Stocks got back in the winning column after steep losses the previous week.
In the U.S., NASDAQ gained 1.4% after falling 2.6% the prior week, while the S&P 500 rose 1.2%, erasing all of the previous week’s 1.0% loss. The Dow rose 0.9%. Stocks were up most of the week on optimism about trade talks between the U.S. and China. But bond prices were lower, pushing yields higher for the third week in a row. The yield on the two-year Treasury note jumped another 10 basis points to end the week at 2.80%, another post-financial crisis high. The benchmark 10-year note rose five bps to just below 3.00%, its highest level since the beginning of August. The Federal Reserve meets later this month, when it is expected to raise its benchmark short-term interest rate by another 25 bps, but several Fed officials have declared the need to continue raising rates well beyond that.
Foreign stocks were also higher. The Euro Stoxx 600 rebounded 1.1%, its biggest gain since July, recouping about half of the prior week’s loss. The European Central Bank confirmed that it will purchase €30 billion ($35 billion) in bonds this month before paring back to €15 billion monthly until yearend, when its asset-purchase program is scheduled to end. However, “this doesn’t mean our monetary policy stops being” accommodative, ECB President Mario Draghi said, noting that the ECB’s benchmark deposit rate would remain at negative 0.4% “at least through the summer of 2019.” The ECB also lowered slightly its growth forecasts for the euro zone for this year and next. Japan’s Nikkei 225 jumped 3.5%, its biggest gain in two months, rising to its highest level since February.
The week’s reports on the U.S. economy were mostly positive, especially on the inflation front. Consumer prices rose a less-than-expected 0.2% in August, 0.1% for the core rate, excluding food and energy. The year-on-year increases were 2.7% and 2.2%, respectively. Producer prices, however, actually fell from July, by 0.1% for both the headline number and the core rate. That was the first decline since February 2017. The YOY increases were 2.8% and 2.3%, respectively, down from the previous month. The Fed’s Beige Book said “some” Fed districts noted an increase in inflation expectations, although “there were some signs of a deceleration” in “most” districts. The Fed report also described the labor market throughout the country as “tight,” with most districts reporting “widespread shortages.” Indeed, half of the Fed’s 12 districts said “labor shortages were constraining sales or delaying projects.”
Retail sales for August came in below expectations, largely due to weaker auto sales. Sales rose just 0.1% from July, 0.3% when excluding autos, which fell 0.8%. However, the numbers were slightly offset by upward revisions for July in total sales (+0.7%) and ex autos (+0.9%). Industrial production rose 0.4% last month, unchanged from the prior month’s upwardly revised increase.
Reports/dates/facts/links worth paying attention to over the next week:
1. September 17: Empire State manufacturing survey for September.
2. September 18: National Association of Home Builders housing market index for September.
3. September 19: Housing starts for August.
4. September 20: Weekly unemployment claims; existing home sales for August; leading economic indicators for August; Philadelphia Fed business outlook survey for September.