Week in Review July 21, 2017
U.S. stocks and bonds closed mostly higher last week as investors absorbed a bevy of corporate earnings reports and awaited this week’s Federal Reserve meeting, at which the central bank is expected to leave interest rates unchanged for now.
Despite a small loss on Friday – which ended its 10-day winning streak, its longest in more than two years – NASDAQ rose 1.2% for the week to raise its year-to-date gain to 18.7% in price. The S&P 500 was also higher for the week, rising 0.5%, while the Dow lost 0.3%. The yield curve in the U.S. Treasury market continued to flatten out, with yields on the short end rising sharply and those on the long end falling. The yield on the three-month T-bill, for example, ended the week at 1.17%, up 13 basis points to its highest level since September 2008, basically the start of the financial crisis when Lehman Brothers filed for bankruptcy. But long-term bond yields fell about 10 bps on the week, with the benchmark 10-year note closing at 2.24%.
European stocks were down sharply but sovereign bond prices and the euro higher after the European Central Bank said it is putting on hold any talk of tightening monetary policy for a few months. At his press conference following the bank’s meeting on Thursday, at which it left rates unchanged, ECB President Mario Draghi said, “We were unanimous in setting no precise date for when to discuss changes in the future. In other words, our discussions should take place in the fall. The last thing we may want is an unwanted tightening of conditions.” That boosted the price of the euro against the dollar by about two cents to $1.1666, its highest level since January 2015. Since a higher euro makes the price of European goods more expensive in foreign markets, stock prices fell. The broad-based Stoxx Europe 600 fell 1.7%, reversing most of the prior week’s 1.8% gain, while Germany’s DAX index dropped more than 3%. But leaving the ECB’s asset-purchase program in place for at least a few more months was good news for sovereign bond prices, pushing yields down. The yield on the benchmark 10-year German bund fell nine bps to 0.51% while those on comparable Spanish and Italian government bonds fell about 20 bps each.
Reports on the American economy were mixed. Housing starts rebounded in June, rising 8.5% to an annual rate of 1.215 million. Starts for single-family homes were up 6.3% while multifamily units were up 13.3%. Permits, a leading indicator, rose 7.4%, the biggest one-month increase since November 2015. On the downside, the National Association of Home Builders’ housing market index, which measures builder confidence, fell two points in July to 64, well below expectations of 68 and its lowest level since last November. The group said the decline was due to concerns about rising lumber prices. Outside the housing sector, the Conference Board’s index of leading economic indicators rose 0.6% in June. Business confidence indexes from the New York and Philadelphia Federal Reserve banks for July came in lower than expected.
Reports/dates/facts/links worth paying attention to over the next week:
1. July 24: Existing home sales for June.
2. July 25: Conference Board consumer confidence index for July; S&P Corelogic Case-Shiller home price indexes for May; Federal Open Market Committee meeting begins in Washington, D.C.
3. July 26: New home sales for June; FOMC meeting ends, followed by announcement at 2:00 P.M. EST.
4. July 27: Weekly unemployment claims; durable goods orders for June; Chicago Fed national activity index for June.
5. July 28: Second quarter GDP, first estimate; University of Michigan consumer sentiment index for July, second reading.