What I’m Watching This Week – 22 August 2016

The Markets (as of market close August 19, 2016)

By the close of last Monday, the Dow, S&P 500, and Nasdaq each had reached record highs for the second time in the past week, only to retreat by Tuesday’s close. The dollar lost value against the euro, yen, and pound on the heels of a Federal Open Market Committee member’s suggestion that the Committee may increase the inflation target rate from its current 2.0%. If that is true, it may hint at the Committee’s reservations about the short-range outlook for the economy.

By midweek, the price of crude oil jumped a couple of dollars–but not enough to quell the slide of equities–as investors seemed to exercise caution while waiting for the minutes from the July FOMC meeting. Stocks rallied on Thursday as oil prices continued to climb. However, by the close of the market for the week, light trading saw the indexes listed here slip slightly, possibly over concerns that the Federal Reserve may raise rates before the end of the year.

The price of crude oil (WTI) closed at $48.57 a barrel last week, up from $44.69 per barrel the previous week. The price of gold (COMEX) climbed a bit, closing at $1,345.80 by late Friday afternoon, up from the prior week’s price of $1,341.70. The national average retail regular gasoline price decreased for the ninth week in a row to $2.149 per gallon on August 15, $0.001 under the prior week’s price and $0.567 below a year ago.

Market/Index 2015 Close Prior Week As of 8/19 Weekly Change YTD Change
DJIA 17425.03 18576.47 18552.57 -0.13% 6.47%
Nasdaq 5007.41 5232.89 5238.38 0.10% 4.61%
S&P 500 2043.94 2184.05 2183.87 -0.01% 6.85%
Russell 2000 1135.89 1229.82 1236.77 0.57% 8.88%
Global Dow 2336.45 2445.34 2455.47 0.41% 5.09%
Fed. Funds target rate 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.51% 1.58% 7 bps -68 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

  • There’s a divergence of opinion among FOMC members as to the state of the economy and whether interest rates should be raised, according to the minutes from the July meeting. Generally, members agreed to continue to leave their options open pending additional economic information, particularly regarding jobs and inflation. The cost of borrowing can have a significant impact on the economy, affecting businesses and consumers. The Fed does not meet again until the end of September. From its last meeting in July, economic indicators have been mixed, so it’s anyone’s guess what course of action, if any, the Committee will adopt following its next meeting.
  • Lately, inflationary pressures have been modest at best. Following mundane retail sales and producer price reports, last week’s Consumer Price Index was unchanged in July after rising each of the previous 4 months. Over the last 12 months, the CPI rose 0.8%. Energy prices dropped 1.6% from June after advancing each of the prior 4 months. The index for all items less food and energy increased a scant 0.1%–the smallest increase since March 2016.
  • The Housing Market Index rose 2 points to 60 in August compared to July. An index reading over 50 indicates optimism over pessimism. Home builders are more confident about present sales and future sales in the single-family home market, but are concerned about a lack of traffic, particularly among first-time home buyers.
  • New residential construction was not as robust in July as in prior months. According to the latest report from the Census Bureau, building permits and privately-owned housing completions were down in July from June, 0.1% and 8.3%, respectively. Housing starts, on the other hand, were up 2.1%. This report may be an outlier and data can be volatile, but the current information points to builders’ lack of confidence in the market for new home sales.
  • The manufacturing sector may be showing signs of strengthening. According to the Federal Reserve’s latest report, industrial production rose 0.7% in July after moving up 0.4% in June. The advance in July was the largest for the index since November 2014. Manufacturing output increased 0.5% in July for its largest gain since July 2015. Capacity utilization for the industrial sector, a measure of how much factory capacity is in use, increased 0.5 percentage point in July to 75.9%, a rate that is 4.1 percentage points below its long-run (1972-2015) average.
  • In the week ended August 13, the advance figure for seasonally adjusted initial unemployment insurance claims was 262,000, a decrease of 4,000 from the prior week’s unrevised level. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended August 6 was 2,175,000, an increase of 15,000 from the previous week’s revised level.

Eye on the Week Ahead

The latest reports on new and existing home sales are available next week. The second quarter GDP estimate comes out at the end of next week. It is not expected to change much from the July estimate, which showed a quarter-to-quarter change of only 1.2%.