Presented by Mark Gallagher
General market news
• Treasury yields were lower across the long end of the curve last week, with the 10-year at 2.01 percent and the 30-year back to pre-election levels at 2.63 percent. The 10-year Treasury opened Monday at 2.09 percent and the 30-year opened at 2.71 percent. It seems for now that the Federal Reserve (Fed) will be on hold in terms of raising rates; with the Fed funds at 1.25 percent, the curve is quite flat.
• All three major U.S. markets were down on the week as uncertainty loomed from North Korea’s hydrogen bomb test and the U.S. suffered damage from hurricanes Harvey and Irma. The Nasdaq Composite led the move down, dropping 1.16 percent due to poor performance in the technology sector. The Dow Jones Industrial Average and S&P 500 followed, posting losses of 0.82 percent and 0.58 percent, respectively.
• Additional points of unease were the resignation of Fed Vice Chair Stanley Fischer and the passage of a new U.S. budget deal to extend the debt ceiling for three more months. The debt-ceiling deal transpired when President Donald Trump worked with Democrats for the first time to get legislation approved. This move came under fire from many Republicans, including Speaker of the House Paul Ryan, who wanted a longer-term deal.
• The health-care sector continued to lead the way last week, with energy and utilities following behind as oil prices moved higher. The worst-performing sectors on the week included telecom, financials, and materials.
• There were two important data releases last week. On Tuesday, durable goods orders data for August was released. For the second month in a row, this measure of business confidence declined due to a fall in aircraft orders. The core figure, which excludes airline sales, rose by a healthy 0.6 percent, however. This was also the second month in a row where core orders increased while headline figures disappointed.
• On Wednesday, the Institute for Supply Management (ISM) nonmanufacturing composite increased following a surprise decline in July. Given the recent strength in the manufacturing portion of this survey, this increase was quite favorable. Historically, ISM surveys at today’s levels have been linked to 4-percent annualized gross domestic product growth.
|MSCI Emerging Markets
|Fixed Income Index
|U.S. Broad Market
Source: Morningstar Direct
What to look forward to
We’ll see a wide range of economic news this week. We’ll get a good look at consumer behavior, manufacturing, and the economy as a whole. These combined factors will influence the Fed’s decision on when to raise rates.
On Thursday, the Consumer Price Index will be released, giving us a look at inflation. The headline index, which includes food and energy, is expected to rise 0.3 percent in August, largely due to a spike in gas prices after Hurricane Harvey. This will take the annual inflation rate from 1.7 percent to 1.8 percent, which is closer to the Fed’s 2-percent target. There may be some upside risk to this number. Core prices, which exclude energy and food, are expected to rise a more modest 0.2 percent for the month. On an annual basis, however, core prices are expected to decline from 1.7 percent to 1.6 percent. Core prices are a better signal for underlying economic conditions because energy and food prices can be volatile, although a decrease could raise the Fed’s concern about low inflation.
On Friday, headline retail sales are expected to slow from 0.6 percent in July to 0.1 percent in August due to a decline in auto sales. The core figure, which excludes auto sales and is a better indicator for underlying trends, is expected to remain steady at 0.5-percent growth. There could be some upside to these results, as consumer confidence is high, and buying ahead of the hurricanes may have driven sales higher.
Industrial production is expected to decline modestly, from 0.2-percent growth in July to 0.1-percent growth in August. This decline can be attributed to low utilities output. Manufacturing growth is expected to increase strongly from negative to 0.5-percent growth, as exports continue to rise on the weak dollar. This growth would align with the improved Institute for Supply Management nonmanufacturing survey, which would be a boon for the economy.
Finally, the University of Michigan Consumer Confidence survey is expected to decline from 96.8 to 96.6. There may be some downside risk due to the hurricanes and rising gas prices, but the overall confidence level is likely to remain strong, indicating a robust economy.
Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.
Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at email@example.com.
Authored by the Investment Research team at Commonwealth Financial Network.
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