Market Update: Monday, August 28, 2017

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Last Week’s Market Activity

  • Stocks rose slightly Friday. S&P 500 Index +0.2% in quiet session with no market-moving information out of Jackson Hole central banker meetings.
  • Telecommunications, energy, and industrials outperformed; technology and healthcare fell.
  • Treasuries mostly stronger, some curve flattening weighed on the dollar (-0.6%). 10-year yield -0.02% at 2.17%.
  • WTI Crude oil +0.9% as Hurricane Harvey made landfall. COMEX gold +0.5% on Friday.
  • For the week: S&P 500 up 0.7% for the week, breaking two-week losing streak amid renewed tax reform optimism. Bond proxies led, REITs, telecommunications outperformed. Treasury yields inched lower, gold +0.4%, oil -1.6%.

Overnight & This Morning

  • S&P 500 slightly higher as market participants focus on rescue efforts, potential economic implications from the devastating Houston storm.
  • Gasoline futures up ~3% following 7% spike overnight after roughly 15% of domestic refinery capacity taken offline. Resulting inventory overhang weighing on oil prices, which are down ~1% near $47.40/bbl.
  • European markets lower, STOXX 600 -0.2%, led lower by Germany (DAX -0.6%). U.K. markets closed, though Brexit talks start up again today.
  • Asian markets mostly higher, led by Shanghai Composite +0.9% on well-received bank earnings; Hang Seng +0.1%, Sensex +0.5%, Nikkei flat.
  • Treasuries, U.S. dollar both little changed. 10-year yield at 2.17%.
  • Today’s economic calendar includes international trade, wholesale inventories.

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Key Insights

  • The St. Louis Federal Reserves’s (Fed) Jackson Hole Symposium held no surprises; neither Fed Chair Janet Yellen nor European Central Bank (ECB) President Mario Draghi directly addressed monetary policy. One can interpret their comments as support for the status quo, and in a way, a victory lap for current policies. Fed Chair Yellen’s comments about financial stability could have been interpreted as dovish, but they were also a clear defense of post-crisis regulatory policy. Yellen said reforms since the crisis have boosted the resilience of the system, and she downplayed concerns about the effects of regulation on bank lending and liquidity. ECB President Draghi delivered nothing new in terms of policy expectations, but did say that substantial accommodation is still warranted given still low inflation, which can also be interpreted as a dovish lean. Most of his speech was a defense of international trade and a warning against the increasing rise of protectionism. He did not mention the strength of the euro, which was discussed at the last ECB meeting. His failure to do so resulted in the euro rallying late in the day to levels not seen since the beginning of 2015.
  • The long-term impact, if any, on the energy markets from Hurricane Harvey will not be known until there is some damage assessment to energy infrastructure after the storm has passed. Early indications suggest that refining has been impacted more heavily than production. As a result, we have seen prices for refined products (gasoline, diesel, and petrochemicals) rise, though they are still at low levels compared to recent history; while oil prices themselves have fallen. When refineries close, this reduces demand for crude oil and contributes to what is already an oversupplied crude oil market, pushing down prices. Until we get more clarity on the damage, it looks like the gap between oil and gasoline prices will widen.

Macro Notes

  • Companies remained generally upbeat during second quarter earnings season, based on our measure of corporate sentiment, the Corporate Beige Book Barometer. As discussed in our latest Weekly Market Commentary, due out later today, we saw solid improvement in the ratio of strong and positive words relative to weak and negative words. We believe the positive tone from corporate management teams supports a positive outlook for further solid earnings gains in the quarters ahead.
  • Low odds of a recession starting soon. This week in our Weekly Economic Commentary we take a look at the odds of a recession starting soon. Given some of the largest equity drops take place during recessions, we think it is important to know the current state of the economy. Fortunately, we see a very small chance of a recession starting within the next year. From the Conference Board’s Leading Economic Index up nicely over the past year, to a lack of overspending, overleveraging, or overborrowing; the economy looks strong still.
  • Checking in on emerging markets. It has been a great year for emerging markets (EM), as the MSCI Emerging Markets Index is up more than 25%, more than double the 10% gain for the S&P 500. The big question is whether this strong performance can continue. Several data points, which we discuss in our latest blog post, suggest it could.
  • The week ahead. The U.S. Institute for Supply Management (ISM) manufacturing survey and August payroll employment data, due out on Friday, September 1, headline the economic calendar for this week (August 27-September 1). Other U.S. data include revised second quarter gross domestic product (GDP), July personal income and spending, and consumer confidence. Overseas data due out this week include Eurozone money supply, Consumer Price Index (CPI), and unemployment; purchasing managers’ surveys for China and Japan; and GDP for France, Italy, Canada, South Korea, Brazil, and India.

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Click Here for our detailed Weekly Economic Calendar

Monday

Tuesday

  • Consumer Confidence (Aug)
  • France: GDP (Q2)
  • Japan: Retail Sales (Jul)

Wednesday

Thursday

  • Personal Income and Spending (Jul)
  • Chicago Area PMI (Aug)
  • Pending Home Sales (Jul)
  • France: CPI (Aug)
  • Eurozone: Unemployment Rate (Jul)
  • Eurozone: CPI (Aug)
  • Canada: GDP (Jun)
  • South Korea: GDP (Q2)
  • India: GDP (Q2)
  • Japan: Housing Starts (Jul)
  • Japan: Nikkei Japan Mfg. PMI (Aug)
  • China: Caixin China Mfg. PMI (Aug)

Friday

  • Change in Nonfarm, Private & Mfg. Payrolls (Aug)
  • Unemployment Rate (Aug)
  • Average Hourly Earnings (Aug)
  • Average Weekly Hours (Aug)
  • Labor Force Participation & Underemployment Rates (Aug)
  • ISM Mfg. PMI (Aug)
  • Italy: GDP (Q2)
  • Eurozone: Markit Mfg. PMI (Aug)
  • Australia: RBA Commodity Index (Aug)
  • Brazil: GDP (Q2)
  • Japan: Vehicle Sales (Aug)

 

Past performance is no guarantee of future results.

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

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