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Week in Review

Week Ending: Friday, August 24, 2018

Recap & Commentary

Despite numerous political headlines, markets moved higher with the S&P 500 ending the week at a new record high. The Fed and monetary policy were in focus as minutes from the Fed’s July/August meeting were released and global central bankers convened in Jackson Hole, WY for the Fed’s annual economic policy symposium.

Minutes from the Fed’s July/August FOMC meeting revealed that the committee discussed implications of a flattening yield curve along with trade, the latter of which was mentioned a total of 22 times vs. just eight at the June meeting. The Committee also noted that in the “not-too-distant” future it would no longer be appropriate for the Fed to characterize its stance towards monetary policy as “accommodative”.

Both the minutes and Powell’s comment that current economic strength will likely continue reinforced the belief that the Fed will hike rates two more times before year-end.  As of Friday, markets were pricing in a 96% and 66% chance of a rate hike following the Fed’s September and December meetings, respectively.

The yield curve flattened further, with the 2-10 spread narrowing to 0.19% following a rally in bonds which resulted in the 10-year yield falling by about 0.05% to 2.84%.

On Thursday, the U.S. enacted tariffs on $16B of Chinese goods, prompting China to retaliate in kind. The move came even as the two countries held direct, albeit lower-level, trade talks. The talks marked the first formal interaction on trade between the two countries since June. Though the talks represented a step in the right direction, for now, neither side seems willing to cede any ground in the burgeoning dispute.

Economic Bullet Points

Housing sales remain in a soft spot despite an otherwise robust economy. Existing home sales missed expectations in July after dipping 0.7% from June. The pullback marks the fourth consecutive monthly decline this year. Year-on-year, existing resales are down 1.5%–a 2-1/2 year low. Supply was unchanged at 4.3 months. New Home Sales also declined, down 1.7%, however, underlying fundamentals look to be improving at the margin. Specifically, supply increased 2.0% to 309K new homes, which is the best showing since 2009. Relative to sales, new homes supply rose to 5.9 months after July’s increase from 5.7 and 5.5 in the two prior months. More homes for sale increases buyer options which should bode well for sales numbers in the coming months. Overall, rising mortgage rates, construction constraints, low inventory, and higher prices remain as headwinds to home sales transactions. Q3 GDP is shaping up to be solid, but its unlikely to get much of a lift from residential investment.

Durable Goods Orders, at the headline level, fell 1.7% in July, a larger-than-expected drop driven by continued weakness in aircraft orders which fell 35.4% M/M. Core durable goods orders (non-defense, ex-aircraft), however, handily beat the 0.5% expectation with a 1.4% print. Computers, electronics, and machinery were the notable positive contributors. July’s strength in orders points to a further acceleration of what has already been very strong growth in business investment YTD.

Jobless Claims remain near historic lows and consistent with low unemployment and strong job growth. Claims decreased 2K to 210K, versus the 215K expectation.

Of Note

On Wednesday, by some calculations, the current bull market became the longest in history, running 3,453 days from when the S&P 500 hit an intraday low of 666 on March 9, 2009.

Market Indices Week of 8/24

S&P 500                         0.9%

Russell 2000                  1.9%

MSCI EAFE                     1.5%

MSCI EM                        2.7%

Commodities               0.5%

Barclay’s Agg.               0.3%

US Dollar Index           -1.0%

10-Yr Yield                    2.84%

WTI Oil ($/bl)                   $69

Gold ($/oz)                    $1,198

The Week Ahead

  • GDP
  • Corporate Profits
  • Consumer Confidence
  • International Trade in Goods
  • Jobless Claims

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