Market Update: Friday, July 29, 2016

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  • Stocks lower on GDP; BOJ disappoints. The Dow and S&P 500 are trading lower this morning following a disappointing read on Q2 GDP; the Nasdaq is also in the red, despite by strong earnings from Alphabet and Amazon. This comes after U.S. markets were little changed Thursday as the S&P 500 gained 0.2% with no clear sector leadership. Meanwhile, the Bank of Japan opted not to push rates further into negative territory and delivered less monetary stimulus than expected; the yen and surprisingly, the Nikkei Index, both gained on the news. In afternoon trade, European indexes are mostly green ahead of bank stress tests due out later today. WTI crude oil continues its multi-week slide, now testing its 200 day moving average below $41/barrel, COMEX gold is up near $1350/oz. and the 10-year Treasury yield is down to 1.48%.

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  • Q2 and 1H ’16 GDP weaker than expected, but GDP since 2013 revised higher. The Bureau of Economic Analysis of the U.S. Department of Commerce released Q2 GDP data this morning, and as is the case every year in late July, also released revised GDP data, this time back to 2013. Q2 GDP-which was expected to come in at +2.7% posted just a 1.2% increase, and Q1 GDP was revised lower from 1.1% to 0.8%. A few caveats to these data points, however. The level of GDP was revised higher since 2013, and all of the disappointment in Q2 GDP relative to expectations came in inventory accumulation, which sets up Q3 for a big bounce. Stripping out inventories, GDP was a solid 2.4% in Q2, accelerating from 1.2% readings in Q1 2016 and Q4 2015. More on revisions on our blog.
  • Q2 Employment Cost Index accelerates, putting pressure on the Fed. The Employment Cost Index (ECI), the broadest and most comprehensive measure of labor costs, accelerated to +2.3% year-over-year in Q2, from 1.9% in Q1 2016 and 2.0% in Q2 2015. Since bottoming at 1.4% in late 2009, the year-over-year reading on the ECI has moved higher, but remains well below the pace of gains seen before the Great Recession, when the ECI was running consistently in the 3-4% range.
  • Week ahead: Post Brexit data on jobs, ISM, vehicle sales, key China data, and the Olympics begins. July readings on the labor market, ISM for manufacturing, and vehicle sales dominate next week’s busy U.S. data calendar. Overseas, China’s PMI data for July is due out over the weekend, and the Bank of England’s meeting next week is also key, as the central bank may respond to Brexit with a rate cut. The Summer Olympics begin next Friday, August 5th in Rio.
  • A wide variety of European economic data was released. Individually, none of these data points is particularly important, but collectively this data came in relatively weak. French Q2 GDP was 0.0% on an annualized basis, actual GDP grew 1.4% over the past 4 quarters. Expectations were for 0.2% for Q2 and 1.6% for the past 4 quarters. Monthly inflation was down -0.4%, expected, but down from last month’s positive reading 0.1%. German retail sales were down -0.1% in July, down from 0.9% in June.
  • Kicking the can, or passing the buck? The Bank of Japan (BOJ) decided this morning to expand its quantitative easing. This action did not cut interest rates, nor announce additional bond purchases. These measures seem unlikely to stoke inflation in Japan. The BOJ’s actions take place in the context of confusing signals from the government related to fiscal stimulus. There is growing tension between these institutions in Japan. The yen strengthened on the news, as did Japanese stocks. These two usually move in opposite directions, but the prospect of more BOJ stock purchases overwhelmed the negative impact of a stronger yen, at least for today.
  • Last day of the month. Today is the last day of July and the S&P 500 is up 3.4% for the best monthly return since March added 6.6%, and the best July since 2013 gained 4.9%. The S&P 500 is also up five straight months for the first time since February to June 2014. We’ve noted it before, but the last day of the month has historically been very weak the past 20 months, up only four times. In fact, it hasn’t been up back-to-back for 25 consecutive months. The last day of June did gain 1.4%, so with a gain today that streak could come to its end.
  • Crude in a bear market. Crude oil is officially down 20% from its peak above $51/barrel on June 8th. Crude has dropped eight of the last nine days and is down the past six days. This is the fourth 6-day losing streak of 2016, but the first since late March. It is worth noting that using data back to 1983, this is the first year to ever have four 6-day losing streaks. Technically, crude oil sits right on its 200-day moving average.

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Friday

  • GDP (Q2 and Revisions to Data from 2013 – 2016)
  • Chicago Area PMI (Jul)
  • Eurozone: GDP (Q2)
  • UK: Money Supply and Bank Lending (Jun)
  • Eurozone: CPI (Jul)
  • Japan: Bank of Japan Meeting
  • Mexico: GDP (Q2)

Sunday

  • China: Official Mfg. PMI (Jul)
  • China: Official Non-Mfg. PMI (Jul)
  • China: Caixin Mfg. PMI (Jul)

Click Here for our detailed Weekly Economic Calendar

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