Resnick Advisors Weekly Update – August 7, 2017
August 7, 2017
Another strong month of growth in the employment sector as there were 209,000 new jobs added in July. This follows the 231,000 new jobs added in June. Employment growth has averaged 184,000 per month thus far this year. Job gains occurred in food services and drinking places, professional and business services, and health care. The unemployment rate for the month was 4.3%, down from 4.4% in June. The average workweek was unchanged at 34.5 hours in July. Average hourly earnings rose by $0.09 to $26.36 in July. Over the year, average hourly earnings have risen by $0.65, or 2.5%.
Not unexpectedly, growth in consumer income and spending was essentially nonexistent in June. Pre-tax personal income and after-tax personal income were unchanged in June from May. Consumer spending, as measured by personal consumption expenditures (PCE), increased 0.1% in June. Core personal consumption expenditures (excluding food and energy) also increased 0.1% for the month. For the 12 months ended in June, the PCE was up 1.4%, while the core PCE has gained 1.5%. This report confirms that, entering the summer months, inflation is relatively flat and consumers are not seeing an increase in their income. Consumer spending, which accounts for roughly two-thirds of overall economic activity, has also stagnated.
The final report on the international trade in goods and services deficit for June showed the total trade deficit to be $43.6 billion, down $2.7 billion from May. June exports were $194.4 billion, $2.4 billion more than May exports. June imports were $238.0 billion, $0.4 billion less than May imports. Year-to-date, the goods and services deficit increased $26.7 billion, or 10.7%, from the same period in 2016.
The purchasing managers’ index is a survey of selected companies relative to manufacturing output, new orders, inventory, employment, and prices. IHS Markit and the Institute for Supply Management (ISM) each put out a monthly index. The results of each survey are not always similar, as is the case for July. Markit’s U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 53.3 in July, up from 52.0 in June, indicating an increase in production. On the other hand, the ISM purchasing managers’ index was 56.3%, down 1.5 percentage points from the June reading of 57.8%. It should be noted that a reading over 50% indicates growth, which means manufacturing expanded in July according to the ISM report, but at a slower pace than June.
According to the Institute for Supply Management’s Non-Manufacturing ISM® Report On Business®, the non-manufacturing index slipped 3.5 percentage points in July to 53.9%. This represents continued growth in the non-manufacturing sector, but at a slower rate than in June. Survey respondents thought business activity, new orders, and employment decelerated while prices increased in July from June. The report covers industries such as accommodation and food services; utilities; wholesale and retail trade; real estate, rental, and leasing; health care and social assistance; and finance and insurance.
In the week ended July 29, the advance figure for seasonally adjusted initial claims for unemployment insurance was 240,000, a decrease of 5,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 244,000 to 245,000. The advance seasonally adjusted insured unemployment rate remained 1.4%, unchanged from the previous week’s unrevised rate. During the week ended July 22, there were 1,968,000 receiving unemployment insurance benefits, an increase of 3,000 from the previous week’s revised level. The previous week’s level was revised up 1,000 from 1,964,000 to 1,965,000.
DJIA: 22,092.81, up 1.20%
Nasdaq: 6,351.56, down 0.36%
S&P 500: 2,476.83, up 0.19%
Russell 2000: 1,412.32, down 1.19%
Global Dow: 2,870.04, up 0.72%
Fed. Funds: 1.00%-1.25%, unchanged
10-year Treasuries: 2.26%, down 3 bps
Most of the major benchmarks ended the week modestly lower, although the Dow Jones Industrial Average recorded a decent gain. The benchmarks received a boost from energy stocks, as oil prices advanced following the promise of production cutbacks by Saudi Arabia. Real estate-related shares also performed well. Health care stocks fared poorly, weighed down in part by a steep drop in AstraZeneca shares following disappointing test results for its new lung cancer drug. Health care service providers also performed poorly for much of the week as uncertainty persisted over changes to health care regulations.
The week got off to a slow start, with trading volumes Monday among the lowest of the year so far, according to traders. Volumes picked up later in the week, with investors paying attention to the Federal Reserve’s statement on Wednesday following its policy meeting. The statement revealed that the Fed intended to begin reducing its holdings of mortgage-backed securities and Treasuries “relatively soon,” which might put upward pressure on long-term interest rates. The Fed had previously outlined its plan to draw down its holdings by not reinvesting all of its principal payments on these securities — a process that is expected to begin in October.
Market activity spiked further on Thursday, the busiest day for second-quarter earnings releases — 74 S&P 500 companies reported results, with 380 firms reporting overall. The AstraZeneca test results also captured attention and weighed on the market somewhat. The firm’s traders noted that the biggest driver of sentiment, however, appeared to be a research note from a JPMorgan strategist, who warned that current low levels of market volatility were reminiscent of periods just before previous bear markets.
Longer-term Treasury yields rose for the week. The municipal new issuance calendar was again relatively light, which continued to drive returns and activity in the secondary market, as investors enter the last week of the month and anticipate new cash flows in August. Analysts noted that despite the lighter calendar, there has been an uptick in the 30-day supply, as August’s total new issuance has historically surpassed July’s total.
The investment-grade corporate bond market benefited from a strong technical backdrop, the generally healthy tone in U.S. equities, and the move higher in rates. Helped by strong demand from Asia, the market easily absorbed new supply from large new deals in the technology, media, and telecommunications segments. Meanwhile, the high yield market was largely focused on quarterly earnings reports, which did not contain any major surprises. Bonds in the energy and metals segments traded higher following the moves in commodity prices. Credit spreads compressed due to a combination of light new issuance and strong demand. Both investment-grade and high yield corporate bonds had little reaction to the Fed statement.
A busy week of corporate earnings injected volatility into the major European indexes. Soft manufacturing data, notably in Germany and France, at the start of the week weighed on the market. But by midweek, as earnings season was in full swing, telecommunication, technology, and utility stocks led the markets higher. Traders said on Wednesday that for the one-third of companies that had reported, earnings and sales results were tracking slightly ahead of estimates. But investors were somewhat disappointed that, so far, second-quarter earnings results compared poorly with the strong earnings results seen over the last few quarters. By the end of the week, European technology stocks, hurt by earnings misses and profit taking, were a drag on Germany’s Dax and France’s CAC 40. The pan-European index Stoxx 600 finished the week lower.
On Thursday, the euro rose to its highest level against the U.S. dollar in just over two years, following U.S. GDP estimates, before retreating. The euro’s strength has weighed on companies that have a comparatively larger share of exporting markets, as the stronger currency makes their goods less competitive for overseas buyers.
The Japanese stock market benchmarks fell for the week. The widely watched Nikkei 225 Stock Average declined 0.7% (140 points) and closed at 19,959.84. For the year to date, the Nikkei is up 4.4%, the broad-based TOPIX Index is ahead 6.8%, and the TOPIX Small Index, which held up better than the large-cap yardsticks for the week, has advanced 13.1%. The yen was little changed versus the greenback and stayed above ¥111 per U.S. dollar, which is about 5.0% stronger than ¥117 per dollar at the end of 2016.
Portions of the preceding information are reprinted with permission from Broadridge Investor Communication Solutions, Inc. Copyright 2017. Portions of the preceding information are shared from T. Rowe Price Weekly Market Wrap-Up.