Market Update: Friday, August 4, 2017

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Yesterday’s Market Activity

  • U.S. stocks struggled to gain traction as disappointing earnings from several insurance companies weighed on the financial sector, while better than expected profits from consumer goods companies lifted consumer staples.
  • Dow edged higher by less than 10 points, enough to hold 22k mark, 33rd record high of 2017. S&P 500 Index, Nasdaq Composite fell slightly.
  • Grand jury announcement in Special Counsel Robert Mueller’s Russia investigation weighed on sentiment in the last hour of trading.
  • Bonds rallied with 10-year Treasury yield falling to 2.22%; dollar slipped 0.1%.

Overnight & This Morning

  • Asian stocks were weak, dragged lower by uncertainty associated with U.S. investigation of Russian interference in election. Amid the risk aversion, safe-haven yen strength continued vs. dollar. Nikkei -0.4%, Shanghai Composite -0.3%.
  • Australian dollar spiked lower after Reserve Bank of Australia’s (RBA) quarterly monetary policy statement suggested that, while confident on gross domestic product, unemployment, wage growth likely to languish in months and quarters ahead. RBA also tried to talk down strength of the Aussie, warning it could dampen growth and inflation.
  • Major Australian banks moved lower after one of the largest banks was accused in a money laundering investigation; ASX 200 -0.3%.
  • European stocks slightly higher, but like U.S., insurance stocks under pressure on disappointing earnings. STOXX Europe 600 +0.5%.
  • Mixed messages continue from Bank of England (BOE) officials. Mark Carney suggested possibility of only two interest rate hikes over the next three years, while others indicating a more aggressive path. Given Brexit uncertainty, fact that Carney is in charge, we suspect the bank will err on the side of caution.
  • Commodities – WTI crude oil prices ($48.80/bbl) -0.2%, headed for a weekly loss as crude exports from major producers continued to increase. COMEX gold (-0.4%) to $1269/oz., copper +0.3%.
  • Domestic equities higher in early trading, following jobs report (details below).
  • U.S. employers added 209k jobs in July vs. +183k estimate. Unemployment rate 4.3%, wage growth +2.5% steady year over year (details below).

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Key Insights

  • Alan Greenspan continues to warn of a bond bubble. While global central banks in the developed world have quintupled the size of their balance sheets, we’re not convinced the former Federal Reserve (Fed) Chair is on to something here. All that liquidity must become income before it can translate into inflation, and wage pressures remain elusive in the developed world. It can be argued that former tried and true indicators like the Philips Curve (employment vs. inflation) no longer accurately predict price or wage pressures, given developments in globalization, demographics, technology, and trade.

Macro Notes

  • Job growth tops 200,000 in July. The U.S. economy added 209,000 jobs in July, soundly topping consensus expectations of 180,000 after adding an upwardly revised 231,000 jobs in June. Average hourly earnings accelerated to 0.3% month over month (2.5% year over year) from 0.2% in June, in line with expectations, while the unemployment rate ticked down to 4.3% despite more job seekers coming into the market. Growth in manufacturing jobs was noteworthy, with 16,000 jobs added in July. Overall, this was a strong report with average monthly job growth in 2017 now largely in line with the pace set in 2016.
  • The German economy continues to expand. Factory orders were up 1%, better than the 0.5% expected, with particular strength in metals and electronics. Construction PMI was 55.8 and has been above the 50 mark that denotes expansion since January 2015. The German market, and most European indexes, were up marginally overnight. The euro is slightly weaker this morning, but still near a two and a half year high.

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