The Markets
The large-cap indexes
cooled off a bit last week, particularly influenced by a somewhat
disappointing GDP growth rate for the second quarter and lackluster
earnings reports from some key companies. On the other hand, the
tech-based Nasdaq and the small-cap Russell 2000 each posted weekly
gains, with the Nasdaq leading the way among the indexes listed here.
Treasury yields fell, with the benchmark 10-year Treasuries dropping 11
basis points by last week's end, likely influenced by falling oil
prices. Abroad, the eurozone seems to be recovering from the initial
shock caused by the Brexit vote, as the second-quarter GDP expanded at a
modest 1.2% (the same as the U.S. GDP), which is ahead of the
first-quarter pace.
Crude oil (WTI) prices
continue to fall, closing at $41.38 a barrel last week, down from $44.21
per barrel the previous week. The price of gold (COMEX) jumped to
$1,357.90 by late Friday afternoon, up from the prior week's price of
$1,330.30. The national average retail regular gasoline price decreased
for the sixth week in a row to $2.182 per gallon on July 25, $0.048
under the prior week's price and $0.563 below a year ago.
Last Week's Headlines
- While the latest estimate of the gross
domestic product isn't particularly noteworthy, some of the underlying
information bodes well for economic growth. The GDP grew at a 1.2%
annualized rate in the second quarter, up slightly from the prior
estimate of 1.1%. The annual growth rate for the GDP has been below 2.0%
for the last three quarters. The final estimate of the first-quarter
GDP showed a 0.8% annual rate of growth. On the plus side, consumer
spending expanded at a rate of 4.2%--the highest growth rate since 2014.
Spending for goods grew at a 6.8% rate, while spending on services
expanded by 3%. The drawback to overall economic growth is on the
business side of the GDP, which saw businesses scale back inventories
and business investment.
- Following its July meeting, the
Federal Open Market Committee noted that, while the labor market has
continued to strengthen and economic activity has been expanding at a
moderate rate, business fixed investment has been soft and inflation
continues to run below the Committee's 2.0% target rate. Against that
backdrop, the Committee decided to maintain the target range for the
federal funds rate at 0.25%-0.50%. The Committee does not meet again
until mid-September.
- Demand for manufactured durable goods
fell for the third consecutive month in June. Following May's 2.8%
decline, new orders for durable goods in June fell another $9.3 billion,
or 4.0%--the largest decrease since August 2014. Shipments of durable
goods were up 0.4%, unfilled orders fell 0.9%, and inventories decreased
0.2%. This information predates the Brexit vote, which further
strengthened the dollar compared to the pound and euro, likely leading
to continued weakening of foreign demand for U.S. manufactured goods.
- The housing market continues to expand
as new home sales increased by 3.5% in June over the prior month.
Compared to last year, the rate of new home sales is 25.4% above the
June 2015 estimate. The median sales price of new houses sold in June
2016 was $306,700; the average sales price was $358,200. The seasonally
adjusted estimate of new houses for sale at the end of June was 244,000.
This represents a supply of 4.9 months at the current sales rate--well
below the available supply of 5.5 months in June of 2015.
- Primarily curtailed by affordability
and supply constraints, pending home sales based on contract signings
remained relatively the same in June compared to the prior month. The
Pending Home Sales Index inched up 0.2% for the month to 111.0 (110.8 in
May), but is 1.0% higher than June 2015 (109.9).
- The S&P-Case-Shiller U.S. National
Home Price NSA Index reported a 5.0% annual gain in May, the same as
the prior month. According to the report, home prices continue to
increase across the country, while sales of existing homes in May
reached the highest monthly level since 2007.
- The United States continues to spend
more on imports than it receives for exports as the trade deficit for
June grew by $2.2 billion (3.7%) over May. Exports of goods were $120.2
billion, while imports were $183.5 billion, for a net trade deficit of
$63.3 billion.
- Labor costs continue to expand as
evidenced by the employment cost index, which increased 0.6% for the
second quarter. Employee costs grew at the same rate in the first
quarter, and are up 2.3% year-on-year. Wages and salaries increased
0.6%, while benefit costs jumped 0.5% for the second quarter (2.5% and
2.0%, respectively, year-on-year).
- Consumers remain slightly more
positive about current business and labor market conditions, according
to the latest Conference Board Consumer Confidence Index®. The index for
July, at 97.3, is essentially the same as the June index of 97.4.
However, respondents in the University of Michigan's Surveys of
Consumers were troubled by the Brexit vote, particularly those consumers
in the top third in household income. Overall, the Index of Consumer
Sentiment dropped a bit from 93.5 in June to 90.0 in July.
- In the week ended July 23, the advance
figure for seasonally adjusted initial unemployment insurance claims
was 266,000, an increase of 14,000 from the prior week's level. The
advance seasonally adjusted insured unemployment rate rose to 1.6%. The
advance number for seasonally adjusted insured unemployment during the
week ended July 16 was 2,139,000, an increase of 7,000 from the previous
week's revised level.
Eye on the Week Ahead
So far, the summer has been good for equities markets and most economic
indicators. Two important reports are issued next week for the month of
June: personal income and outlays and the employment situation. Personal
income and outlays, offers information on consumer income, savings, and
spending, which can offer a glimpse into the strength of the economy
from the consumer's perspective. June's jobs report was encouraging
following May's disappointing information. This report often has a
direct impact on the U.S. stock markets as Wall Street tends to pay
particular attention to several pieces of information from this report,
including the unemployment rate, the number of new jobs added, and wage
information.
Data sources: News items are based
on reports from multiple commonly available international news sources
(i.e. wire services) and are independently verified when necessary with
secondary sources such as government agencies, corporate press releases,
or trade organizations. Market data: Based on data reported in WSJ
Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S.
Energy Information Administration/Bloomberg.com Market Data (oil spot
price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX
Street (currency exchange rates). 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. All investing involves
risk, including the potential loss of principal, and there can be no
guarantee that any investing strategy will be successful.
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 2,000 U.S. small-cap common stocks. The
Global Dow is an equally weighted index of 150 widely traded blue-chip
common stocks worldwide. Market indices listed are unmanaged and are not
available for direct investment.
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