Resnick Advisors Weekly Update – October 9, 2017
October 9, 2017
Hurricane Harvey may have disrupted shipping along the Gulf Coast, impacting foreign trade in August. The goods and services deficit was $42.4 billion in August, down $1.2 billion from $43.6 billion in July, revised. August exports were $195.3 billion, $0.8 billion more than July exports. August imports were $237.7 billion, $0.4 billion less than July imports. Year-to-date, the goods and services deficit increased $29.1 billion, or 8.8%, from the same period in 2016. Exports increased $84.9 billion, or 5.8%. Imports increased $114.0 billion, or 6.4%. A relatively weak dollar has made U.S. goods and services cheaper to buy for foreign consumers, expanding exports. Moderate domestic economic growth has encouraged buyers to shop in less expensive foreign markets, pushing imports higher.
In the week ended September 30, the advance figure for initial claims for unemployment insurance was 260,000, a decrease of 12,000 from the previous week’s unrevised level. The advance insured unemployment rate remained at 1.4%. The advance number of those receiving unemployment insurance during the week ended September 23 was 1,938,000, an increase of 2,000 from the previous week’s revised level.
DJIA: 22,773.67, up 1.65%
Nasdaq: 6,590.18, up 1.45%
S&P 500: 2,549.33, up 1.19%
Russell 2000: 1,510.22, up 1.30%
Global Dow: 2,929.76, up 0.76%
Fed. Funds: 1.00%-1.25%, unchanged
10-year Treasuries: 2.35%, up 2 bps
Stocks maintained their winning streak for much of the week, sending the major indexes to a new round of records. The large-cap S&P 500 Index notched its eighth consecutive daily gain before falling back a bit on Friday — its longest winning streak since 2013. As has often been the case in recent months, the rally coincided with exceptionally low volatility. On Thursday, the CBOE Volatility Index, or VIX, closed at the lowest level on record since its inception in 1993.
Good economic data seemed to be behind much of the positive sentiment. On Monday, the Institute for Supply Management (ISM) reported that its gauge of factory activity had risen to its highest level in September since 2004. The ISM’s services sector gauge proved even stronger when it was released Wednesday, hitting its best level in 12 years. Separate data on Wednesday showed that September auto sales were also particularly robust, although replacement vehicle demand following recent hurricanes was partly at work.
The hurricanes also had a large impact on the week’s closely watched employment data. On Friday, the government said that the economy lost 33,000 jobs in September, the first monthly drop in payrolls in seven years. The Labor Department report pointed out that hurricanes Harvey and Irma had resulted in many of the job losses, however, particularly among restaurant and bar workers. Indeed, average hourly wages grew at a solid pace in September — although T. Rowe Price Chief U.S. Economist Alan Levenson noted that a reduction in the number of low-paid jobs in the food service industries was again at work. Still, he said that growth in average hourly earnings was broad-based — wages grew faster in September in 13 of 14 industry groups. Levenson expects a rebound in job growth in October.
Treasury yields increased following the jobs report, an indication that traders were focusing on the strong wage gains in the report rather than the payrolls decline. (Bond prices and yields move in opposite directions.) The yield increase followed a modest rise earlier in the week, fed by the strong economic data and recent comments from Philadelphia Federal Reserve President Patrick Harker, who noted that he had “penciled in” a December rate hike despite low inflation readings. Rising yields helped the U.S. dollar climb to its highest level since July.
Municipal bonds continued to be supported by high demand and relatively modest new supply, especially in light of the previous week’s heavier issuance calendar. Puerto Rico’s benchmark general obligation bonds sold off, however, after President Trump made comments on Tuesday suggesting that the commonwealth’s debt would have to be wiped out as a result of the catastrophic damage caused by Hurricane Maria. The market had begun pricing in the storm impact even before Trump’s comments, but after the president’s remarks Puerto Rico’s general obligation bonds tumbled from about 44 cents on the dollar to 32 cents before rebounding somewhat. Traders noted that volume in the bonds outpaced any other name in the muni market by far. Stocks of companies that insure Puerto Rico’s debt also came under pressure.
Momentum remained intact in the investment-grade corporate bond market. Credit spreads (the additional yield offered over comparable-maturity Treasuries) continued to narrow as higher rates, limited dealer inventories, light new issuance, and healthy global risk sentiment supported the asset class. However, as the week progressed, some investors sought to harvest recent gains, particularly among liquid bonds from larger companies, recent new issues, and U.S. bank bonds. Limited overseas demand due to holidays in Asia led to slightly weaker technical conditions, however.
The high yield market was mostly focused on new issuance that was generally met with healthy demand from portfolios with high cash balances. Oil prices rallied briefly after an Energy Department report showed a drop in U.S. stockpiles, and some stability in crude oil prices fostered greater interest in energy-industry bonds — a large part of the high yield market. High yield funds reported inflows, but there was very little movement in below investment-grade credit spreads.
Rising tensions between the Spanish government and secessionists in Spain’s Catalonia region cast a shadow over European markets during the week. Spain’s main index, the IBEX 35, tumbled in what was one of its worst weeks in two months, with bank shares recording steep losses following concerns among investors about key lenders headquartered in Catalonia. Banco de Sabadell confirmed in a regulatory filing late in the week that it would move its headquarters out of Catalonia, one of the richest regions in Spain, to Alicante. Another bank, CaixaBank, is also considering relocating, according to published news reports. Traders pointed out that the Spanish government was looking to pass legislation to make it easier for other companies to move their headquarters out of Catalonia.
Spanish government bonds sold off during the week, and the yield on 10-year Spanish government bonds increased to around 1.78% at Wednesday’s close before pulling back to around 1.70% on Thursday. The impact on other eurozone bond yields was limited, although Italy saw its 10-year government bond yield rise to 2.17% by Friday.
The pan-European Stoxx 600 index ended the week higher. The pound sank to below $1.31 against the dollar, as political party infighting weighed heavily on the British currency. The FTSE 100 and Germany’s DAX declined.
With several major Asian markets closed for holidays this week, Japanese stocks posted good gains in quiet trading. The Nikkei 225 Stock Average advanced 334 points (1.6%) and closed at 20,690.71. For the year to date, the Nikkei is up 8.3%, the broad-based, large-cap TOPIX Index has advanced 11.1%, and the TOPIX Small Index, which was basically flat for the week, has gained 19.2%. The yen weakened and closed near ¥113 per U.S. dollar, which is about 3.5% stronger than the ¥117 level at the end of 2016.
China’s manufacturing activity surged in September, suggesting that Beijing’s efforts to clean up the country’s indebted financial system and crack down on polluting industries haven’t yet curbed economic growth.
The official manufacturing PMI rose to a five-year high in September, beating forecasts and August’s growth pace. A separate gauge, the official nonmanufacturing PMI, also quickened from last month. Both readings remained comfortably above 50, the reading that separates expansion from contraction. Strong domestic and overseas demand and stepped-up production from consumer goods companies drove September’s uptick, China’s statistics bureau said. Meanwhile, a private survey, the Caixin China General Manufacturing PMI, declined in September from a six-month high in August and lagged forecasts, though it, too, stayed in expansionary territory.
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.