US equity markets recovered some ground this week and the Shanghai Composite appeared to stabilize after another round of government pledges. The DJIA is looking a little shaky, weighed on by pain in the commodities related industrials, but the S&P500 is within sight of the recent all-time highs, notching a 1.2% gain on the week. Despite pledging hundreds of billions to prop up its market, China’s stocks sunk another 8.5% on Monday – the biggest one-day drop since 2007 – drawing another promise from the China Securities Finance Corporation(CSFC) to boost its stock purchases. The FOMC statement kept expectations of a September rate hike alive without pre-committing, while Thursday’s upward revisions to past core PCE readings and a hotter than expect initial Q2 core PCE print only supported that notion. Short term US Treasury yields backed up to levels not seen since early June as traders rotated into the US long bond, likely on the belief that rates can only rise very gradually under the current subdued growth outlook. The US Q2 employment cost index threw markets a bit of a curve ball on Friday, unwinding some of the week’s earlier bets the Fed was on the precipice of raising rates for the first time since 2006. The prospect of a Puerto Rico bond default over the weekend also dampened sentiment.

The semantic tweaks made to the FOMC statement released on Wednesday did not include any overt signals that rate hikes were imminent. However, Fed watchers characterized several minor changes as a hint that Fed officials see the economy closer than ever to full employment. For several meetings, the language talked about the need to see “additional” improvement in the labor market, but this was changed to “some” additional improvement. A related section stated that slack in the labor market had diminished, striking an earlier qualification that slack had diminished “somewhat.” On the inflation front, the statement dropped reference to “stabilized” energy prices, given that oil prices are retesting their spring lows, and it retained language that said inflation is running below the Fed’s 2% objective. The next FOMC meeting is scheduled for September 16-17.

The slowdown seen in the US Q2 employment cost index (ECI) had a broad impact on markets on Friday and made some question the viability of a September Fed rate hike. The report indicated that labor costs decelerated sharply in the quarter (+0.2% v +0.6%e), reversing Q1’s +0.7% figure and delivering the lowest rate of growth in 30 years. The Q1 reading suggested wage growth had picked up perceptibly from the stagnant trend of earlier years, holding out the hope for accelerating inflation and spending, with obvious implications for monetary policy. Analysts noted that some of the slowdown could be a reversal of a seasonal effect: the uptick in the first Q1 was concentrated in incentive-pay occupations, where bonuses and commissions can be volatile, and this pop reversed itself in the second quarter. Analysts caution that the adjusted data also rose in Q1 and decelerated in Q2. Commenting after the ECI release, Fed hawk Bullard said he was not concerned by the data, and that a September rate hike can’t be ruled out.

The first reading of Q2 US GDP was just fine, with the headline figure of +2.3% a hair below expectations but much better than the revised final Q1 figure of +0.6% (which itself was revised up from the -0.2% final report in June). Personal consumption beat expectations at +2.9%, while the export figure grew to +5.3% from -5.9% in the final Q1 report. Friday’s GDP report was the first to include new methodology meant to correct the tendency to slightly underestimate growth in Q1 and overestimate growth in Q3, due to issues in measuring military spending and consumer services. Under the new approach, the government has found that the US economy grew somewhat slower in 2012-14, at an average of +2.0% a year instead of +2.3%. The slowest recovery since the end of World War II is now even weaker than previously believed.

Continue reading “Market Recap & Economic Reports 8.04.2015”