Northwestern Mutual

Market Commentary

For the week of Aug. 22, 2016

Though the Olympics continued in Rio last week, American investors started to shift their attention back to their favorite spectator sport, Federal Reserve watching.

Key Market Data

While the three major indexes yet again reached new records on Monday, for the rest of the week they drifted and dipped amidst speculation about when the Fed would finally raise its benchmark rate – as soon as September or as late as December.

On Tuesday, William Dudley, president of the Federal Reserve Bank of New York and a voting member seen as simpatico with the Fed’s Chairwoman Janet Yellen said that growth in the second half of the year would pick up and a September rate hike was “possible.” The same day, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, echoed Dudley on growth and added, “I’m not locked in to any policy position at this stage, but if my confidence in the economy proves to be justified, I think at least one increase of the policy rate could be appropriate later this year.”

On Wednesday, the Fed released the minutes of its most recent meeting on July 26 and 27. The minutes seemed to indicate the committee was not quite ready to act, with members agreeing, “it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity.” In addition, because of stubbornly low inflation, many committee members “judged it was appropriate to wait for additional information” before considering raising rates, though there has been some positive data since that meeting on jobs and, most recently, the Consumer Price Index (CPI) (see below). On Thursday, John Williams, the president of the Federal Reserve Bank of San Francisco (and a non-voting Fed committee member), said that the economy was strong enough to warrant a rate hike “sooner rather than later,” and that waiting too long could trigger high inflation or an asset bubble. Williams, like Dudley, is seen as an ally of Yellen. By week’s end, attention had turned to the Fed’s upcoming annual meeting in Jackson Hole which begins on Thursday, and more particularly to Yellen’s Friday speech for any clues as to the Fed’s timetable.

Post-Brexit resilience?

Despite the fact that Great Britain is expected to slip back into a recession in the second half of the year, last week the word most often heard to describe the post-Brexit economy was “resilient.” This came after retail sales rose 1.4% in July (they dipped 0.9% in June), and jobless claims fell 8,600 in July (after rising by 900 in June). However, in both instances there were caveats: when it came to retail sales, they were seen as having been boosted by hot weather as well as the tumbling pound which spurred spending by tourists. As for jobs, a report released earlier in August by the Recruitment and Employment Confederation concluded that Great Britain’s labor market was in “free fall” after the vote. Meanwhile, the minutes of the European Central Bank’s July meeting showed that the bank’s governors agreed not to talk about any changes to monetary policy and to avoid doing anything that would lead markets to expect further stimulus measures.

We're #1, for now

By the end of this year, China’s retail sales are forecast to total $4.886 trillion and eclipse those in the United States, projected to reach $4.823 trillion in 2016, making China the world’s biggest retail market according to eMarketer. There was less positive news for China, however, when the International Monetary Fund said the nation needed to take “decisive action” to deal with growing threats to its economy, particularly soaring credit growth, noting that the vulnerabilities of China’s economy were “rising on a dangerous trajectory.”

Japan's slowdown — and further stimulus?

Japan’s economy grew less than expected in the second quarter, coming in at 0.2% rather than the expected 0.7% as the stronger yen hurt exports. July showed little sign of improvement as exports fell 14% from a year earlier, the biggest drop since 2009, while imports plummeted 24.7% from July 2015. Also last week, Etsuro Honda, an advisor to Prime Minister Shinzo Abe, said that the “comprehensive assessment” of its monetary policy recently announced by the Bank of Japan will likely lead to more stimulus, not less. “However they conduct the assessment,” he said, “there is already an answer: Monetary policy hasn’t been eased enough.”

Oil's recent rebound continues

Though it dipped on Friday, the rising price of oil helped push the market up early in the week and Brent crude still managed to finish back above the $50-a-barrel mark at $50.51 (U.S. crude closed at $48.14). At the same time, U.S. oil producers added rigs for the seventh week in a row, the longest period of expansion since the final days of the drilling boom in early 2014.

In other news, the National Association of Home Builders/Wells Fargo Housing Market Index rose two points to 60 in July. Housing starts in July were up 2.1% from the month before to 1.21 million, while building permits declined 0.1% to 1.15 million from June’s total. The CPI was flat in July from June while up 0.8% year on year; Core CPI, less food and energy, increased 0.1% from the previous month and 2.2% over the last year. Industrial production rose 0.7% in July from June, its largest gain since November 2014, with manufacturing up 0.5%, its fastest pace since July of last year; capacity utilization inched up from 75.4% to 75.9%. First-time jobless claims for the week ending Aug. 13 fell 4,000 to 262,000; the four-week moving average for the week ending Aug. 6 rose 2,500 to 262,750.

A look ahead

Although most of the week will be spent waiting for and then parsing Yellen’s speech in Jackson Hole on Friday, there will be other releases this week. These include updates on new and existing home sales, orders for durable and capital goods, Markit’s Manufacturing Purchasing Manager’s Index, personal consumption and consumer confidence, and the government’s second estimate for second-quarter gross domestic product, expected to be revised down from 1.2% to 1.1%.