Week in Review August 11, 2017
All three major U.S. equity indexes recorded weekly losses for the first time since the end of June as tensions between North Korea and the U.S. sent worried investors out of stocks and into safe haven assets like gold and sovereign bonds.
The Dow lost 0.9% for the week while the S&P 500 and NASDAQ were down about 1.4%, although all three finished the week on an up note on Friday. The VIX volatility index shot up more than 50% late in the week, closing Friday at 15.5, its highest level in three months. Stocks outside the U.S. were down even more. The Korea Stock Exchange’s KOSPI Index fell 3.2% for the week, falling to its lowest level since the end of May. Hong Kong, one of the hottest markets of 2017, fell 2.5%, while Indian stocks, which have also been one of the best performers so far this year, dropped 3.4%. Japanese stocks were down more modestly, falling a little over 1%. European stocks were also down sharply, with most of the damage coming on Friday. The Stoxx Europe 600 was off 2.7% for the week, while most of the major national indexes were off by more than 2%.
Gold and bond prices rose as investors sought safety. Gold closed the week at $1288 an ounce, up 2.3% on the week to its highest level since the first week of June. Prices of the strongest sovereign bonds rose higher, reducing yields. In the U.S., the yield on the 10-year Treasury note closed Friday at 2.19%, its lowest level since late June and down seven basis points on the week. In Europe, the yield on the benchmark 10-year German bund closed at 0.39%, down eight bps. Oil prices were relatively stable, with benchmark U.S. crude down a little over 1% to $48.82 a barrel on Friday.
Inflation figures for July came in lower than expected, but a prominent Federal Reserve official said he expected inflation to rise over the next several months. The consumer price index rose a less-than-expected 0.1% compared to June, while the year-over-year rate was just 1.7%. Producer prices fell 0.1% for the month, while the YOY rate fell to 1.9%. But William Dudley, president of the New York Fed, said he expected inflation to hit the Fed’s 2% target soon. "Our outlook anticipates a continued moderate growth trend, with some further strengthening in the labor market and an increase in inflation over the medium term toward our objective of 2%," he said. Other Fed officials have said they want to see more signs of higher inflation before they vote for another increase in short-term interest rates. The Fed doesn’t meet again until September 19-20.
Reports/dates/facts/links worth paying attention to over the next week:
1. August 15: Retail sales for July; National Association of Home Builders housing market index for August; Empire State manufacturing survey for August.
2. August 16: Housing starts for July; the minutes of the Federal Reserve’s monetary policy meeting of July 26 are released.
3. August 17: Weekly unemployment claims; industrial production for July; leading economic indicators for July; Philadelphia Fed business outlook survey for August.
4. August 18: University of Michigan consumer sentiment index for August, first reading.