Resnick Advisors Weekly Update – July 31, 2017
July 31, 2017
Slowing inflation was the primary reason the Federal Open Market Committee decided to keep the target range for the federal funds rate at its current 1.00%-1.25% range following last week’s meeting. The Committee noted that the labor market has continued to strengthen and household spending and business fixed investment have continued to expand. However, overall inflation has declined, while wage inflation has remained low. The FOMC does not meet again until September.
The initial (advance) estimate of the gross domestic product showed the second-quarter economy grew at a healthy annual rate of 2.6%. In the first quarter, the GDP increased 1.2%. The acceleration in GDP growth in the second quarter reflected a smaller decrease in private inventory investment, an acceleration in personal consumption expenditures, and an upturn in federal government spending. These movements were partly offset by a downturn in residential fixed investment and decelerations in exports and in nonresidential fixed investment. Disposable personal income increased $122.1 billion, or 3.5%, in the second quarter, compared with an increase of $176.3 billion, or 5.1%, in the first quarter (revised). It’s important to note that the initial estimate of the GDP is based on source data that is incomplete and subject to revision.
Good news for domestic manufacturers as new orders for long-lasting goods increased $14.9 billion, or 6.5%, in June. This increase follows two consecutive monthly decreases. However, the gain in new orders is attributable, in large part, to transportation, particularly aircraft. New orders excluding transportation increased only 0.2%. Shipments of manufactured durable goods in June, down three of the last four months, decreased $0.1 billion to $236.0 billion. This followed a 1.2% May increase. Unfilled orders for manufactured durable goods in June, up three of the last four months, increased $14.2 billion, or 1.3%, to $1,135.6 billion. This followed a 0.1% May decrease. Inventories continued to build, increasing $1.6 billion, or 0.4%.
Following a surge in May, sales of existing homes fell 1.8% in June. Despite last month’s decline, June’s sales pace (5.52 million) is 0.7% above a year ago, but is the second lowest of 2017 (February, 5.47 million). The demand for existing housing remains strong, but a dearth of supply and climbing prices has kept interested buyers at bay. Total housing inventory at the end of June declined 0.5% to 1.96 million existing homes available for sale — 7.1% lower than a year ago. Unsold inventory is at a 4.3-month supply at the current sales pace, which is down from 4.6 months a year ago. The median existing-home price for all housing types (single family, condos, townhouses, and co-ops) in June was $263,800, up 6.5% from June 2016 ($247,600). June’s median sales price surpassed May as the new peak after registering the 64th straight month of year-over-year gains.
Sales of new single-family homes were only marginally better in June than existing home sales. New single-family home sales were at a seasonally adjusted annual rate of 610,000 — 0.8% above the revised May rate of 605,000 and 9.1% above the June 2016 estimate of 559,000. The median and average sales prices decreased in June from May. The median sales price of new homes sold was $310,800 ($324,300 in May). The average sales price was $379,500 ($381,400 in May). The seasonally adjusted estimate of new houses for sale at the end of June was 272,000, which represents a supply of 5.4 months at the current sales rate.
The trade deficit decreased in June. The international trade deficit was $63.9 billion in June, down $2.5 billion from May. Exports of goods for June were $128.6 billion, $1.8 billion more than May exports. Imports of goods for June were $192.4 billion, $0.7 billion less than May imports.
The Conference Board Consumer Confidence Index® rose to 121.1 in July, up from 117.3 in June. Surveyed consumers expressed growing optimism in the present state of the economy and the short-term outlook. On the other hand, the University of Michigan’s Surveys of Consumers had consumer sentiment fall from 95.1 in June to 93.4 in July. This is still 3.8% higher than the reading from July 2016. Survey respondents were bullish about current economic conditions, but not so optimistic concerning future prospects for the economy.
In the week ended July 22, the advance figure for seasonally adjusted initial claims for unemployment insurance was 244,000, an increase of 10,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 233,000 to 234,000. The advance seasonally adjusted insured unemployment rate remained 1.4%, unchanged from the previous week’s unrevised rate. During the week ended July 15, there were 1,964,000 receiving unemployment insurance benefits, a decrease of 13,000 from the previous week’s unrevised level.
DJIA: 21,830.31, up 1.16%
Nasdaq: 6,374.68, down 0.20%
S&P 500: 2,472.10, down 0.02%
Russell 2000: 1,429.26, down 0.46%
Global Dow: 2,849.54, up 0.58%
Fed. Funds: 1.00%-1.25%, unchanged
10-year Treasuries: 2.29%, up 6 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 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. 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.