Week in Review September 15, 2017
Global stocks rebounded sharply last week and bond yields spiked, as investors largely ignored another threatening missile launch by North Korea over Japan and a terrorist bombing in London.
In the U.S., both the Dow and S&P 500 closed Friday at record highs while NASDAQ hit its highest peak two days earlier. For the week, the Dow gained 2.2%, the S&P rose 1.6% — ending above 2500 for the first time – and NASDAQ added 1.4%. It was one of the best weekly gains for stocks this year. Foreign stocks were also broadly higher. In Europe, the Stoxx Europe 600 rose 1.4%, its best gain in two months, while in Japan the Nikkei 225 jumped 3.3%, its best performance this year.
It was a different story in bonds, as investors took profits following recent price gains. In the U.S. Treasury market, the yield on the benchmark 10-year note jumped 15 basis points to close the week at 2.20% after falling the prior week to its lowest level since last November’s presidential election. Reports of higher inflation in August (see below) raised the chances that the Federal Reserve will raise interest rates at its monetary policy meeting on Wednesday, although that seems like a long-shot. Bond yields were also sharply higher overseas. In Europe, the yield on the benchmark 10-year German bund climbed 12 bps to 0.43% while the comparable U.K. government bond shot up 32 bps to 1.31% as the Bank of England said an interest rate increase may be coming soon.
The major reports on the U.S. economy came in on the negative side, some affected by hurricanes, some not. Industrial production fell an unexpected 0.9% in August compared to a 0.1% increase the Street was anticipating, dragged down by Hurricane Harvey, which depressed oil drilling, petroleum refining and other activity in the Houston area. Capacity utilization dropped to 76.1% from 76.9%. On the positive side, July’s original 0.2% increase was upwardly revised to a 0.4% gain. But the surprising 0.2% decline in August retail sales was largely unrelated to weather, while July’s 0.6% gain was revised downward to 0.3%. Inflation readings came in stronger than expected, largely due to a spike in energy prices due to the temporary shutdown of refineries in Texas. The consumer price index rose 0.4% in August, the biggest jump since January as gasoline prices jumped 6.3%. But the core rate, excluding food and energy prices, rose a more modest 0.2%, 1.7% on a year-on-year basis. Producer prices were up 0.2% for the month, while the core rate rose an even 2.0% on a YOY basis.
Reports/dates/facts/links worth paying attention to over the next week:
1. September 18: National Association of Home Builders housing market index for September.
2. September 19: Housing starts for August; the Federal Open Market Committee meeting begins in Washington, D.C.
3. September 20: Existing home sales for August; FOMC meeting ends at 2:00 P.M., followed by Fed Chair Janet Yellen press conference and updated Fed forecasts.
4. September 21: Weekly unemployment claims; leading economic indicators for August; Philadelphia Fed business outlook survey for September.