Market Update: Thursday, August 4, 2016

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  • Stocks little changed after Bank of England cuts key rate. Equities are inching lower this morning, despite the Bank of England (BOE) voted unanimously to cut its key lending rate to 0.25%, marking a new all-time low. The bank also signaled that they expect to cut rates closer to zero by the end of the year, and announced additional quantitative easing (QE) measures that were not expected by the market. The move has put pressure on the pound, which has fallen 1.1% against the dollar, as well as U.S. Treasury yields, which are down to 1.51% on the 10-year note. Yesterday’s session saw the major U.S. averages all finish higher, though the more defensive utilities, consumer staples, and healthcare sectors all closed in the red. Energy stocks were the best performing on the day, led higher by a more than 3% jump in WTI crude oil, back above $40/barrel. Overnight, Asian markets finished higher across the board, despite markets closing before the BOE’s announcement; in afternoon trading, European stocks are moving up, led by the financial sector. Meanwhile, the dollar is modestly higher, as is COMEX gold at $1,369/oz.

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  • Layoff announcements declined in July, another sign that the labor market is on solid footing post-Brexit, but announcements remain elevated in the energy sector. There were 45,346 announced job cuts in July 2016, up from 38,536 in June but 60% below the 105,696 in July 2015. Energy layoffs in July totaled 18,000, accounting for 40% of all the layoffs announced in July. In the past 12 months, there were 568,000 announced layoffs economy-wide, roughly 100,000 higher than the levels seen in 2012-14, which, taken at face value, suggests some weakening in labor market trends. But 125,000 (or just under 25%) of the 568,000 announced layoffs in the past 12 months came in the energy sector. To put that in context, energy jobs only account for 1-2% of overall employment in the U.S. Although energy prices have stabilized and moved higher in recent months, oil production remains weak, and we continue to expect more layoffs in the energy sector in the coming weeks and months. Outside of energy, the layoff data are consistent with a solid labor market.
  • Post-Brexit data point: initial claims. At 269,000, new claims for unemployment insurance remained at 40-year lows in the week ending July 30, 2016. The latest report is another indicator that the labor market post-Brexit is little changed from pre-Brexit; but as usual, the weekly claims data are beset by distortions. At this time of the year, the end of the quarter/start of a new quarter and the annual auto plant shutdowns are the likely culprits. Claims are down 17,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate a recession, so clearly there is no recession signal from claims.
  • Bank of England surprised to the upside. The BOE cut interests rates in half, to 25 basis points, this morning. This cut was largely expected by the markets. However, the BOE also expanded its QE program, announcing that it will buy an additional 60 billion pounds of government bonds over the next six months and will expand its purchases to corporate bonds as well. The bank also announced a loan program to banks to encourage lending. We believe that the BOE has learned from the policies in the EU and Japan that cutting rates is not enough, and policies are needed to get the financial transmission mechanism in full gear. Markets looked at this news favorably, with U.K. stocks rising 1.5% this morning.

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Thursday

  • Challenger Job Cut Announcements (July)
  • Kaplan (Hawk)
  • UK: Bank of England Meeting (Rate Cut Expected)

Friday

  • Employment Report (July)
  • Indonesia: GDP (Q2)

Click Here for our detailed Weekly Economic Calendar

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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