NCM Market Review: August 2017
The Markets
Equity markets finished the month of August in positive territory despite an upsurge of political risk led by mounting U.S.-North Korea tensions, terrorist attacks in Spain, the events in Charlottesville and one of the most destructive hurricanes ever to hit North America. Markets were initially rattled by each of these events as volatility, measured by the CBOE Volatility Index (VIX), reached a nine month high of 17.30 (mid-month) pushing some markets into negative territory. However, the VIX Index finished the month unchanged as strong macroeconomic data and stronger-than-expected growth in many regions around the world, pushed equity prices higher.
In the U.S., the S&P 500 ended the month up 0.3% as data continues to demonstrate solid growth. Second quarter GDP growth was revised up to 3.0%, while unemployment fell to 4.3%. Retail sales increased 4.2%, year over year, and the consumer sentiment index jumped to 97.6, returning to the peak it reached in January. Inflation (as measured by the CPI Index) disappointed, coming in below consensus at 1.7%, reducing the likelihood that the Fed will increase rates again in December.
In Europe, economic momentum improved, as the euro area posted second quarter GDP growth of 2.2%, its highest reading since 2011. The purchasing managers index (PMI) remained strong, posting a reading of 55.8 and consumer confidence increased to close to a 10-year high. The optimism of continued growth was reflected in the Euro as it reached 1.20 vs. the dollar.
Emerging Market Equities (helped by a falling dollar and positive GDP data out of China) outperformed developed markets as the MSCI Emerging Markets Index finished the month up 2.2%. Manufacturing PMI remained above 51, signaling continued expansion.
Looking Ahead
It remains too early to fully understand the impact, both socially and economically, of hurricane Harvey. Houston represents approximately 3% of U.S. GDP, so it is in the country’s best interest to get the city back up and running. The costs are expected to far exceed that of hurricane Katrina and hurricane Sandy combined. The sheer magnitude of the dollars needed will likely increase political discord, calling into question any tax reform, which could weigh on stocks. The Federal Open Market Committee meets mid-month. While a rate hike is not expected during this meeting, much attention will be paid to how the Fed discusses the slowing inflation picture.
Monthly Economic News
Employment: The second half of the year began with a strong showing in the employment sector. In July, job growth expanded by 209,000 and the unemployment rate slid 0.1 percentage point to 4.3%, representing about 7.0 million unemployed persons. Employment growth has averaged 184,000 per month thus far this year, in line with the average monthly gain of 187,000 in 2016. Notable employment gains occurred in health care, professional and business services, and food services and drinking places. The labor participation rate was essentially unchanged at 62.9%. The average workweek for all employees was unchanged from June at 34.5 hours. Average hourly earnings rose by $0.09 to $26.36. Over the year, average hourly earnings have risen by $0.65, or 2.5%.
FOMC/interest rates: The Federal Open Market Committee did not meet in August, so the target federal funds rate range remained at 1.00%-1.25%. If upward price inflation continues to stagger, the Committee may be hard-pressed to raise interest rates when it next meets in mid-September.
GDP/budget: The gross domestic product expanded over the second quarter at an annual rate of 3.0%, according to the second estimate from the Bureau of Economic Analysis. The first-quarter GDP grew at an annualized rate of 1.2%. Consumer and government spending and business investment were positives in the report, offset by deceleration in residential investment and net exports. As to the government's budget, the federal deficit for July was $42.9 billion, $47.3 billion lower than the June deficit. Through the first 10 months of the fiscal year, the deficit sits at $566 billion, which is about 10.6% above the deficit over the same period last year.
Inflation/consumer spending: Upward price inflation continues to be weak. Consumer spending, on the other hand, is increasing. The personal consumption expenditures (PCE) price index (a measure of what consumers pay for goods and services) ticked up only 0.1% in July. The core PCE (excluding energy and food) price index also inched ahead 0.1% for the month. Personal (pre-tax) income climbed 0.4% and disposable personal (after-tax) income increased 0.3% from the prior month. With increased income, consumer expenditures rose, climbing 0.3% in July.
The prices companies receive for goods and services fell 0.1% in July from June, according to the Producer Price Index. Year-over-year, producer prices have increased 1.9%. Over 80% of the July decrease in prices is attributable to services, which fell 0.2%. Prices for goods edged down 0.1%. Prices less food, energy, and trade were unchanged in July from the prior month and are up 1.9% over the last 12 months.
Consumer prices rose a scant 0.1% in July, after recording no change in June. For the 12 months ended in July, consumer prices are up 1.7%, a mark that remains below the Fed's 2.0% target for inflation. Core prices, which exclude food and energy, edged up 0.1% in July, the same increase as June, and are up 1.7% year-over-year.
Housing: Scant inventory and rising prices have slowed sales of new and existing homes in July. Total existing-home sales slipped 1.3% for the month and are up only 2.1% from a year ago. The July median price for existing homes was $258,300, which is 2.1% below June's median price of $263,800 but up 6.2% from the price last July. Housing inventory declined 1.0% for the month and is now 9.0% lower than a year ago. The Census Bureau's latest report reveals sales of new single-family homes fell 9.4% in July to an annual rate of 571,000 — down from June's upwardly revised rate of 630,000. The median sales price of new houses sold in July was $313,700 ($310,800 in June). The average sales price was $371,200 ($379,500 in June). The seasonally adjusted estimate of new houses for sale at the end of July was 276,000. This represents a supply of 5.8 months at the current sales rate, which is an increase in inventory from May and June (5.2 months).
Manufacturing: Industrial production expanded by 0.2% in July following an increase of 0.4% in June, according to the Federal Reserve's monthly report on Industrial Production and Capacity Utilization. Manufacturing output edged down 0.1% after increasing 0.2% in June. Contributing to the recession in manufacturing output was a drop in production of motor vehicles and parts, which decreased 3.5%. Mining output was again strong, posting a gain of 0.5% in July after increasing 1.6% in June. The index for utilities rose 1.6% after remaining stagnant in June. Capacity utilization for the industrial sector was unchanged in July to 76.7%, a rate that is 3.2 percentage points below its long-run average. New orders for durable goods fell in July on the heels of a steep drop in aircraft orders. The Census Bureau reports new orders decreased $16.7 billion, or 6.8%, from June, which saw new orders increase 6.4%. However, excluding the transportation segment, new durable goods orders increased 0.5%. Orders for core capital goods (excluding defense and transportation) jumped 0.4% in July. Over the 12 months ended in July, core capital goods orders are up 3.5%.
Imports and exports: The advance report on international trade in goods revealed that the trade gap widened 1.7% in July over June. The overall trade deficit was $65.1, up $1.1 billion from the prior month. The total volume of exports of goods decreased $1.6 billion to $127.1 billion. Imports of goods fell $0.5 billion to $192.2 billion. Prices for U.S. imports edged up 0.1% in July, led by higher fuel prices, which more than offset lower prices for nonfuel imports. The July increase in import prices followed declines in each of the two previous months. U.S. export prices advanced 0.4% in July, after decreasing 0.2% in June.
International markets: In anticipation of its departure from the European Union, the United Kingdom's Department for Business, Energy and Industrial Strategy published a set of reforms aimed at strengthening the country's image as a leader in corporate governance. Negotiations between the UK and the EU continued with nothing of substance resolved to date. China's stocks surged on strong corporate earnings reports. Otherwise, world markets were mixed, particularly at the end of August as investors wait for the economic impact of Hurricane Harvey.
Consumer Sentiment: The Conference Board Consumer Confidence Index® for August rose to 122.9, up from July's revised 120.0. Consumers expressed growing confidence in current economic conditions, but were reticent about future economic prospects.