Economic comments, week ending Sept. 1
| Reports on Manufacturing were remarkably strong across the globe for August. The Purchasing Managers' Indices on Manufacturing remained firmly in the expansion zone; other than the Markit US reading, the surveys increased from their July readings. The most positive surprise in the US Employment Report was in Manufacturing. The August Employment Report otherwise showed a modest, less than expected, lift in payrolls, but minuscule increase in wage gains. In the last two weeks of "summer" most equity markets gained and bond yields fell, the US dollar weakened, and commodity prices (other than WTI and Corn) gained. |
Perspective: The lines above were part of Mark Anthony's oration in Shakespeare's Julius Caesar. Yet, they could also apply to predictions of "stock returns based on news" according to this month's issue of the Financial Analyst Journal. An article by researchers Steven L. Heston and Nitish Ranjan SInha, "News vs. Sentiment: Predicting Stock Returns from News Stories," studied the relationship between news articles and subsequent returns of stocks. The authors found that, "Positive news predicts positive returns for only about one week, but negative news predicts negative returns for up to a quarter." |
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Economic Releases: US Employment The August Employment report showed steady, but lower-than-expected, hiring without wage gains. Non-Farm Payrolls (blue in the chart below) rose only 156,000, near the lower end of the range of expectations. July's Payrolls were revised 20,000 lower to 189,000. Private Payrolls (red in the chart below) rose 165,000. Manufacturing Payrolls (green in the chart below) surprised on the up-side with 36,000 and an 10,000 increase revision in July's report. The Participation Rate remained 62.9%, but the Unemployment Rate ticked up to 4.4%. The Average Hourly Earnings rose only +0.1%, increasing only 2.5% from a year ago. The Average Workweek ticked down to 34.4 hours. The weekly Initial Claims for Unemployment Benefits was little changed at 236,000 the week of August 26th; Continuing Claims fell 12,000 to 1.942 million. These reports of continued labor market improvement without associated increases in wages or inflationary pressures provide a challenge to Federal Reserve policy decisions in the months ahead.
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Other US Releases:
The Purchasing Manager Indices reported mixed direction on changes from the previous month, but both ISM and Markit PMIs remained solidly in the expansion zone above 50. Also positive the 2nd quarter GDP was revised higher to 3.0% on the back of higher Consumer Spending, up 3.3% in the quarter; Corporate Profits were up 8.1% year-over-year. July's Personal Income rose +0.4%; Consumer Spending rose +0.3%. The Case-Shiller Home Price Index rose +0.1% (SA, Seasonally Adjusted) in June; the year-over-year increase was 5.7% (NSA). The Conference Board's Consumer Confidence rose almost 3 points to 122.9 in August. In contrast, the University of Michigan's Consumer Sentiment index dropped a point to 96.8. Source: Econoday and the Wall Street Journal |
Economic Releases outside the US
Japanese Unemployment Rate remained 2.8% and Retail Sales increased 1.9%, but Industrial Production fell -0.8% in July. |
Equity and Bond Index Returns: Most equity markets rose in the last two weeks of August; only the DAX posted a loss. Each of the Bloomberg Bond Market indices in the table also generated positive returns due to lower interest rates; the High Yield Index benefited from a narrowing of the credit spreads for that sector.
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Bond Yields and Spreads: Government Bond yields were mostly lower the last two weeks of August. The yield curve flattened due to the rise in short term yields. The TIPS spread widened 4 basis points due to a relative rally in TIPS prices.
Data Source: Bloomberg app for the Iphone |
Currency and Commodity Markets: The US dollar gained only on the Yen the last two weeks of August; even the poorly led South African currency gained against the Greenback. In the face of Hurricane Harvey, WTI fell, but Brent Oil Prices rose in the past two weeks. Natural Gas and Metals commodity prices rose, but Corn commodity prices fell in the last two weeks of August.
Data Source: Bloomberg app for the Iphone |
Equity Index Gains in US dollar terms: The equity table above shows the percent change of different stock indices in terms of its local currency. To calculate the return to the US dollar investor one must combine the change of each index with the change in the applicable currency. The following table shows the 5-day, quarter-to-date and year-to-date results of investments made in each index in US dollar terms:
For US dollar investors, the TSX, CSI, and FTSE were better places to have been invested in the last two weeks of August. |
Disclaimer: The views discussed herein are exclusively those of John W. Davidson. These views are not meant as investment advice, and are subject to change. Information contained herein is derived from sources believed to be reliable, however, Mr. Davidson does not represent that the information is complete or accurate and therefore, should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information purposes only, and does not pertain to specific investment objectives, the financial situation or the particular needs of any specific person or investor who might receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or utilizing any investment strategy discussed or recommended in this report, and should understand that statements regarding future investment prospects may not be realized. |
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