Market Update: Monday, August 29, 2016

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  • Markets near flat to begin data-heavy week. U.S. stocks are little changed this morning, following consumer purchases data that matched forecasts and showed an advance for the fourth straight month. Investors are also looking ahead to a swath of tier-one data releases throughout the week including: consumer confidence, housing figures, auto sales, construction spending, and nonfarm payrolls. Today’s action comes on the heels of a disappointing last week that saw markets close lower the final three days, with Friday’s session highlighted by a sharp drop in utilities and telecom stocks. Overnight in Asia, the Bank of Japan’s Governor said that the central bank is ready to implement more easing if necessary, boosting the Nikkei 2.3%; China’s Shanghai Composite closed flat. European shares are broadly lower in afternoon trading, as investors continue to weigh Federal Reserve Bank (Fed) Chair Yellen’s speech from Friday; Italy’s MIB is displaying relative weakness, down 1.3%. Dollar strength is helping to push commodities lower, with COMEX gold down slightly and WTI crude oil slipping below $47/barrel. Finally, the yield on the 10-year Treasury is down modestly, following Friday’s 0.06% jump to 1.64%, a post-Brexit high.

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  • Down three in a row. The S&P 500 dropped slightly on Friday, for the third consecutive lower close. This was the first three day losing streak in 50 days, the longest such streak since 57 that ended in early September 2014. The S&P 500 still hasn’t closed up or down 1% for 35 straight days, the longest since 62 in a row during the summer of 2014. Lastly, although Friday closed near flat, it was a fairly volatile day – as the S&P 500 traded in a daily range of 1.3%. That was the largest daily range since late June and the post-Brexit volatility. In fact, it marked the end to 17 consecutive days of an intraday range of less than 0.75% – the longest streak going back to at least 1970.
  • Yellen warming to a 2016 rate hike. In a speech last Friday at the Kansas City Fed’s Monetary Policy Symposium, Fed Chair Janet Yellen sounded relatively upbeat about the prospects for both the US and global economies, and while she didn’t make any promises, she noted that the case for a rate hike “has strengthened in recent months”. Yellen also noted that fiscal policy must be part of the policy mix to address the lackluster recovery from the Great Recession. We continue to expect the Fed to raise rates in December 2016, and several more times in 2017. The Fed funds futures market puts the odds of a Fed rate hike in September at just under 50% and the odds of a December hike have moved to 65%.The Fed’s Beige Book is due out next week and the next Federal Open Market Committee (FOMC) meeting-accompanied by an FOMC statement, a Yellen press conference, and a new set of economic forecasts and “dot plots” from the FOMC is on September 20-21, 2016.
  • Very busy last week of August. The August data on employment, Institute for Supply Management (ISM) manufacturing, and vehicle sales highlight a very busy week for data and events this week ahead of the Labor Day weekend. There are a handful of Fed speakers as well, but aside from Brazil, there are no major central bank meetings this week. China will release its August manufacturing ISM, and there are a few key reports in Europe as well, notably, the August CPI reading for the Eurozone. In addition, Japan will release most of its key economic data for August.
  • The nation’s fiscal situation is the topic of this week’s Weekly Economic Commentary. Although the deficit and debt have not received a great deal of attention in this year’s presidential election campaign, the deficit and debt do matter, and we examine the recent history and near and medium term outlook for the debt and deficit in this week’s commentary.
  • Corporate Beige Book suggests corporate sentiment improved little. The message from our earnings recap three weeks ago where we wrote, “we were hoping for more,” is appropriate for our latest Corporate Beige Book barometer, our analysis of earnings conference call transcripts for second quarter earnings season and the subject of this week’s Weekly Market Commentary, due out later today. We did see some signs of improvement in managements’ tones based on the use of more strong words, talk of recession was virtually non-existent in the U.S., and the Brexit vote in the UK. was generally not as disruptive as some may have feared. However, the ratio of strong words to weak ones suggests only tentative improvement, while foreign currency remained a drag and low oil prices are still in focus.
  • Earnings rebound still on tap? Our latest Corporate Beige Book may not inspire much confidence, but we still expect earnings to rebound in the second half of the year. Though the rebound will fall short of our expectations back when the year began, we expect better U.S. economic growth to help more as the year progresses. Currency and energy drags should continue to abate through year-end, while the resilience of estimates is a positive sign. Look for more from us on earnings in about a month as we gear up for the start of third quarter earnings season in October.

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Monday

  • Dallas Fed Mfg. Report (Aug)
  • Japan: Jobless Rate (Jul)

Tuesday

  • Germany: CPI

Wednesday

  • ADP Employment (Aug)
  • Rosengren (Dove)
  • Eurozone: CPI (Aug)
  • China: Official Mfg. PMI (Aug)
  • China: Caixin Mfg. PMI (Aug)

Thursday

  • ISM Mfg. (Aug)
  • Vehicle Sales (Aug)
  • Mester (Hawk)

Friday

  • Employment Report (Aug)
  • Lacker (Hawk)

Click Here for our detailed Weekly Economic Calendar

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

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