What I’m Watching This Week – 2 November 2015

The Markets (as of market close October 30, 2015)

News that the Fed would not be raising interest rates at least until December had little impact on the markets in general, as equities closed last week without much movement from the prior week. The Dow and S&P 500 finished last week up 0.1% and 0.2%, respectively. Of the indexes listed here, last week’s biggest gainer was the Nasdaq, up 0.44% to 5053.75, while the Russell 2000 and the Global Dow both finished the week losing value.

The price of gold (COMEX) decreased, selling at $1,141.70 by late Friday afternoon compared to $1,164.00 a week earlier. Crude oil (WTI) prices gained a bit, selling at $46.39 per barrel by week’s end. The national average retail regular gasoline price decreased to $2.228 per gallon on October 26, 2015, $0.049 under the previous week’s price of $2.277 per gallon, and $0.828 below a year ago.

Market/Index 2014 Close Prior Week As of 10/30 Weekly Change YTD Change
DJIA 17823.07 17646.70 17663.54 0.10% -0.90%
Nasdaq 4736.05 5031.86 5053.75 0.44% 6.71%
S&P 500 2058.90 2075.15 2079.36 0.20% 0.99%
Russell 2000 1204.70 1166.06 1161.86 -0.36% -3.56%
Global Dow 2501.66 2458.13 2436.23 -0.89% -2.62%
Fed. Funds 0.25% 0.25% 0.25% 0% 0%
10-year Treasuries 2.17% 2.04% 2.14% 10 bps -3 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The Federal Open Market Committee (FOMC) again voted to maintain its current interest rate policy through November. While noting that economic activity has been expanding at a moderate pace, with household spending and business fixed investment increasing in recent months, the FOMC also noted that net exports are soft, the pace of job gains has slowed, and inflation continues to run below the FOMC’s target rate of 2.0%. The FOMC does not meet again until December, at which time it will assess progress towards its objectives of maximum employment and 2.0% inflation. While a rate increase is still in play for December, the FOMC cautioned that, “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the [c]ommittee views as normal in the longer run.”
  • As predicted by the FOMC, last Thursday’s first report on the third-quarter GDP showed a slowdown in the economy’s growth. Real gross domestic product–the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production–increased at an annual rate of 1.5% in the third quarter of 2015, according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.9%. The deceleration in the growth of the GDP is attributable, in part, to a decrease in private inventory investment and in exports.
  • While consumers spent a little more in September, it wasn’t much of an increase, according to the latest figures on personal income and outlays from the Bureau of Economic Analysis. Personal spending by consumers for durable goods, nondurable goods, and services increased by a scant 0.1% in September compared to August. Personal pretax income also rose only 0.1% for the month–the smallest increase since this past March. Most importantly from the perspective of the FOMC, inflation, as measured by the personal consumption expenditures index, increased only 1.3% (excluding food and energy) from last September–well below the FOMC’s target rate of 2.0%.
  • The housing market, which has been a consistently favorable performer this year, received a bit of a jolt with the latest U.S. Census Bureau report revealing that sales of new single-family houses in September were at a seasonally adjusted annual rate of 468,000–11.5% below the revised August rate of 529,000. The median sales price of new houses sold in September was $296,900, while the average sales price was $364,100. The seasonally adjusted estimate of new houses for sale at the end of September was 225,000. This represents a supply of 5.8 months at the current sales rate. Despite the drop in new home sales in September, sales of newly constructed homes is still 2% above the September 2014 estimate of 459,000. The slowdown in new home sales could be attributed to a rise in asking price, which, at $296,900, is 13.5% higher than a year ago.
  • The National Association of Realtors Pending Home Sales Index® declined 2.3% to 106.8 in September from August’s revised 109.3. This is the second-lowest level of the year (January was 103.7), and is likely due to the lack of available inventory, especially in the lower end of the market, coupled with a possible hesitancy from consumers who may fear a continued economic slowdown.
  • The S&P/Case-Shiller home price index showed a 4.7% annual increase in August 2015 versus a 4.6% increase in July 2015. “Home prices continue to climb at a 4% to 5% annual rate across the country,” according to David M. Blitzer, Managing Director and Chairman of the Index Committee.
  • The U.S. Census Bureau publishes an advance report on the trade gap in goods (not services) about a week before more detailed information is released by the U.S. Bureau of Economic Analysis. The advanced report revealed that the trade gap is expected to narrow–closing at $58.6 billion in September compared to $67.2 billion in August.
  • An early estimate of new orders for durable goods (manufactured items expected to last at least three years) placed with domestic manufacturers for immediate and future delivery predicts a decrease of $2.9 billion, or 1.2%, in September, according to the U.S. Census Bureau. This decrease, down two consecutive months, followed a 3% August decrease. Excluding transportation, new orders decreased 0.4%. Excluding defense, new orders decreased 2%. The dip in durable goods orders may be attributable to low oil prices and weak exports resulting from a strong U.S. dollar.
  • For the third quarter, compensation costs for civilian workers increased 0.6%, the U.S. Bureau of Labor Statistics reported last week. Wages and salaries (which make up about 70% of compensation costs) increased 0.6%, and benefits (which make up the remaining 30% of compensation) increased 0.5%. As the number of available jobs contracts, wages may be showing some upward movement based on these latest figures.
  • According to The Conference Board Consumer Confidence Index®, consumer confidence declined in October. The index dropped from 102.6 in September to 97.6 in October. Lynn Franco, Director of Economic Indicators at The Conference Board said, “Consumers were less positive in their assessment of present-day conditions, in particular the job market, and were moderately less optimistic about the short-term outlook.” Conversely, the University of Michigan’s Index of Consumer Sentiment for October rose to 90.0 from 87.2 in September due to gains in confidence among lower income households. However, confidence among households with incomes in the top third retreated a bit.
  • Initial claims for unemployment insurance increased by 1,000 for the week ended October 24, to close at 260,000, up from the previous week’s unrevised level of 259,000. The advance seasonally adjusted insured unemployment rate was unchanged at 1.6% for the week ended October 17, while the advance number for continuing unemployment insurance claims decreased 37,000 to 2,144,000–the lowest level since November 4, 2000.

Eye on the Week Ahead

With news that the Fed will not be raising interest rates in the near term, focus for the coming week will center on manufacturing, the trade deficit, and the employment situation–areas of particular interest to the FOMC.