U.S. stocks were modestly higher last week but enough to keep the five-week old rally alive.
The Dow gained 0.4% while the S&P 500 and NASDAQ were higher by 0.2%, keeping them at or near their all-time highs. But small-cap stocks, which have outperformed the big-cap indexes over the past month, hit a slight bump, with the Russell 2000 losing 0.5%. Year-to-date, NASDAQ remains well ahead with a 22.7% gain in price, followed by the Dow, up 15.7%, and the S&P, up 14.0%. The Russell is now up 10.7% for the year. Government bond prices were higher for the first time in five weeks, with yields falling by about nine basis points on the long end. The yield on the benchmark 10-year Treasury note ended the week at 2.27%.
Japanese stocks continued to move higher, rising another 2.2% last week. The index closed Friday at 21155, its highest level since 1996 and up nearly 10% in the past month. The Shanghai stock market, which was closed the prior week, rose 1.2%, while Hong Kong stocks were up marginally. European stocks were modestly higher. The European Central Bank is reportedly considering reducing its monthly bond purchases by at least half beginning in January. That idea was embraced by German Bundesbank President Jens Weidmann, who said in a speech Friday, “I don’t see the need to continue pressing on the gas pedal of monetary policy and we are doing just this if we continue to make further purchases every month.” The ECB is currently buying 60 billion euros of various assets a month.
The minutes of the Federal Reserve’s September meeting showed a strong likelihood of an interest rate increase at its December gathering, although Fed members remain divided about whether inflationary pressures are strong enough to warrant a rate hike. “Many participants continued to believe that the cyclical pressures associated with a tightening labor market or an economy operating above its potential were likely to show through to higher inflation over the medium term,” warranting “another increase in the target range later this year,” the minutes said. At the same time, though, “many participants expressed concern that the low inflation readings this year might reflect not only transitory factors,” and “a few of these participants thought that no further increases in the federal funds rate were called for in the near term." Still, the market consensus, at least right now, is that a rate rise in December is close to a sure thing.
U.S. economic reports for September were skewed by hurricanes – to the upside. For example, retail sales jumped 1.6%, the largest monthly increase since March 2015, as vehicle sales climbed 3.6% as people replaced their cars damaged in the storm, and gasoline prices soared 5.8%. Less autos and gas, total sales were up a still respectable 0.5%, up from a comparable 0.1% rise in August. Inflation readings were likewise affected by the surge in gas prices. The consumer price index rose 0.5%, 2.2% on an annual basis, but up only 0.1% and 1.7%, respectively, after excluding food and energy costs. Likewise, producer prices were up 0.4% for the month, 2.6% on a year-on-year basis. Moving into October, the first reading of the University of Michigan’s consumer sentiment index jumped six points to 101.1, its highest level in 13 years.
Reports/dates/facts/links worth paying attention to over the next week:
1. October 16: Empire State manufacturing survey for October.
2. October 17: Industrial production for September; National Association of Home Builders housing market index for October.
3. October 18: Housing starts for September; Fed Beige Book.
4. October 19: Weekly unemployment claims; leading economic indicators for September; Philadelphia Fed business outlook survey for October.
5. October 20: Existing home sales for September.