Volume 13, Issue 16             
August 17, 2015
The Federal Reserve / Economic Reports
  • Atlanta Federal Reserve Bank President Dennis Lockhart said the Fed is close to raising short-term interest rates, possibly as soon as September, noting that the economy is "approaching an acceptable normal," that he is "comfortable the economy can handle a gradually rising interest-rate environment" and that he would need to see a significant deterioration in economic conditions to convince him to delay raising rates. Lockhart, however, also hedged by saying, "At the same time, in the greater scheme of things, I don't think [waiting] a meeting or two is going to be decisive for the U.S. economy." Lockhart indicated the path of future interest rate increases is likely to be gradual, meaning "something less frequent than every meeting."
  • The labor department reported nonfarm payrolls increased 215,000 in July, matching consensus estimates, while 14,000 jobs were added for the prior two months report revisions. The unemployment rate was reported at 5.3%, the lowest since April 2008. The workweek rose 0.1 hour to 34.6 hours, which is equivalent to adding as many as 347,000 jobs. The private sector added 210,000 jobs, 92% of which were in the service sector, led by restaurants, healthcare, professional and technical services, and the financial sector. The participation rate remained weak at 62.6%, its lowest level since October 1977.
  • Retail sales were up 0.6% in July, matching estimates, while June was revised upward from -0.3% to flat. Most categories posted positive sales, led by Internet retailers (up 1.5%) and vehicle sales (up 1.4%). Electronics and appliances fell 1.2%. Economists remain optimistic regarding sales in the second half of 2015.
  • The June Job Openings and Labor Turnover Survey (JOLTS report) reflected modest but improving labor market conditions, with a report of a job opening rate of 3.6%. The number of unemployed per job opening fell to levels not seen since 2007. Since improved labor markets are viewed as a precondition for a rate hike, this report supports the Fed's intention of raising rates.
  • Retail inventories rose 0.9% in June, led by vehicles, while overall inventories rose 0.8%, much greater than the 0.2% gain in sales. The inventory/sales ratio increased to 1.37, the most since the end of the recession. High inventories are expected to have a negative contribution to third quarter GDP by as much as 2.2%.
  • The Bloomberg Consumer Comfort Index, which had reached a level of 47.9 in early April, rebounded modestly to 40.7 in the week ending August 9. On a scale of 0 to 100, the view of the state of the economy fell to 32.0, personal finances rose to 52.8, and the buying climax rose to 37.1. Comfort rose for those earning over $100,000, while generally declining for those in lower income households.
  • The Wells Fargo/Gallup Small Business Index fell five points in the third quarter to 59, its lowest level this year. Meanwhile the NFIB Small Business Optimism Index rose 1.3 points in July to 95.4, although remaining below the 42-year average of 98. Lower input costs and ongoing demand for goods and services caused the improvement. Higher minimum wage legislation is weighing on CEOs, although they also viewed the economic backdrop as favorable for expansion. Taxes and government regulations were expressed as the largest problems.
  • The ISM's Nonmanufacturing Index, primarily representing the services industry, rose 4.3 points in July, the most since February 2008, to 60.3. This widely surpassed consensus expectations looking for 56.1, representing the largest underestimation since August 2005. Fifteen industries reported growth, while two contracted. The Prices Index rose to 53.7, led by food and fuel costs, while construction and services labor were indicated in short supply.
  • On the other hand, the ISM Manufacturing Index fell the first time in four months by 0.8 points in July to 52.7, below estimates looking for an unchanged reading at 53.5. Production and new orders rose 2.0 points and 0.5%, respectively. Inventories fell 3.5 points and into contraction territory, while order backlogs declined at the fastest rate since November 2012, a sign of slower future demand. Of the 18 ISM industries, 11 expanded and five contracted. The ISM Prices Index declined 5.5 points to 44.0, due to the decline in raw materials prices.
 
Financial Markets
  • Equity markets gave back some ground in the first half of August. The Chinese government's surprise devaluation of the Yuan caused concern for economic growth and further currency devaluation from export-oriented countries. As would be expected in this environment, MSCI Emerging Markets index led the decline, falling 4.2%, while the International Developed EAFE index fell 2.1%. The small-cap Russell 2000 pulled back 2.1%, the NASDAQ composite fell 1.6% and the large-cap S&P 500 declined 0.6%.
  • Style trends over the period favored value over growth, with the Russell 3000 Value down 0.34% and the Russell 3000 Growth down 1.06%. The interest-rate-sensitive utilities and REIT areas led the advance, while consumer discretionary and healthcare led the decline. Year to date, growth has significantly outperformed value, up 5.6% versus -2.0%.
  • The yield curve flattened modestly. Short rates rose, while long rates declined along with falling inflation expectations (five-year forward inflation expectations were 2.12% on July 31 and 2.0% on August 13).  High yield spreads widened further, with the Barclays High Yield to 10-year Treasury spread moving up to 4.9% from 4.7%.
  • 436 of the S&P 500 companies have now reported earnings, in aggregate representing an earnings decline of 1.0% (up from -1.3% at the end of last month).  "Currency", "Europe" and "China" were most cited in conference calls for the weakness, while "Greece" and "oil" are gaining attention. The healthcare sector is beating estimates on both sales and earnings, while the energy sector remains the largest contributor to earnings declines. Excluding the energy sector, S&P 500 earnings growth would jump to 5.7% (from -1.0%).
  • Mutual fund flows for the five-week period ending August 5 show continued outflows, with buying preference being shown for world equity funds. World equity flows over the five-week period were a positive $20.8 billion while domestic equity outflows were almost $30 billion, representing the tenth consecutive week of outflows. Total taxable bond fund outflows totaled just shy of $11 billion. Outflows for the week of August 5 were $8.85 billion, the largest weekly outflow year to date. Corporate buybacks remain the largest source of domestic equity demand.
  • Given gradually declining inflation expectations, the Fed funds futures market now reflects a 45% implied probability of a September 17 rate hike and 72% implied probability of a December 16 hike of 0.25%.
  • Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20% from recent closing highs, meeting the common definition of a bear market, the same number as at the end of October 2008.
  • Energy price declines continued with the front month spot prices falling from $47.12 to $42.50 per barrel. Six-month and 12-month futures have been declining as well with current prices of roughly $47 and $50.70, respectively. OPEC members Saudi Arabia and Iraq continue to be primarily responsible for the oversupply. Surplus is projected at roughly 3 million barrels/day.
  • Gold dropped $10/oz. before rallying $25 to finish the period at $1,115. China's devaluation sparked concerns about currency competitive devaluation, with gold as a likely beneficiary under those conditions. Hedge fund manager John Paulson cut his gold position last quarter for the first time in two years. Speculators hold a net short position of futures and options contracts.
  • Should the current pace of M&A activity continue, announcements would reach almost $4.6 trillion this year, exceeding the $4.29 trillion record reached in 2007. This is in an effort to improve growth and find further cost savings in an overall economic environment of slowing revenue and profit growth.
Economic Figures and Forecast


  Data as of 8/15/15

  

  Numbers in red reflect decreasing estimates since last report while numbers in green represent increases.

Disclaimers
The material herein is based on data from sources considered to be reliable, but it is not guaranteed as to accuracy, does not purport to be complete and is subject to change without notice. It is not to be construed as a representation by us or as an offer or the solicitation of an offer to sell or buy any security. Any opinions expressed are subject to change. From time to time, this firm, its affiliates, and/or its individual officers and/or members of their families may have a position in the subject securities which may be consistent with or contrary to the recommendations contained herein; and may make purchases and/or sales of those securities in the open market or otherwise. This communication is for informational purposes only. Use by other than intended recipients is prohibited. Sender accepts no liability for any errors or omissions arising as a result of transmission. Any comments or statements made herein do not necessarily reflect those of Reliance Financial Corporation or its affiliates.

Mark Teichner
Chief Investment Officer, Reliance Trust 
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