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Market Insights

Market Insights: August 4, 2014

Market Insights: August 4, 2014

Economic Outlook:  Most of the Important Data Continues to Come In Strong…

  • The PMI Services “Flash” Index last week showed continuing strong expansion with a 60 reading for July. The PMI Manufacturing metric also remained strong at a reading of 55.8. ISM’s Manufacturing Index also provided a strong reading at 57.1.
  • The Conference Board’s Consumer Confidence measure surged last week to 90.9 from 85.2. The gauge is now at the highest level since the beginning of the recovery in 2009. 
  • The Nonfarm Payroll growth was a little weaker than expected at +209,000, and the Unemployment Rate ticked up to 6.2%. Neither of these readings particularly signal alarm. 
  • On Wednesday, 2nd quarter GDP showed 4.0% annual growth, significantly exceeding consensus expectations of 3.1%.  
  • Following the GDP reading, Thursday’s Employment Cost Index rose at its fastest rate in over 5 years, noting increasing wage and salary pressures.  
  • ADP’s Private Employment Report missed expectations, but still posted a positive showing with 218,000 private payrolls added. 
  • Germany’s Retail Sales picked up a bit in June, rebounding from some recent weakness, rising 1.3% month to month. 
  • No change for the low inflation in European Union. The reading was up only 0.4% year-over-year, through July. 
  • European Union’s PMI Manufacturing reading posted at 51.8, still modestly in the growth column. Regionally, the best performer was Ireland where the PMI posted a 3-month high of 55.4 ahead of Spain (53.9) and the Netherlands (53.5). France (47.8) and Greece (48.7) were the only countries beneath the 50 growth mark but four of the reporting states posted multi-month lows.

Equities Outlook:  Big News for the Week – Return of Volatility…

  • Equity markets sold off pretty hard beginning on Thursday, bringing the July returns for most indices into negative territory, and bringing some year-to-date indices back to roughly a zero return (Dow Industrial Average for example).
  • Because of stronger-than-expected reports on 2nd Quarter GDP and Wages, market participants may be interpreting these as a signal that the inevitable Fed tightening of monetary policy might be sooner than expected.  Monetary policy has been accommodative for so long, investor anxiety surrounding any policy shift is naturally heightened. 
  • Changes in the market’s expectations could be cause for greater volatility in the future, which has been running at extremely low levels recently. 
  • Also, some more well followed risks, including Argentina defaulting on a portion of its sovereign debt, and pending sanctions against Russia disrupting the European economy, have made headlines the past couple days, possibly another catalyst for the decline in markets.  
  • Overall we still feel comfortable with equity valuations, though we expect volatility to increase to more normal levels going forward as we move off a low base.  

Fixed Income Markets:  Fed Minutes and the Outlook  

  • The Ten-Year Treasury remained below the psychological 2.5% level again last week. It had closed the previous week at a yield of 2.47%, and ticked up slightly at the end of last week to close at the 2.48% level.
  • The Fed Minutes were released last week. In general, the economy is seen as on the mend from the anemic first quarter with household spending rising moderately, and business fixed investment advancing. The report indicated that Housing continues to be slow.
  • Inflation is closer to the Fed’s long-term goal and longer-term inflation expectations have remained stable. 
  • Due to continued progress in the labor market, the FOMC decided to take a further measured reduction in asset purchases. Total purchases will be scaled back by a further $10 billion per month. Half of this will be on the bond side and half on the mortgage side.  

The Week Ahead 

Tuesday

  • PMI Services (Markit)
  • Factory Orders (Dept of Commerce)
  • ISM Services Index (ISM)