic news, Spain’s Q2 GDP growth was unexpectedly revised higher and U.K. August retail sales figures rebounded. The U.K. report added to recent data to suggest the U.K. economy is seeing a limited impact from the late-June vote to leave the European Union, known as Brexit.

The euro was higher and the British pound lost ground on the U.S. dollar, while bond yields in the region finished mostly higher.

Stocks in Asia finished lower in subdued volume as the global markets remained cautious ahead of tomorrow’s key speech from U.S. Fed Chair Janet Yellen, while the recent drop in crude oil prices and dampened sentiment in the mining sector weighed on commodity-related issues. Japanese equities declined despite some weakness in the yen, while basic materials led Australian securities lower. Stocks in India fell amid some choppy trading on the expiration of monthly derivatives contracts and South Korean listings finished flat. Equities trading in mainland China fell and those in Hong Kong were little changed as liquidity concerns resurfaced and reports that the government may act to cool speculation in the financial and real estate markets fostered some uneasiness.

Tomorrow, the international economic docket will deliver consumer price inflation for Japan, consumer confidence from Germany, preliminary 2Q GDP from France and business investment, the Index of Services and preliminary 2Q GDP from the U.K.

Market Insights 8/24/2016

Oil and Housing Reports Pressure Stocks

U.S. equities finished lower in the wake of a disappointing existing home sales report, some lackluster earnings, and a tumble in crude oil prices on the heels of a bearish government inventory report. Plus, an extra amount of caution continued as the global markets await Friday’s speech from Federal Reserve Chairwoman Janet Yellen.

Treasuries were flat and gold was lower, while the U.S. dollar inched higher.

The Markets…

The Dow Jones Industrial Average declined 64 points (0.4%) to 18,483

The S&P 500 Index fell 11 points (0.5%) to 2,176,

The Nasdaq Composite decreased 42 points (0.8%) to 5,218

In moderate volume, 745 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil tumbled $1.33 to $46.77 per barrel, wholesale gasoline lost $0.01 to $1.41 per gallon

The Bloomberg gold spot price declined $11.81 to $1,325.75 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 94.78

Earnings News….

Intuit Inc. reported fiscal Q4 earnings-per-share of $0.08, compared to the FactSet estimate of a $0.02 per share loss, with revenues rising 8.0% year-over-year to $754 million, above the projected $733 million. The business and financial software maker issued Q1 guidance that came in below expectations and a mixed current year outlook. Shares are lower.

La-Z-Boy Inc. posted fiscal Q1 profits of $0.28 per share, one penny below estimates, with revenues roughly flat y/y to $341 million, missing the forecasted $358 million.

Express Inc. announced Q2 EPS of $0.13, south of the projected $0.17, as revenues decreased 6.0% y/y to $505 million, versus the expected $521 million. Q2 same-store sales fell 8.0% y/y, versus the forecasted 4.6% decline. EXPR issued softer-than-expected 3Q guidance, while lowering its full-year outlook. Shares are lower.

Existing home sales snap a four-month string of gains

Existing-home sales in July declined month-over-month for the first time since February, decreasing 3.2% to a 5.39 million annual rate compared to the Bloomberg forecast of a 5.51 million pace. June’s figure was unrevised at a 5.57 million annual rate—the highest since February 2007. Compared to last year, sales were 1.6% lower, the first y/y decline since November 2015. The median existing-home price was up 5.3% y/y at $244,100. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were lower in all regions except for in the West as single-family and condominium and co-op sales both fell. National Association of Realtors (NAR) Chief Economist Lawrence Yun said severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month.

In our opinion, he latest batch of U.S. economic data doesn’t appear to presage an imminent recession, which would typically lead to a bear market. Consumer confidence has firmed, with the labor market continuing to improve, housing looking good, and wages finally starting to rise. Additionally, we’ve seen both revolving consumer credit and bank loans increase, indicating consumers may be more comfortable taking on debt.

The MBA Mortgage Application Index declined 2.1% last week, after falling 4.0% in the previous week. The decrease came as a 3.2% drop for the Refinance Index was accompanied by a 0.3% dip for the Purchase Index. The average 30-year mortgage rate rose 3 basis points to 3.67%.

Treasuries were little changed, as the yields on the 2-year and 10-year notes were flat at 0.76% and 1.55%, respectively, while the 30-year bond rate ticked 1 bp higher to 2.23%.

Tomorrow, the headlining event on the U.S. economic calendar will likely be the release of the preliminary durable goods orders report, projected to rebound 3.4% m/m in July, after June’s 3.9% drop. Excluding transportation, orders are anticipated to rise 0.4%, after declining by the same amount in the month prior. Orders for non-defense capital goods excluding aircraft—a proxy for business spending—are expected to tick 0.2% higher on the heels of June’s 0.4% increase. As noted, it will be difficult to get the U.S. economy rolling without an improvement in productivity. A contributing factor to weak productivity is undoubtedly ongoing tepid capital spending. Additionally, industrial production has been relatively weak, but there is some hope as gains have been posted in the past two months.

Weekly initial jobless claims will be released, forecasted to move higher to a level of 265,000 from the prior week’s 262,000, as well as the Kansas City Fed Manufacturing Index, with economists expecting the measure of activity to rise from July’s level of -6 to -2 for August, with a reading below zero denoting contraction in activity.

Europe mostly higher, Asia mixed amid caution ahead of Fed Chair speech

European equities moved mostly to the upside, with financials leading the way, though the global markets continue to tread lightly ahead of Friday’s speech from Federal Reserve Chairwoman Janet Yellen at the Central Bank’s annual monetary policy gathering in Jackson Hole, Wyoming. The euro traded lower versus the U.S. dollar to lend some support, while bond yields in the region ticked higher. In economic news, Germany’s Q2 GDP growth was unrevised as expected at a 0.4% quarter-over-quarter pace, after expanding 0.7% in Q1.

However, the U.K. markets lagged behind amid some weakness in basic materials stocks, while the British pound continued its recent rally to a three-week high versus the greenback on the heels of a report that showed consumer credit rose by the fastest pace in almost a decade, per Bloomberg. The upbeat report was the latest in a string of data to suggest the U.K. economy is seeing a limited impact from the late-June vote to leave the European Union, known as Brexit. Gains were limited by some weakness in oil & gas issues as crude oil prices saw pressure on the heels of two bearish oil inventory reports.

The U.K. FTSE 100 Index was down 0.5% and Switzerland’s Swiss Market Index finished flat, while France’s CAC-40 Index and Germany’s DAX Index advanced 0.3%, Spain’s IBEX 35 Index rose 0.9%, and Italy’s FTSE MIB Index increased 0.7%.

Stocks in Asia finished mixed with volume subdued amid some caution ahead of Friday’s key speech from U.S. Fed Chair Yellen, while economic data in the region remained on the lighter side. Japanese equities rose, aided by some modest weakness in the yen, while mainland Chinese markets dipped and those in Hong Kong fell markedly, with banking stocks seeing pressure following a recent run. Strength in resource-related issues, along with technology and financial stocks helped Australian stocks tick higher, while securities in India gained modest ground, and South Korean equities declined. Amid the lull in volatility in the global markets, now might be a good time for investors to assess portfolio asset allocations and risk tolerance with their advisor.

Market Insights 8/23/2016

Markets Posts Modest Gains

Although off the highs of the day, U.S. equities finished positive, aided by a near nine-year high in new home sales, a favorable read on eurozone business activity, as well as upbeat quarterly results from Best Buy.

However, the gains were likely kept in check on some softer-than-expected domestic manufacturing data and as Fed Chairwoman Janet Yellen’s key Friday speech looms on the horizon.

Treasuries and the U.S. dollar were little changed, crude oil prices rebounded somewhat, while gold ticked lower.

The Markets…

The Dow Jones Industrial Average increased 18 points (0.1%) to 18,547

The S&P 500 Index rose 4 points (0.2%) to 2,187,

The Nasdaq Composite gained 15 points (0.3%) to 5,260

In moderate volume, 722 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.69 to $48.10 per barrel, wholesale gasoline added $0.02 to $1.50 per gallon

The Bloomberg gold spot price declined $1.02 to $1,338.07 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.55

New home sales surge, while manufacturing data disappoints

New home sales jumped 12.4% month-over-month in July to an annual rate of 654,000, and well above the Bloomberg forecast of 580,000 units. The median home price dipped 0.5% y/y to $296,000. The supply of new home inventory dropped to 4.3 months at the current sales pace as sales surged in the Northeast m/m, gained solidly in the South and ticked higher in the Midwest, while sales in the West were flat. Compared to last year, sales in all regions were up solidly. New home sales are based on contract signings instead of closings. This was the fastest pace in new home sales since October 2007 and the report comes ahead of tomorrow’s broader measure of the housing sales market in the form of existing home sales, projected to dip 1.2% from more than a nine-year high to an annual rate of 5.51 million units in July. Existing home sales are based on contract closings.

The preliminary Markit U.S. Manufacturing PMI Index for August decelerated more than expected, declining to 52.1 from July’s 52.9 level, and versus the forecasted dip to 52.6, with a reading above 50 denoting expansion in activity.

The Richmond Fed Manufacturing Activity Index surprisingly fell into contraction territory (a reading below zero), dropping to -11 in August from the 10 posted in July, while economists had anticipated a decline to 6.

Treasuries were nearly unchanged, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.75%, while the yields on the 10-year note and the 30-year bond were flat at 1.55% and 2.23%, respectively.

Europe higher following upbeat Eurozone and U.S data, Asia mixed

European stocks finished higher, despite global caution ahead of this week’s annual Fed monetary policy gathering in Jackson Hole, Wyoming, which will be highlighted by Chairwoman Janet Yellen’s speech on Friday. Basic materials stocks rebounded, along with oil & gas issues, as crude oil prices reversed to the upside, aided by a favorable U.S. home sales report and an upbeat read on Eurozone business activity in August.

The preliminary Markit Eurozone Composite PMI Index—a gauge of output from both the services and manufacturing sectors—unexpectedly improved to 53.3 from July’s 53.2 level and compared to the forecasted dip to 53.1. A reading above 50 denotes expansion and the index hit the highest level in seven months, suggesting the fallout from the U.K.’s late-June vote to leave the European Union, known as a Brexit, so far is having a limited impact. The euro was flat and the British pound finished higher versus the U.S. dollar, while bond yields in the region dipped.

Stocks in Asia finished mixed in cautious trading as the global markets await this week’s annual Fed gathering in the U.S. as policy uncertainty remains elevated, culminating with Yellen’s speech on Friday. The continued pullback in crude oil prices from last week’s rally weighed on the energy sector. Japanese equities dropped, with the yen gaining solid ground on the U.S. dollar to weigh on export-related issues.

Mainland Chinese securities increased slightly, while those listed in Hong Kong finished flat. Elsewhere, Australia’s markets saw a nice gain, with some weakness in oil & gas issues being more than offset by strength in financials and healthcare issues, while South Korean equities moved modestly higher, and stocks in India were little changed.