The Markets
Measures to provide increased liquidity for European banks also helped money flow back into equities last week. Domestic stocks reversed their losses of the previous week and then some. The Dow managed to return to being almost flat for the year, and even the Global Dow was positive for the week. As a result, Treasuries and gold prices retreated a bit in the face of fickle investors' renewed tolerance for risk.
Last Week's Headlines
- Growing demand for loans from the European Central Bank by banks having difficulty obtaining credit elsewhere led to an agreement to provide increased liquidity through dollar-based lending by the ECB in coordination with the Federal Reserve and the central banks of Japan, the United Kingdom, and Switzerland. An Italian bond auction resulted in higher borrowing costs for the country, with the yield on the five-year bond hitting a steep 5.6%; officials confirmed talks with China about the possibility of purchasing Italian bonds, though there was no formal agreement. Meanwhile, French and Spanish bond auctions saw solid demand, though yields on Spanish debt also were high.
- French and German leaders reaffirmed support for keeping Greece in the European Union if bailout-mandated austerity measures are implemented, and agreed to allow the European Financial Stability Facility to buy bonds on the open market. However, German Chancellor Angela Merkel's party was defeated in elections in Berlin. Finally, Moody's downgraded two French banks' credit rating because of their exposure to Greek debt and concerns about future governmental support.
- Consumer prices saw a broad-based 0.4% increase in August (0.2% excluding food and energy), and are up 3.8% for the past year, according to the Bureau of Labor Statistics. Meanwhile, at the wholesale level, lower energy costs offset higher food prices, leaving inflation flat for the month. However, core wholesale prices, which exclude food and energy, were up 0.1%.
- Federal Reserve gauges of manufacturing activity in the Philadelphia and New York regions slowed by 17.5% and 8.8% respectively. Though the Philly Fed's September report was better than the previous month's 31% drop, it was the third decline in four months, and the fourth straight for the Empire State. However, a different Fed report said industrial production nationwide was up 0.2% in August, the fifth increase in the last six months and 3.4% above a year ago.
- Retail sales were flat in August, though they were up more than 7% from the previous August. Lower auto sales offset increased spending for gas, electronics, and food.
- The Census Bureau reported that the number of people below the poverty threshold hit 46.2 million last year; that's the highest number since record-keeping began 52 years ago, and represents approximately 1 in every 6 Americans. Meanwhile, the median household income fell by 2.3% to $49,445, and is roughly 7% below its 1999 peak. And approximately 1 million more people lacked health insurance than in 2009, though the percentage doing without was about the same.
Eye on the Week Ahead
Investors will keep a close eye on the Federal Reserve's Wednesday announcement, hoping for new measures to support economic recovery. Will the Fed replicate a 1960s policy, called Operation Twist, by swapping short-term bonds for those with longer maturities? Cut interest rates for banks? Do nothing? And of course there's always the potential for more European debt drama as investors assess the impact of German politics on its future support for its European brethren.
Key dates and data releases: housing starts (9/20); Federal Reserve Open Markets Committee announcement, home resales (9/21); weekly new unemployment claims, leading economic indicators (9/22).
Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.
