Northwestern Mutual

Market Commentary

For the week of Aug. 29, 2016

Investors bided their time for most of last week. They were waiting for Friday when, it was hoped, they’d gain some clarity about the Federal Reserve’s timetable for raising its benchmark rate from the speech that Chairwoman Janet Yellen would deliver that day at the annual meeting in Jackson Hole.

Key Market Data

While her message at the annual meeting in Jackson Hole was upbeat – and the odds of a September hike increased from 21% to 36% – no date was indicated. The key determinant in any next step is now seen as the jobs report for August which will be released this Friday. In other words, it’s another week of waiting.

Up until Friday, stocks drifted slightly but not dramatically lower. The shares of energy companies were pushed down by the lower price of oil, and the shares of biotech companies were hurt by the Mylan saga – the company has been excoriated for the sharp rise in the price of its EpiPen, and some investors were concerned that the federal government would step in to regulate industry pricing. Even so, trading volumes were at or near yearly lows as traders took summer vacations or awaited the Fed.


Yellen speaks – and Fischer follows up

On Friday, in a speech that was mostly about the Fed’s readiness for a next recession, should one come, Yellen said, “In the light of continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.” As noted, that put a rate hike at the September meeting in play, though the odds remained stronger for one in December, now at 61% (a hike at the Nov. 1 and 2 meeting is seen as unlikely because of its proximity to the elections). Yellen also unveiled a chart that showed that the benchmark rate could be anywhere from 0% to 4% by the end of 2017, noting, “The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted.” The market, not quite sure what to make of her comments, at first rose, but then headed south after the Fed’s Vice Chairman Stanley Fischer appeared on CNBC and suggested that there could be two hikes in 2016, while also noting that a strong jobs report for August “would probably weigh in our decision.” By the end of the day, the three major indexes were down, closing out in their worst weekly performance since the Brexit, but were nonetheless all off less than 1.0%. The yield on the 10-year Treasury jumped to finish the week at its highest level since the June 23 Brexit.


A clue?

Those looking for clues as to the Fed’s intentions might take note of the fact that when the Fed met in July, eight of the twelve regional banks voted to raise the discount rate, the interest rate the central bank charges for loans to commercial banks, from 1% to 1.25%. While the rate remained at 1%, the vote marked the first time that a majority of the regional banks favored raising the discount rate since the Fed raised its rate in December, its first such hike since 2006.


Q2 gross domestic product

The government revised its estimate of second-quarter growth down from 1.2% to 1.1% as strong consumer spending was more than offset by the continued lack of business spending. In fact, consumer spending was up 4.4% from a year earlier, the fastest pace since the fourth quarter of 2014. Still, fixed nonresidential investment, which includes spending by businesses, fell 0.9%, and residential investment tumbled 7.7%. The low growth rate doesn’t seem likely to hold the Fed back, however. The Federal Reserve Bank of Atlanta’s most recent forecast for third-quarter growth is 3.4%, more in keeping with Yellen’s positive take on the economy.


A push for reform

China, the current head of the Group of 20, said it will lead efforts for global financial reform, including expanding access to online financial services and measures important to emerging markets, at this weekend’s summit of finance ministers and central bankers in Hangzhou, China.


New home sales soar

The Commerce Department announced that new single-family home sales jumped 12.4% in July from June to 654,000 units, the highest total since October 2007, and were up a whopping 31.3% from July 2015. In what was also seen as positive, the median price fell to $294,600 in July from $310,500 in June, making homes more affordable to first-time buyers. In other news, existing home sales, in contrast, fell 3.2% in July to 5.39 million from June’s 5.57 million. Orders for durable goods bounced back in July, rising 4.4% from June after dipping 4.2% the month before. Orders for durable goods ex-transportation improved 1.5% over June, while orders for capital goods climbed 1.6%. Wholesale inventories were flat in July from the month before. The University of Michigan’s Consumer Sentiment Index for August was 89.8, down from 90.4. And first-time jobless claims for the week ending Aug. 20 fell 1,000 to 261,000; the four-week moving average for the week ending Aug. 13 dipped 1,250 to 264,000. That makes 77 weeks of claims below 300,000, the longest such streak since 1970.


A look ahead

Though Friday’s jobs report will be the week’s most awaited release, there will also be updates on core personal consumption expenditures, the S&P/Case-Shiller Home Price Index, consumer confidence, pending home sales, motor vehicle sales, construction spending, factory orders and the Institute for Supply Management’s Manufacturing Index. In addition, a number of Fed bank presidents will speak this week, including two voting members, Eric Rosengren, president of the Federal Reserve Bank of Boston, and Loretta Mester, president of the Federal Reserve Bank of Boston. Investors will no doubt be sifting their remarks for clues about the Fed’s next steps.

Have a happy Labor Day — and remember, the market is closed on Monday, Sept. 5th.