What I’m Watching This Week – 17 October 2016

The Markets (as of market close October 14, 2016)

Oil prices reached a one-year high early last week, as Russia expressed its support of OPEC in its efforts to limit production, prompting stocks to post early week gains. With corporate earnings season upon us, early reports from some major companies were not encouraging. Globally, China’s 10% year-over-year drop in exports once again raised concerns about the weakening of the world’s second-largest economy. Major market indexes trended down midweek, while long-term bond yields expanded and the price of crude oil remained just above $50 per barrel. Favorable earnings reports from some of the world’s largest banks at the end of last week helped boost stocks, but not enough to prevent each of the indexes listed here from closing the week in the red.

The price of crude oil (WTI) closed at $50.32 per barrel last week, up from $49.55 per barrel the previous week. The price of gold (COMEX) continued to fall, closing at $1,252.90 by late Friday afternoon, down from the prior week’s price of $1,258.60. The national average retail regular gasoline price increased to $2.272 per gallon on October 10, 2016, $0.027 more than last week’s price but $0.065 less than a year ago.

Market/Index 2015 Close Prior Week As of 10/14 Weekly Change YTD Change
DJIA 17425.03 18240.49 18138.38 -0.56% 4.09%
Nasdaq 5007.41 5292.40 5214.16 -1.48% 4.13%
S&P 500 2043.94 2153.74 2132.98 -0.96% 4.36%
Russell 2000 1135.89 1236.56 1212.41 -1.95% 6.74%
Global Dow 2336.45 2464.52 2426.05 -1.56% 3.83%
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% 1.72% 1.80% 8 bps -46 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 prices producers received for goods and services increased by 0.3% in September. The Producer Price Index increased 0.7% for the 12 months ended in September, the largest 12-month rise since December 2014. The price index less foods, energy, and trade services moved up 0.3% in September, the same as in August. For the 12 months ended in September, prices less foods, energy, and trade services rose 1.5%, the largest increase since climbing 1.5% for the 12 months ended November 2014.
  • Retail sales at stores, online retailers, and restaurants increased 0.6% in September, following a 0.2% decline the prior month. Excluding automotive and gasoline, retail sales were up 0.3% for September. Compared to September 2015, retail sales are up 2.7%. Increased household spending, reflective of a healthy labor market, should give a boost to the GDP. Inflation may be starting to firm up based on the latest reports on producer prices and retail sales.
  • The Labor Department’s Job Openings and Labor Turnover Summary for August revealed that the number of job openings decreased by 388,000 (7.3%) from July. The number of new hires fell from 5.258 million in July to 5.210 million in August. The number of job separations also dropped from 4.991 million in July to 4.954 million in August. Roughly 3.0 million workers quit their jobs in August, while 1.6 million were laid off or otherwise dismissed — rates that were essentially unchanged from the prior month. Over the 12 months ended in August, hires totaled 62.7 million and separations totaled 60.1 million, yielding a net employment gain of 2.6 million. Nevertheless, the fall in job openings coupled with the decrease in new hires seems to indicate a slowing in job growth.
  • Not unexpectedly, the Fed was split as to whether to increase interest rates at its September meeting, according to the minutes released last week. In a 7-3 vote, the FOMC decided to keep rates at their current level “for the time being” with the expectation that rates would be raised, “relatively soon.” With the U.S. presidential election taking place in November, it isn’t likely that rates will be altered when the Committee meets next month. However, there is a growing expectation that rates will be increased when the Committee meets in December.
  • The federal government’s fiscal year ended in September with a total deficit of $587.4 billion — roughly $148 billion over the 2015 fiscal year deficit. September saw a $33.4 billion surplus for the month. For the 2016 fiscal year, total receipts increased less than 1.0%, while expenses rose 4.5%, led by an 8.8% increase in Medicare spending.
  • According to the latest information from the Bureau of Labor Statistics, both import and export prices increased in September. Prices for U.S. imports increased 0.1% in September, following a 0.2% decline the previous month. The increase is largely due to an increase in fuel prices. Export prices rose 0.3% in September, after decreasing 0.8% in August. Rising import and export prices, albeit marginal, could be a sign of strengthening inflationary trends.
  • The preliminary results for October show consumers’ confidence in the economy is waning, particularly in households with incomes below $75,000. According to the Surveys of Consumers, the Index of Consumer Sentiment fell from 91.2 in September to 87.9 for October. The drop is likely driven by a fall in consumer expectations, as that index moved from 82.7 in September to 76.6 in October.
  • In the week ended October 8, the advance figure for seasonally adjusted initial unemployment insurance claims was 246,000, unchanged from the prior week’s revised level, which had been revised down by 3,000. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended October 1 was 2,046,000, a decrease of 16,000 from the previous week’s revised level.

Eye on the Week Ahead

Several major corporations will be reporting their earnings, which have historically impacted the market — at least over the short term. Consumer spending, inflation, and housing are on tap this week. Through August, the Consumer Price Index for consumer goods and services is about 1.1% ahead of last year, and is expected to maintain that pace through September. As an indicator of inflationary trends, the CPI is still running short of the 2.0% target set by the Fed. The housing sector slowed a bit in August, but is expected to pick up the pace in September as this week’s reports on both housing starts and existing home sales should show improvement.