The FOMC meeting ended with no serious action. The only change was an alteration/toughening of language indicating the Fed was poised to act and provide accommodation, as opposed to being ‘prepared to take action.’ A small distinction, but an important one. While markets were clearly disappointed in a lack of action (as they were with similar lack of easing by the European and U.K. central banks this week), there are two issues to consider: either the economy is not weak enough to warrant additional action (or the data remains inconclusive at this point), or the tools the Fed is considering (‘unconventional’ stimulus) are not viewed as being quite as effective going forward.
The odds of action are higher after the annual August Jackson Hole conference and mid-September FOMC meeting, especially if data continues to decelerate. Whether this consists of a lengthening of low rate guidance beyond late 2014, or additional easing through Treasury or mortgage-backed security purchases remains to be seen. But expect some response if data continues to deteriorate and/or the European situation adds further chances for negative carryover. But the Fed can’t do it alone—other parties (such as the legislative branch) must act more decisively/responsibly provide additional market confidence as well.
As mentioned, the ECB also kept rates on hold (at 0.75%), as Mario Draghi reiterated that while individual nations must continue to take positive actions internally, such as fiscal austerity, the ECB would act as needed to stabilize bond markets. This has been occurring in nations like Spain and Italy, but such actions don’t improve conditions overnight—they can take years. Moreover, nations like Germany aren’t spurred to action ‘bailing out’ states if this action isn’t apparent. A catch-22? Perhaps, but an ongoing one.
The ISM Manufacturing Index was up 0.1 for July at 49.8, which was just a few tenths below the expected number (around 50). Components of the report, like new orders and production were almost unchanged, while the employment piece fell a bit. As a diffusion index, and being right about 50, it’s roughly balanced between negative and positive… which is right about where other data is falling as well. Non-Manufacturing ISM rose in July as well, from 52.1 to 52.6, which beat the consensus forecast calling for no change. The business activity and new orders parts of the index were both up strongly.
Factory orders were down -0.5% in June, which was a bit of a surprise, as consensus called for a +0.5% increase. ‘Core’ orders (non-defensive capital goods ex-aircraft) were revised down, while core shipments were revised up a bit—just not enough to counteract the overall drop.
The Chicago PMI report also rose from 52.9 to 53.7, which was also unexpected (consensus estimates called for a drop, in line with other regional surveys). The underlying figures were mixed, as new orders and order backlogs were higher, while production and the employment index weakened.
Motor vehicle sales for U.S. automakers cooled off a bit in July after a strong start to 2012., while Japanese car makers continued to roll ahead. The primary factor appeared to be weaker sales in Europe, where unit volumes fell off with general economic activity. Overall, global car makers have continued to do well this year.
On the housing front, the Case-Shiller house price index gained by +0.9% for May on a month-over-month, seasonally-adjusted basis, which was an improvement on the expected +0.4% result. Price increases occurred in 18 of the 20 survey cities, with Chicago, Atlanta and Las Vegas up around 2% each—the biggest gainers.
Construction spending increased by +0.4% month-over-month in June, which as largely as expected—mostly duet private residential building, as non-residential remained flat.
Consumer Confidence rose to 65.9 for July, which was quite a bit better than the expected 61.5 figure. The composition of the report was also improved; while the ‘present’ situation weakened just slightly, the ‘expectations’ piece was much improved from the prior month. Personal income came in slightly better than expected—at a +0.5% increase for June. Consumer spending was flat, largely as expected. As might be expected with the difference, the savings rate rose slightly.
Initial jobless claims increased less than expected, at 365k, versus a forecasted 370k for the July 28 week. The continuing claims number was also lower at 3,272k for the July 21 week, versus a forecast 3,288k. Part of the volatility this time of year is due to auto industry shutdowns, which should abate in coming weeks.
The big employment situation report late in the week ended up with nonfarm payrolls rising more than expected in July, at +163,000 versus an estimate of +100,000. Some of this increase may be due to adjustments from auto plant shutdowns and other seasonal distortions; so, it is important to remember that the initial ‘error’ range for this report is +/- 100,000 per week. These releases contain much more noise than markets account for. On the more negative side of the news, while consensus called for no change, the unemployment rate rose from 8.2% to 8.3%. This was essentially due to the household measure of employment falling faster than the labor force. Additional data, like work week and wage gains, were flat.
The Employment Cost Index for compensation costs rose a non-annualized +0.5% for the 2nd quarter, which was largely line with the expected figure. Wage and salary growth decelerated a bit, but only by a tenth of a percent or so. Why do we care about this number? It tends to be fairly slow-moving, but labor costs can be an early sign of inflation or lack thereof. Right now, it’s tracking along at an annualized 2.0%, so in line with everything else for now.
Market Notes
| Period ending 8/3/2012 |
1 Week (%) |
YTD (%) |
| DJIA |
0.18 |
8.82 |
| S&P 500 |
0.40 |
11.99 |
| Russell 2000 |
-0.93 |
7.26 |
| MSCI-EAFE |
1.53 |
4.81 |
| MSCI-EM |
1.17 |
3.97 |
| BarCap U.S. Aggregate |
0.06 |
3.49 |
| U.S. Treasury Yields |
3 Mo. |
2 Yr. |
5 Yr. |
10 Yr. |
30 Yr. |
| 12/31/2011 |
0.02 |
0.25 |
0.83 |
1.89 |
2.89 |
| 7/27/2012 |
0.11 |
0.25 |
0.65 |
1.58 |
2.63 |
| 8/3/2012 |
0.09 |
0.24 |
0.67 |
1.60 |
2.65 |
Markets this week fell early in response to the Fed’s lack of action, but bounced back as the July job numbers were better than expected.
Large-cap outperformed small cap (as it has all year thus far), and technology and industrials came out as the best performing sectors, while health care and utilities lagged the most. However, U.S. stocks were outperformed by foreign despite the initial lackluster response to Draghi’s comments.
Government bonds were generally flat, with limited Treasury yield curve movement, but it was a more positive week for ‘credit,’ such as high yield, floating rate and foreign debt (especially emerging market bonds).
In commodity markets, the accommodative central bank sentiment helped energy markets, and agricultural commodities gained on continued difficult weather conditions. Industrial and precious metals were generally weaker.
Have a good week.
Karl Schroeder, RFC, CSA, AACEP
Investment Advisor Representative
Schroeder Financial Services, Inc.
480-895-0611
Sources: FocusPoint Solutions, Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Thomson Reuters, Schroder’s, Standard & Poor’s, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. Schroeder Financial Services, Inc. is a registered investment advisor.