The Good: U.S. economic data released this past week were almost uniformly good, indeed, better than expected in most cases. The Atlanta Federal Reserve’s “GDPNow” rules-based GDP forecaster has bent up from an early August indication of 2.6% GDP growth for the third quarter of 2014 to more than 3.0% last week, largely on improvements in wholesale and international trade, industrial production and housing starts.
Also beating expectations were the business outlook survey from the Philadelphia Fed and the leading economic indicators from the Conference Board. The flash Markit PMI for manufacturing hit a 3-year high, and better building permits and home resales added some needed optimism on housing. Every report that went into the Bloomberg Economic Surprise index this past week exceeded expectations.
The Bad: Markit PMI readings for Europe fell short of expectations and prior month levels in August. The HSBC flash PMI for China fell to a 3-month low of 50.3 in August, down from a 51.7 reading in July and below forecasts. Economic surprises in Europe and China were pretty much mirror images of the U.S.’s stronger reports – i.e., not good.
Nonetheless, Europe’s stock markets rose on the order of 2% for the week, despite pullbacks ranging to 0.9% in France on Friday. Germany and Spain, the alpha and omega of Europe in many respects, both rose 2.7%, notwithstanding 0.5%-0.7% declines on Friday.
The Draghi: For most of the week, investors had their eyes on the coming Jackson Hole symposium, at which Fed Chair Janet Yellen and, probably more importantly, ECB President Mario Draghi were to speak. As things transpired, Yellen sent bond prices lower momentarily on Friday, saying the U.S. economy was getting closer to its dual goals of full employment and 2% inflation. But by the end of Friday’s trading, or more precisely, by the end of her speech on labor market dynamics and monetary policy, Yellen had offered enough qualifications that bonds ended fairly flat for the day.
In terms of labor market developments, Mario Draghi had far less progress to point to than Yellen did. He expressed confidence that the stimulus steps unveiled at the beginning of summer would, with some help from fiscal policy and structural reform, boost demand in the EU economies. His pledge two years ago to do “whatever it takes” to support the euro was augmented by Friday’s statement that the ECB “stands ready” to adjust policy again should growth continue to wane and inflation to sink. We suspect that, unlike 2012, it will take more than words to convince European markets that the ECB will do the right thing.
For the week, stock prices rose almost everywhere, although by Friday the upward momentum was largely spent. The major U.S. market averages rose four out of five days, with gains for the week ranging from 1.6% for the S&P 600 SmallCaps to 2.3% for the S&P 400 MidCaps. The Dow held above 17000 on Friday, for a one-week gain of 338 points or 2.0%. Pro-cyclical sectors led the way with 2.3% gains for the week in industrials, financials and technology stocks; they were followed by consumer discretionary stocks, which rose an encouraging 2.2%. Defensive stocks tended to lag.
For bonds, the week brought mixed results: Treasury prices were lower, although just modestly so, while high yield and bank loans saw prices rise. Flows into high yield bond funds and ETFs rebounded to new highs in the latest period. For the week, yields on long Treasurys and TIPS rose by just 2 and 4 basis points; 10-year yields bumped up 6 bps (Tsys) to 10 bps (TIPs); and 5-year rates climbed 12 (Tsys) to 16 bps (TIPs). In Europe, rates were higher in Germany (3 bps), France (3 bps) and the U.K. (8 bps), where BOE head Mark Carney had two dissenters voting for higher rates at the latest policy meeting. Rates continue to fall in Italy and Spain, where the 10-year bond ended 2 bps below the 2.40% yield on comparable Treasurys.
Reports/dates/facts/links to watch for over the next week:
- August 23: Jackson Hole symposium concludes.
- August 25: U.S. new home sales (July); Dallas Fed manufacturing survey (August); Chicago Fed national activity index (July).
- August 26: Durables goods orders and shipments (July); Case-Shiller home price indexes (June); Conference Board consumer confidence survey (August).
- August 28: U.S. GDP, first revision of Q2 growth (4.0%); corporate profits, first estimate for Q2.
- August 29: U.S. personal income, spending and inflation (July); University of Michigan consumer sentiment (August final).
Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.