Author: dredheadz

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.

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%.

The Markets (as of market close August 12, 2016)

Talk of a possible cut in oil production following news of an informal meeting of OPEC next month sent energy stocks higher at the beginning of last week. The spike in both energy stocks and market indexes didn’t last long, however, as oil prices slumped by midweek, taking equities with them. Nevertheless, by last week’s end, stocks rallied to close at just about where they started. In fact, by last Thursday, the Dow, S&P 500, and Nasdaq had surged to all-time highs–the first time all three major indexes had done that on the same day since 1999.

The price of crude oil (WTI) closed at $44.69 a barrel last week, up from $41.98 per barrel the previous week. The price of gold (COMEX) remained at about the same price, closing at $1,341.70 by late Friday afternoon, $0.30 ahead of the prior week’s price of $1,341.40. The national average retail regular gasoline price decreased for the eighth week in a row to $2.150 per gallon on August 8, $0.009 under the prior week’s price and $0.479 below a year ago.

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

• Some economic indicators in June showed inflationary trends moving upward, but that appears to have been a brief burst as producer prices fell 0.4% in July and retail sales remained unchanged from a month earlier. With July’s decrease in prices, the Producer Price Index moved down 0.2% for the prior 12 months. For the month, prices for services fell 0.3% and goods prices decreased 0.4%. The drop in the prices businesses pay for goods and services is the largest one-month decline since September 2015.
• According to the latest estimate from the Census Bureau, retail sales were essentially unchanged in July from June, where sales climbed 0.8%. Compared to July 2015, retail sales for goods and food services are up 2.3%. Excluding motor vehicles, retail sales actually fell 0.3%. Also in July, department store sales fell 0.5%, while online retail sales saw a 1.3% increase over the prior month. Gas prices dropped 2.7%, which could encourage consumers to increase spending on other goods and services in future months if gas prices remain subdued.
• Business productivity and efficiency dropped off in the second quarter, continuing the longest stretch of declines since 1979. Output increased 1.2% while hours worked jumped 1.8%, resulting in productivity decreasing 0.5%. From the second quarter of 2015 to the second quarter of 2016, productivity decreased 0.4%. Labor costs increased 2.0% in the second quarter of 2016, reflecting a 1.5% increase in hourly compensation and a 0.5% decline in productivity. This report reveals an unfavorable trend–Americans are working more hours but production is generally lagging, which might curb future wage and economic growth.
• There were 5.6 million job openings on the last day of June, according to the Job Openings and Labor Turnover report from the Bureau of Labor Statistics. Hires and separations were little changed in June from May at 5.1 million and 4.9 million, respectively. Within separations, the quits rate was 2.0% (2.9 million) and the layoffs and discharges rate was 1.1% (1.6 million). This report reflects continuing strength in the employment sector, with increasing hirings and enough worker confidence in the labor market to quit one job for another.
• The budget deficit for July was $112.8 billion, less than the July 2015 deficit of $149 billion. Through the first 10 months of the fiscal year, the deficit is $513.7 billion–about 10% higher than the deficit over the same period last year ($465.5 billion).
• The prices of imported goods continued to rise in July, moving up 0.1% following a 0.6% increase in June. Prior to July, import price increases were driven by rising fuel prices. In contrast, in July, nonfuel prices led the advance while fuel prices recorded a decrease. Nevertheless, import prices have fallen 3.7% over the last 12 months. Prices for exports rose 0.2% after increasing 2.4% over the 3 previous months. However, for the last 12 months, export prices have declined 3.0%.
• Consumer confidence inched upward in early August as the Index of Consumer Sentiment rose from 90.0 to 90.4. While consumers were still skeptical about current economic conditions, they were generally upbeat about future economic growth.
• In the week ended August 6, the advance figure for seasonally adjusted initial unemployment insurance claims was 266,000, a decrease of 1,000 from the prior week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended July 30 was 2,155,000, an increase of 14,000 from the previous week’s revised level.

Eye on the Week Ahead

Next week’s reports include one of the most widely followed indicators of inflationary trends, the Consumer Price Index, which has not shown significant price increases in the past several months, remaining below the Fed’s target inflation rate of 2.0%. Another report, the Treasury’s Industrial Production Index, not only shows how much factories are producing, but it also measures how much factory capacity is in use. If factory utilization reaches full capacity, production may slow to where it can’t keep up with the demand for goods, which can lead to price increases and rising inflation.

The Markets (as of market close August 5, 2016)

Oil prices continued to fall early last week, sending large-cap indexes lower. As the week progressed, oil prices gained some momentum, as did U.S. stock indexes. On the heels of a favorable jobs report, stocks rebounded by the end of last week to post gains in each of the indexes listed here. Both the S&P 500 and Nasdaq reached record highs. The Dow gained more than 111 points over the prior week’s closing value. Bond prices fell due to lower demand, sending the yield on 10-year Treasuries up 15 basis points.

The Bank of England cut interest rates for the first time since 2009 to 0.25%

Abroad, Japan approved a $274 billion stimulus package in an attempt to spark it’s languid economy. Part of the package includes payment of about $147 to each of the approximately 22 million low-income Japanese. The immediate response from Japanese investors was underwhelming, as the Nikkei Stock Average dropped. The Bank of England cut interest rates for the first time since 2009 to 0.25% and adopted additional stimulus measures in an attempt to support the British economy during the period of adjustment following the vote to leave the EU.

The national average retail regular gasoline price decreased for the seventh week in a row

Crude oil (WTI) prices continue to be volatile, falling below $40 during last week, until a moderate rally had the price close at $41.98 a barrel last week, up slightly from $41.38 per barrel the previous week. The price of gold (COMEX) dropped to $1,341.40 by late Friday afternoon, down from the prior week’s price of $1,357.90. The national average retail regular gasoline price decreased for the seventh week in a row to $2.159 per gallon on August 1, $0.023 under the prior week’s price and $0.530 below a year ago.

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

• In another clear sign of a strengthening economy, the jobs report showed 255,000 new jobs were added in July, while the unemployment rate remained at a relatively low 4.9% (7.8 million unemployed). For the month, job gains occurred in professional and business services, health care, and financial activities. The average workweek for all employees on private nonfarm payrolls increased by 0.1 hour to 34.5 hours in July. In July, average hourly earnings for all employees on private nonfarm payrolls increased by $0.08 to $25.69. Over the year, average hourly earnings have risen by 2.6%. This report should be a boost to the stock market, which has been reacting to volatile oil prices and tepid earnings reports.
• For the third consecutive month, consumers had more to spend in June and they spent it, according to the Bureau of Economic Analysis. Compared to a month earlier, consumers’ income increased by 0.2%, disposable personal income (after taxes) also increased by 0.2%, while personal consumption expenditures (purchases of consumer goods and services) jumped 0.4%. As was the case in April and May, consumer spending outpaced income growth. Since consumers are spending more than they’re making, it stands to reason that they’re saving a little less given that the personal savings rate dipped from 5.5% in May to 5.3% in June. Inflationary pressures remain soft, as the personal consumption expenditures price index–a preferred inflationary measure of the Fed–increased only 0.1% in June from the prior month.
• According to the latest information from the Census Bureau, the goods and services trade deficit reached $44.5 billion in June–up $3.6 billion from May’s revised figures–due to a surge in consumer purchases of foreign goods. June exports were $183.2 billion, $0.6 billion more than May exports. June imports were $227.7 billion, $4.2 billion more than May imports. Year-to-date, the goods and services deficit decreased $5.8 billion, or 2.3%, from the same period in 2015. Exports decreased $54.2 billion, or 4.7%. Imports decreased $60.0 billion, or 4.3%.
• The seasonally adjusted Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 52.9 in July, up from 51.3 in the previous month. During the latest survey period, respondents noted improving business conditions evidenced by stronger rates of output and growth in new orders and employment.
• The July PMI® from the Institute for Supply Management also reported growth, but at a slower rate compared to the prior month. The PMI® registered 52.6%, a decrease of 0.6 percentage point from the June reading of 53.2%. An index reading over 50.0% indicates growth. According to the report, 12 of the 18 industries included in the survey reported an increase in new orders in July (same as in June), but only half of the 18 industries reported an increase in production in July (down from 12 in June).
• From the non-manufacturing sector (services, construction, mining, agriculture, forestry, and fishing and hunting) economic activity grew, but at a slower pace in July compared to June. The Non-Manufacturing Index was at 55.5%, down from June’s reading of 56.5%. Each of the index sub-components–non-manufacturing business activity, employment, and price–decreased with only new orders gaining in July over June, a sign that business activity may be picking up in the third quarter.
• In the week ended July 30, the advance figure for seasonally adjusted initial unemployment insurance claims was 269,000, an increase of 3,000 from the prior week’s level. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended July 23 was 2,138,000, a decrease of 6,000 from the previous week’s revised level.

Eye on the Week Ahead

Trading is expected to be light next week, as it has been for much of the summer. Two reports for July that are indicative of inflationary trends–retail sales and the Producer Price Index–come out at the end of next week.

The Markets (as of market close July 29, 2016)

Following an initial downturn largely in response to June’s Brexit vote, equities rebounded during the month of July. The first full week of the month saw each of the indexes listed here improve over the prior week, led by the Nasdaq, which gained almost 2.0%. The Dow recouped just about all of the value lost right after the vote. Long-term bond yields, highlighted by 10-year Treasuries, continued to slide–falling 90 basis points from their year-end value. By the week ended July 15, money flowed from long-term bonds (10-year Treasuries yield increased by 18 basis points) into equities as the Dow posted a 2.0% weekly gain, while the Russell 2000 jumped almost 2.4%. Also helping boost stocks was a much-improved labor report, which saw the addition of almost 290,000 new jobs in June. As the month wore on, light trading slowed the growth of the indexes listed here with the exception of the Nasdaq, which ended the week of the 22nd about 1.5% ahead of its value from the prior week. As the month of July came to a close, each of the indexes listed here posted robust gains, led by the Nasdaq and the Russell 2000, each gaining about 6.0% over their June closing values.

Long-term bond yields fluctuated during the month, ultimately closing at essentially the same yield as June’s closing return. The price of gold (COMEX) increased by month’s end, selling at $1,357.90–about $33 over June’s end-of-month price of $1,324.90.

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.

The Month in Review

• Employment: The labor market picked up the pace in June after a pullback in May, based on the latest information from the Bureau of Labor Statistics. Total nonfarm payroll employment added 287,000 new jobs in June compared to the revised estimate of only 11,000 in May. Job growth occurred in leisure and hospitality, health care and social assistance, and financial activities. The unemployment rate increased by 0.2 percentage point to 4.9% in June, and the number of unemployed persons increased by 347,000 to 7.8 million. The labor force participation rate remained at 62.7%. The average workweek was 34.4 hours for the fifth consecutive month. In June, average hourly earnings for all employees on private nonfarm payrolls edged up $0.02 to $25.61 on the heels of a $0.06 increase in May. Over the year, average hourly earnings have risen by 2.6%.
• FOMC/interest rates:At its meeting at the end of July, the Federal Open Market Committee opted to maintain the target range for the federal funds rate at its current 0.25% to 0.50%. The rate range has not changed since last December. In its statement, the FOMC noted improvement in the employment sector, growth in household spending, and expanding economic activity in general. However, business fixed investment has been soft, while inflation continues to run below the Fed’s long-run objective of 2.0%. The Committee does not meet again until September, when the possibility of a rate hike may be realized.
• Oil: Crude oil prices took a nosedive during July, as prices dropped to under $42 per barrel by the close of the month. This is well below the June closing price of $48.57 per barrel.
• GDP/budget: The most recent estimate for the second-quarter GDP showed only a modest 1.2% annual rate of growth. On the plus side, consumer spending jumped 4.2%. However, businesses apparently aren’t quite as confident in the prospect of economic growth, as the report showed diminishing business investment and inventories–a drag on the GDP, which has not experienced a rate of growth of at least 2.0% in three quarters. The year-to-date federal deficit was $487.0 billion through June, compared to the $316.4 billion deficit over the same period last year–an increase of about 27%. June actually saw a budget surplus for the month of $6.3 billion. For the month, the government took in $329.6 billion in receipts and paid out $323.3 billion in expenditures.
• Inflation: The latest inflation rate for the United States based on the Consumer Price Index is 1.0% through the 12 months ended June 2016, as published by the Bureau of Labor Statistics–still below the Fed’s stated target rate of 2.0%. For June, the Consumer Price Index rose 0.2%–the same increase as May. The index for all items less food and energy (core prices) increased 0.2% in June. Core prices rose 2.3% over the 12 months ended in June–the same increase as for the 12 months ended May. Businesses paid higher prices for goods and services in June as the Producer Price Index rose 0.5% in June from May–the biggest increase in a year. Prices less foods, energy, and trade services rose 0.3% in June after declining 0.1% in May. The index for services advanced 0.4% in June, the third consecutive monthly increase. Prices for goods rose 0.8%. Since businesses generally pass on any price increases they incur to the consumer, rising producer prices may be a precursor to further price increases for consumers, which will likely accelerate inflationary pressure. Not deterred by rising prices, consumers continued to spend, as retail sales for goods and services increased 0.6% for June from the previous month and 2.7% above June 2015. Excluding autos and gasoline, retail sales climbed 0.7%. Nonstore retailer sales (online sellers) were up 14.2% from June 2015, while department store sales fell 3.8% over the same period.
• Housing: Consumers continued to invest in real estate in June on the back of a solid job market and low mortgage rates. In June, new home sales increased 3.5% for single-family homes from the prior month, and a whopping 25.4% ahead of June 2015. Prompted by increasing demand and limited supplies, the median sales price for new homes jumped from $288,800 in May to $306,700 in June, while the average sales price was $358,200. With roughly 244,000 new homes available for sale, the supply is down to 4.9 months compared to 5.1 months in May. Sales of existing homes also increased in June–up 1.1% to an annual rate of 5.57 million compared to 5.51 million in May. Existing home sales are up 3.0% from a year ago. The median existing-home price for all housing types in June was $247,700, up 3.7% from the prior month and 4.8% ahead of June 2015. The 2.12 million existing homes available for sale represents a supply of 4.6 months, a slight decrease from the 4.7-month supply in May. Single-family home starts increased 4.8% in June as did the number of building permits issued, which increased 1.5% for the month.
• Manufacturing: June brought conflicting information on the health of the manufacturing sector. On the one hand, the Federal Reserve reported that industrial production increased 0.6 percentage point in June following a 0.3 percentage point decline in May. Manufacturing output moved up 0.4 percentage point in June, a gain largely due to an increase in motor vehicle assemblies. However, total industrial production for the 12 months ended June 2016 is down 0.7 percentage point. The recent increase in industrial production is reflected in manufacturers’ guarded optimism as both the Markit U.S. Manufacturing Purchasing Managers’ Index™ and the Institute for Supply Management PMI showed improvement in June compared to May. The Markit PMI was 51.3 in June, up from 50.7 for May. The ISM Manufacturing Index for June came in at 53.2, following May’s reading of 51.5. On the other hand, new orders for manufactured goods fell a noticeable 4.0 percentage points in June. Unfilled orders also dropped 0.9 percentage point, meaning manufacturers are meeting demand, which is a good thing, unless new orders continue to slow, which may cause manufacturers to cut back on jobs.
• Imports and exports: Based on the advance report from the Census Bureau, the trade deficit grew about 3.7% to $63.3 billion in June from $61.1 billion in May. June’s exports were $120.2 billion, while imports totaled $183.5 billion. Based on advance figures, the trade in goods deficit for the first four months of 2016 sits at $239.0 billion. Import prices for goods manufactured abroad and purchased here rose 1.8% for the month, and export prices increased 0.9% in June. The goods deficit in June 2016 is essentially the same as the June 2015 deficit ($63.8 billion).
• International markets: Following the UK’s referendum vote in late June to leave the European Union, UK business and consumer confidence about their respective economic prospects has been less than upbeat. UK businesses cut payroll and output in response to the uncertainty created by the Brexit vote, in contrast to the eurozone, where businesses added to their payrolls at a rate not seen in the last five years. The European Central Bank kept its monetary policy intact with the benchmark rate at 0.0%. Equities in the UK have actually experienced a nice recovery from the end of June through July, with the FSTE 100 gaining almost 6.0%. Elsewhere, major stock indexes in Japan and China continue to run below their 2015 year-end closing values.
• Consumer sentiment: The Conference Board Consumer Confidence Index® for June, at 97.3, remained relatively the same as May’s reading of 97.4, as respondents expressed positive sentiments about the employment situation, but were not as confident in the prospects of economic growth in the short term.

Eye on the Month Ahead

The dog days of August will likely keep trading volumes light, which can sometimes heighten volatility. The FOMC does not meet in August so interest rates will remain unchanged for at least another month. Global economies will probably remain relatively quiet through August as well.

The Markets (as of market close July 29, 2016)

The large-cap indexes cooled off a bit last week, particularly influenced by a somewhat disappointing GDP growth rate for the second quarter and lackluster earnings reports from some key companies. On the other hand, the tech-based Nasdaq and the small-cap Russell 2000 each posted weekly gains, with the Nasdaq leading the way among the indexes listed here. Treasury yields fell, with the benchmark 10-year Treasuries dropping 11 basis points by last week’s end, likely influenced by falling oil prices. Abroad, the eurozone seems to be recovering from the initial shock caused by the Brexit vote, as the second-quarter GDP expanded at a modest 1.2% (the same as the U.S. GDP), which is ahead of the first-quarter pace.

Crude oil (WTI) prices continue to fall, closing at $41.38 a barrel last week, down from $44.21 per barrel the previous week. The price of gold (COMEX) jumped to $1,357.90 by late Friday afternoon, up from the prior week’s price of $1,330.30. The national average retail regular gasoline price decreased for the sixth week in a row to $2.182 per gallon on July 25, $0.048 under the prior week’s price and $0.563 below a year ago.

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

• While the latest estimate of the gross domestic product isn’t particularly noteworthy, some of the underlying information bodes well for economic growth. The GDP grew at a 1.2% annualized rate in the second quarter, up slightly from the prior estimate of 1.1%. The annual growth rate for the GDP has been below 2.0% for the last three quarters. The final estimate of the first-quarter GDP showed a 0.8% annual rate of growth. On the plus side, consumer spending expanded at a rate of 4.2%–the highest growth rate since 2014. Spending for goods grew at a 6.8% rate, while spending on services expanded by 3%. The drawback to overall economic growth is on the business side of the GDP, which saw businesses scale back inventories and business investment.
• Following its July meeting, the Federal Open Market Committee noted that, while the labor market has continued to strengthen and economic activity has been expanding at a moderate rate, business fixed investment has been soft and inflation continues to run below the Committee’s 2.0% target rate. Against that backdrop, the Committee decided to maintain the target range for the federal funds rate at 0.25%-0.50%. The Committee does not meet again until mid-September.
• Demand for manufactured durable goods fell for the third consecutive month in June. Following May’s 2.8% decline, new orders for durable goods in June fell another $9.3 billion, or 4.0%–the largest decrease since August 2014. Shipments of durable goods were up 0.4%, unfilled orders fell 0.9%, and inventories decreased 0.2%. This information predates the Brexit vote, which further strengthened the dollar compared to the pound and euro, likely leading to continued weakening of foreign demand for U.S. manufactured goods.
• The housing market continues to expand as new home sales increased by 3.5% in June over the prior month. Compared to last year, the rate of new home sales is 25.4% above the June 2015 estimate. The median sales price of new houses sold in June 2016 was $306,700; the average sales price was $358,200. The seasonally adjusted estimate of new houses for sale at the end of June was 244,000. This represents a supply of 4.9 months at the current sales rate–well below the available supply of 5.5 months in June of 2015.
• Primarily curtailed by affordability and supply constraints, pending home sales based on contract signings remained relatively the same in June compared to the prior month. The Pending Home Sales Index inched up 0.2% for the month to 111.0 (110.8 in May), but is 1.0% higher than June 2015 (109.9).
• The S&P-Case-Shiller U.S. National Home Price NSA Index reported a 5.0% annual gain in May, the same as the prior month. According to the report, home prices continue to increase across the country, while sales of existing homes in May reached the highest monthly level since 2007.
• The United States continues to spend more on imports than it receives for exports as the trade deficit for June grew by $2.2 billion (3.7%) over May. Exports of goods were $120.2 billion, while imports were $183.5 billion, for a net trade deficit of $63.3 billion.
• Labor costs continue to expand as evidenced by the employment cost index, which increased 0.6% for the second quarter. Employee costs grew at the same rate in the first quarter, and are up 2.3% year-on-year. Wages and salaries increased 0.6%, while benefit costs jumped 0.5% for the second quarter (2.5% and 2.0%, respectively, year-on-year).
• Consumers remain slightly more positive about current business and labor market conditions, according to the latest Conference Board Consumer Confidence Index®. The index for July, at 97.3, is essentially the same as the June index of 97.4. However, respondents in the University of Michigan’s Surveys of Consumers were troubled by the Brexit vote, particularly those consumers in the top third in household income. Overall, the Index of Consumer Sentiment dropped a bit from 93.5 in June to 90.0 in July.
• In the week ended July 23, the advance figure for seasonally adjusted initial unemployment insurance claims was 266,000, an increase of 14,000 from the prior week’s level. The advance seasonally adjusted insured unemployment rate rose to 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended July 16 was 2,139,000, an increase of 7,000 from the previous week’s revised level.

Eye on the Week Ahead

So far, the summer has been good for equities markets and most economic indicators. Two important reports are issued next week for the month of June: personal income and outlays and the employment situation. Personal income and outlays, offers information on consumer income, savings, and spending, which can offer a glimpse into the strength of the economy from the consumer’s perspective. June’s jobs report was encouraging following May’s disappointing information. This report often has a direct impact on the U.S. stock markets as Wall Street tends to pay particular attention to several pieces of information from this report, including the unemployment rate, the number of new jobs added, and wage information.

The Markets (as of market close July 22, 2016)

The S&P 500 reached a record high last Friday as each of the indexes listed here posted marginal gains over the prior week. Equities have demonstrated a positive trend over the past several weeks. The Nasdaq eclipsed its previous high only to slip a bit by week’s end. While the indexes continue to forge ahead, overall trading has been light. Across the “pond” the UK’s economy has likely contracted in July, according to IHS Markit’s Purchasing Managers’ Index, which showed businesses responding to the uncertainty of Brexit by cutting output and payrolls.

Crude oil (WTI) closed at $44.21 a barrel last week, down from $46.28 per barrel the previous week. The price of gold (COMEX) fell to $1,330.30 by late Friday afternoon, dropping from the prior week’s price of $1,337.70. The national average retail regular gasoline price decreased for the fifth week in a row to $2.230 per gallon on July 18, $0.023 under the prior week’s price and $0.572 below a year ago.

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

• June was a good month for new home construction as the number of building permits, housing starts, and new home completions each eclipsed their respective May totals. Building permits for housing units and single family homes were up 1.5% and 1.0%, respectively. Housing starts, marked by the beginning of construction, increased by 4.8% for all housing units and 4.4% for single family housing. Housing completions were 12.3% ahead of May (single-family completions gained only 3.7%). Increasing demand and low inventory have promoted home building, which may be a sign of economic growth.
• Sales of existing homes also improved in June, according to the National Association of Realtors®. Closings for existing homes (including single family homes, townhomes, condominiums, and co-ops) climbed 1.1% to an annual rate of 5.57 million from a downwardly revised 5.51 million in May. Over the last 12 months, existing home sales are up 3.0%–the highest level since 2007. According to the NAR, sustained job growth and lower mortgage rates are factors driving home sales. The median existing home price for all housing types in June was $247,700–up 4.8% from last June and 3.7% ahead of May’s median price. Available inventory remains an issue for homebuyers as it dipped 0.9% to 2.12 million, which is 5.8% lower than a year ago.
• Builders remained cautiously optimistic about the newly built, single-family home market in July, according to the latest survey from the National Association of Home Builders. The Housing Market Index, based on respondents’ feedback, fell 1 point to 59 from June’s index of 60. An index reading above 50 indicates generally favorable expectations.
• According to the Markit Flash U.S. Manufacturing PMI™, the Purchasing Managers’ Index™ was 52.9 in July, up from 51.3 in June. This reading signals solid improvement in overall business conditions, with the latest reading the strongest since October 2015. Manufacturing output, new orders, and employment continue to rise.
• In the week ended July 16, the advance figure for seasonally adjusted initial unemployment insurance claims was 253,000, a decrease of 1,000 from the prior week’s level. The advance seasonally adjusted insured unemployment rate dropped to 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended July 9 was 2,128,000, a decrease of 25,000 from the previous week’s revised level.

Eye on the Week Ahead

This week is an important one for economic news. The FOMC meets and may consider raising interest rates based on the surging stock market, slowly advancing inflation, and the rebounding employment situation. Also, the latest figures on the second-quarter gross domestic product are released at the end of the week.

The Markets (as of market close July 15, 2016)

Stocks continued to surge for the third week in a row as each of the indexes listed here posted significant gains by last week’s end. The Dow gained almost 370 points and over 2.0%, and is substantially ahead of its 2015 closing value. The S&P 500 also pushed nearly 6.0% ahead of last year’s closing value. And the Nasdaq, which had yet to reach its year-end value, finally passed that mark after gaining almost 1.5%. Clearly moving past Brexit panic, the Global Dow gained over 3.0% on the week and is 2.5% past its 2015 closing value. As prices dropped, the 10-year Treasury yield rose nearly 20 basis points on the week.

Crude oil (WTI) closed at $46.28 a barrel last week, up from $45.21 per barrel the previous week. The price of gold (COMEX) fell to $1,337.70 by late Friday afternoon, down from the prior week’s price of $1,367.40. The national average retail regular gasoline price decreased for the fourth consecutive week to $2.253 per gallon on July 11, $0.038 under the prior week’s price and $0.581 below a year ago.

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

• Businesses are paying more for goods and services as the Producer Price Index increased 0.5% in June, the largest increase in a year, according to the Labor Department. Higher energy costs pushed the increase. Since businesses usually pass on increases in the cost of goods and services, it’s likely consumer prices will increase as well, driving inflation upward.
• In fact, consumer prices did increase in June–just not at quite the same rate as producer prices. The Consumer Price Index rose 0.2%, following the same increase in May and a 0.4% gain in April. Over the last 12 months, the CPI has increased 1.0%. Excluding the volatile food and energy components, consumer prices still increased 0.2% in June and 2.3% from a year earlier.
• Consumers continue to spend as retail sales increased in June, jumping 0.6% from the previous month and 2.7% ahead of last June. This follows a 0.2% (downwardly revised) increase in May. Excluding autos and gas, household spending climbed 0.7% from May. Output excluding autos remained the same as the prior month. This report, coupled with increases in consumer and producer prices, provides optimism for the economy over the summer months.
• The manufacturing sector experienced a noticeable uptick in June, as industrial production increased 0.6% after falling 0.3% in May. Manufacturing output rose 0.4%, largely due to an increase in motor vehicle assemblies. June’s gain is the largest monthly increase since November 2014.
• The number of job openings decreased by 345,000 to 5.5 million on the last business day of May, according to the Job Openings and Labor Turnover Survey (JOLTS) report from the Bureau of Labor Statistics. April’s rate was 5.8 million. May’s job openings rate is the lowest of the year. The quits rate was unchanged at 2.0% as workers continue to remain at their present jobs. It’s important to remember that June’s employment situation report showed significant improvement on the labor front.
• S. import prices rose 0.2% in June from May, largely due to a spike in petroleum prices. Exports also increased in June, rising 0.8% following increases of 1.2% in May and 0.4% in April. The 2.4% rise in export prices for the second quarter of 2016 was the largest three-month advance in export prices since the index rose 2.7% between February and May 2011.
• The Treasury Department reported a $6.3 billion budgetary surplus in June, following May’s $52.5 billion deficit. However, over the first nine months of the fiscal year, the deficit is up almost 27%, at $400.9 billion, over the same period last year ($316.4 billion).
• Largely influenced by the immediate negative impact of the Brexit vote, the Index of Consumer Sentiment fell from 93.5 in June to 89.5 in July.
• In the week ended July 9, the advance figure for seasonally adjusted initial unemployment insurance claims remained level at 254,000, unchanged from the prior week’s level. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended July 2 was 2,149,000, an increase of 32,000 from the previous week’s revised level.

Eye on the Week Ahead

This week focuses on the housing sector as June’s reports on housing starts and existing homes sales are released. New home building slipped a bit in May, while existing home sales picked up. Overall, the housing market has been fairly strong with prices rising and inventory having a hard time keeping up with demand.

The Markets (as of market close July 8, 2016)

Equities continue to put the upheaval caused by Brexit in the rearview mirror as several of the indexes listed here are above their 2015 closing values. Of those indexes, only the Nasdaq and Global Dow remain below their end-of-year values. The S&P 500 exceeded its record high of 2130.82 during trading last Friday, finally closing at 2129.90. June’s favorable employment report likely helped fuel the end-of-week surge. The 10-year Treasury yield settled at a record low of 1.36%. After a turbulent start to 2016, the stock indexes listed here have gathered momentum heading to the middle of the summer.

Crude oil (WTI) closed at $45.21 a barrel last week, down from $49.28 per barrel the previous week. The price of gold (COMEX) rose to $1,367.40 by late Friday afternoon, up from the prior week’s price of $1,344.90. The national average retail regular gasoline price decreased to $2.291 per gallon on July 4, $0.038 under the prior week’s price and $0.502 below a year ago.

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

• Better news from the employment sector in June as the Bureau of Labor Statistics reported that 287,000 new jobs were added, compared to only 49,000 (revised) in May. Job growth occurred in leisure and hospitality, health care and social assistance, and financial activities. Unemployment increased by 0.2 percentage point to 4.9%, and the number of unemployed persons increased by 347,000 to 7.8 million. These increases largely offset declines in May and brought both measures back in line with levels that had prevailed from August 2015 to April. The employment participation rate increased slightly from 62.7 in May to 63.1 in June. In June, the average workweek for all employees on private nonfarm payrolls was 34.4 hours for the fifth consecutive month, and the average hourly earnings for all employees on private nonfarm payrolls edged up $0.02 to $25.61. Over the year, average hourly earnings have risen by 2.6%.
• Factory orders fell $4.6 billion, or 1.0%, in May to $455.4 billion. This follows a 1.8% increase in April. Durable goods orders dropped $5.4 billion, or 2.3%, to $230.4 billion. A telling aspect of this report is the overall weakness in business investment, reflective of a lack of expectations for growth in manufacturing and consumer sales.
• Imports once again outpaced exports in May, as the trade gap rose 10.1% from April. According to the Census Bureau, the goods and services deficit was $41.1 billion, up $3.8 billion from April. May’s exports were $182.4 billion, while imports were $223.5 billion–$3.4 billion more than April imports. However, year-to-date, the goods and services deficit decreased $7.2 billion, or 3.5%, from the same period in 2015. Exports decreased $47.2 billion or 4.9%. Imports decreased $54.3 billion or 4.7%. As has been the case for a while now, the strength of the dollar abroad continues to weaken demand for U.S. goods and services.
• According to the latest Non-Manufacturing ISM® Report On Business®, economic activity in the non-manufacturing sector grew in June. The Non-Manufacturing Index registered 56.5% in June, 3.6 percentage points higher than the May reading of 52.9%. The Non-Manufacturing Business Activity Index increased 4.4 percentage points, the New Orders Index® increased by 5.7 percentage points, and the Employment Index grew 3 percentage points. Those non-manufacturing industries reporting growth in June include mining; arts; entertainment and recreation; retail trade; health care and social assistance; utilities; and real estate.
• The minutes from FOMC’s June meeting were released last week. It is clear that the overwhelming deterrent to raising interest rates was the May employment report, which showed only 38,000 (prior to its revision to 49,000) new jobs added.
• In the week ended July 2, the advance figure for seasonally adjusted initial unemployment insurance claims was 254,000, a decrease of 16,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate bumped up to 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended June 25 was 2,124,000, a decrease of 44,000 from the previous week’s revised level.

Eye on the Week Ahead

Inflation is front and center next week as the latest reports on retail sales and producer and consumer prices are available. Growth in producer prices and consumer spending has been subdued as inflation remains below the Fed’s target rate of 2.0%. With retail sales accounting for almost one-half of total consumer spending, next week’s report should help define where the economy is heading.

The Markets (as of market close July 1, 2016)

The beginning of the week saw equities still reeling from the Brexit vote. However, the markets closed with a flourish, recouping all of the losses from the prior week. Each of the indexes listed here enjoyed positive returns by week’s end with each index gaining over 3.0% week-over-week, except the Russell 2000, which finished the week up about 2.6%. Year-to-date, only the Nasdaq and Global Dow remain below their 2015 closing values, but they’re gaining ground. While equities gained some traction, long-term bond yields touched lows that hadn’t been seen in quite some time.

Crude oil (WTI) closed at $49.28 a barrel last week, up $1.71 from the previous week. The price of gold (COMEX) rose to $1,344.90 by late Friday afternoon, up from the prior week’s price of $1,319.10. The national average retail regular gasoline price decreased to $2.329 per gallon on June 27, $0.024 under the prior week’s price and $0.472 below a year ago.

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 third estimate of the first quarter 2016 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, adjusted for price changes–increased at an annual rate of 1.1%. The second estimate for the first quarter GDP showed an increase of only 0.8%. The third estimate is based on more complete data. The primary difference between the second and third estimates for the first quarter GDP is that exports increased more than previously estimated. In the fourth quarter of 2015, the GDP increased 1.4%. Compared to the fourth quarter, total business investment declined as did consumer spending in the first quarter 2016. The economy traditionally starts off slower during the first three months of the year, often picking up speed over the spring and summer months, leading to guarded optimism for the second quarter GDP.
• Personal income increased $37.1 billion, or 0.2%, and disposable personal income (net after taxes) increased $33.9 billion, or 0.2% in May, according to the Bureau of Economic Analysis. Personal consumption expenditures, the Federal Reserve’s preferred inflation measure, increased $53.5 billion, or 0.4%. Compared to April, both income and spending (PCE) slowed in May. In April, personal income increased $75.4 billion, or 0.5%, DPI increased $68.6 billion, or 0.5%, and PCE increased $141.2 billion, or 1.1%, based on revised estimates.
• The trade gap between imports and exports grew in May, according to the latest report from the Census Bureau. Exports for May were at $119.0 billion, while imports came in at $179.6 billion, resulting in a trade deficit of roughly $60.6 billion. Exports fell 0.2% from April, and imports increased a sharp 1.6%. The trade gap in April was $57.5 billion.
• Home prices continue to rise according to the latest report from the S&P/Case-Shiller Home Price Index, which reported a 5.0% annual gain in April, down from 5.1% the previous month. Before seasonal adjustment, the National Index posted a month-over-month gain of 1.0% in April.
• Following three straight months of gains, pending home sales took a step back in May, according to the National Association of Realtors®. The Pending Home Sales Index dropped 3.7% to 110.8 in May from a downwardly revised 115.0 in April. Low mortgage rates and scant inventory are pushing home prices higher, affecting the number of home sales.
• US manufacturers expressed guarded optimism in May and June as manufacturing expanded. The Institute for Supply Management® (ISM®) Purchasing Managers’ Index® registered 51.3 for May, an increase of 0.5 percentage point from April’s reading of 50.8. According to the report, new orders and production were seen as growing, while employment and inventories were contracting. The seasonally adjusted final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 51.3 in June, up from 50.7 in May, and the highest reading for three months. Higher levels of production, new orders, and employment all helped to boost the index.
• The Conference Board Consumer Confidence Index® increased to 98.0 in June, up from 92.4 in May. The Present Situation Index increased from 113.2 to 118.3, while the Expectations Index rose from 78.5 to 84.5 in June. According to the Conference Board’s Lynn Franco, “Consumers were less negative about current business and labor market conditions, but only moderately more positive, suggesting no deterioration in economic conditions, but no strengthening either.”
• In the week ended June 25, the advance figure for seasonally adjusted initial unemployment insurance claims was 268,000, an increase of 10,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate dropped to 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended June 18 was 2,120,000, a decrease of 20,000 from the previous week’s revised level.

Eye on the Week Ahead

Equities markets, at least domestically, seem to have halted the downfall from the UK’s referendum vote to withdraw from the European Union. How this major world event affects other economic indicators remains to be seen. This week, important reports on international trade and the employment situation are released.

The Markets (as of market close June 24, 2016)

The Brexit referendum vote sent a tidal wave of negative returns throughout the world’s stock markets, including the indexes listed here. The large-cap Dow lost over 270 points on the week and, along with the S&P 500, dropped over 1.50% from the prior week. In fact, with this week’s performance, gains that had been made over the close of 2015 have been given back as each of the indexes listed here are below their 2015 closing values.

In addition to stock markets around the world being battered, European currencies took a hit, particularly the British pound, which dropped by more than 11.0% compared to the dollar. Yields on long-term government bonds also fell. The price of gold followed the prior week’s gains with another week of increasing value.

Crude oil (WTI) closed at $47.57 a barrel last week, down $0.69 from the previous week. The price of gold (COMEX) rose to $1,319.10 by late Friday afternoon, up from the prior week’s price of $1,301.60. The national average retail regular gasoline price decreased for the first time in six weeks to $2.353 per gallon on June 20, $0.046 under the prior week’s price and $0.459 below a year ago.

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

• British Prime Minister David Cameron vowed to resign following Britain’s surprise referendum vote last week to exit the European Union. Stock markets around the world plummeted, and the British pound fell by as much as 11% following news of the vote. Roughly 17.4 million United Kingdom voters chose to exit the European Union by 51.8% of the vote. With the vote, the UK has two years to negotiate its withdrawal from the EU. To formally exit the EU, the UK must invoke Article 50 of the Lisbon Treaty. Since Article 50’s adoption in 2009, no member country has exited the EU, so how the process will work is relatively unknown as this is the first time Article 50 will be invoked. Until then, EU treaties and laws will continue to apply to the UK.
• Basically, the EU is an economic and political partnership of 28 countries operating as a single market, which allows free movement of goods, services, money, and people within the EU as if it were a single country. With the EU’s second-largest economy voting to exit the EU, many issues remain to be resolved, including determining the status of UK citizens working in the EU and vice versa, whether travel restrictions will apply to UK citizens seeking to move about the EU, trade ramifications between the UK and the EU, and the status of Scotland and Northern Ireland, both of which voted to remain in the EU. Finally, it is important to note that the referendum vote is not legally binding. Parliament must pass laws to formally withdraw from the EU. In short, much is still to be determined, meaning Brexit will be in the news for quite some time to come.
• It was a busy week for FOMC Chair Janet Yellen, who appeared before the Senate Banking Committee and the House Financial Services Committee. Submitting identical remarks before both committees, Yellen reiterated the need to maintain a cautious monetary approach regarding the economy. Citing the Brexit vote, China’s economic situation, stalled labor growth, and inflation that remains below the Fed’s target 2.0% rate, Yellen said the expectation is that the economy will improve over time. However, the pace of improvement is uncertain, so the timing of interest rate adjustments is not on a preset or predictable course.
• Falling durable goods orders in May provided some justification for the Fed’s cautious stance on projected economic growth. New orders for durable goods (expected to last at least three years) fell 2.2% to $230.7 billion following two consecutive months of gains. According to the Census Bureau, excluding transportation, new orders decreased 0.3%. Excluding defense, new orders decreased 0.9%. Durable goods shipments (-0.2%), inventories (-0.3%), and new orders for nondefense capital goods (-0.8%) each fell short of their April totals. But the biggest impact on May’s orders was felt in new orders for defense capital goods, which dropped 28.0%. Businesses are not upping investment in durable goods, presumably because there is no need to ramp up sales to meet consumer demand. But it is worth noting that overall durable goods orders are up 1.7% for the first five months of 2016 compared to the same period last year.
• Existing home sales picked up the pace in May, according to the National Association of Realtors®. Total existing home sales grew 1.8% to a seasonally adjusted annual rate of 5.53 million, up from a downwardly revised 5.43 million in April. Sales are 4.5% ahead of the May 2015 rate, and are at their highest annual pace since February 2007. The median existing-home price for all housing types in May was $239,700, up 4.7% from May 2015. Total housing inventory jumped 1.4% to 2.15 million existing homes available for sale, which represents a 4.7-month supply–the same as April.
• On the other hand, new home sales edged downward in May, according to the latest report from the Census Bureau. Sales of new single family homes fell 6.0% in May to an adjusted annual rate of 551,000–35,000 below April’s revised annual rate of 586,000. May’s figure is still 8.7% above May 2015. While the pace of new home sales clearly slowed in May, sales are still moving at a favorable pace, particularly compared to April, which marked the fastest sales pace since February 2008. The median sales price of new houses sold in May 2016 was $290,400; the average sales price was $358,900. The seasonally adjusted estimate of new houses for sale at the end of May was 244,000. This represents a supply of 5.3 months at the current sales rate.
• Consumers are a little less confident in the economy moving forward, according to June’s Surveys of Consumers from the University of Michigan. The Index of Consumer Sentiment fell to 93.5 in June from 94.7 in May and 96.1 in June of 2015. The Current Economic Conditions Index, and indication of spending, was positive, as June’s reading of 110.8 was greater than May’s 109.9. Generally, consumer sentiment has remained strong over the last 18 months, particularly bolstered by positive assessments of personal finances.
• In the week ended June 18, the advance figure for seasonally adjusted initial unemployment insurance claims was 259,000, a decrease of 18,000 from the previous week’s unrevised level of 277,000. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended June 11 was 2,142,000, a decrease of 20,000 from the previous week’s revised level.

Eye on the Week Ahead

The last week of the month and quarter is highlighted by the final estimate of the first-quarter GDP and the latest figures on personal income and outlays. Particular attention will be paid to personal consumption expenditures (PCE)–an important measure of inflation according to the Federal Open Market Committee. It will be interesting to see how Wall Street responds following the upheaval caused by the Brexit vote.