General market news
- The yield on the 10-year Treasury was back up to 2.20 percent early Monday morning, after being as low as 2.01 percent fewer than six trading days ago. The move from one support level to the next in such a short period leads us to believe that investors are uncertain about the market and can’t decide whether to favor a risk-on or risk-off trade. The 30-year yield moved from 2.63 percent to 2.77 percent in the same period. It is still well below the 3-percent mark, however, implying that the risk-off trade is still in favor with many.
- S. markets took the opportunity to exhale last week after dealing with tumultuous news about North Korea and hurricanes Harvey and Irma in the week prior. The Dow Jones Industrial Average was the top performer, posting a gain of 2.19 percent. The S&P 500 Index and Nasdaq Composite followed with gains of 1.63 percent and 1.41 percent, respectively.
- Monetary policy grabbed headlines around the world last week. The People’s Bank of China removed a deposit requirement for currency forward trades and axed the deposit requirement for foreign banks’ yuan deposits. These actions are expected to make foreign deals more attractive. The Bank of England also made the news after it voted to keep interest rates steady, despite a 2.9-percent increase in inflation in August. The bank expects this increase in inflation to be temporary. This week, the focus will be on our own Federal Open Market Committee (FOMC).
- There were a number of important economic data points released last week. On Wednesday and Thursday, the Produce and Consumer Price Index reports showed higher-than-expected inflation data. Consumer prices have increased by 1.9 percent year-over-year, while producer prices have grown by 2 percent. Low inflation figures were a concern earlier in the year, but these readings are approaching the Fed’s stated target of 2-percent inflation.
- On Friday, retail sales for August came in lower than expected. Sales declined by 0.2 percent against expectations for 0.1-percent growth. The impact from Hurricane Harvey at the end of the month likely played a part in this miss, but we won’t know whether this slowdown was due to transitory factors until next month.
- The week ended with a slight decline in the University of Michigan Consumer Sentiment survey. This figure remains near post-election highs, so the result is nothing to worry about.
|MSCI Emerging Markets
|Fixed Income Index
|U.S. Broad Market
What to look forward to
Most of the economic data this week focuses on housing. On Monday, the National Association of Home Builders industry survey will be released. It is expected to decrease from a very strong level of 68 in August to a still strong level of 67 in September. Given extensive damage from hurricanes Harvey and Irma—which may worsen labor and material shortages for homebuilders—there may be some downside risk to this number.
On Tuesday, housing starts are expected to tick up from 1.155 million in July to 1.18 million in August. The July number was a surprise, resulting from declines in multi-family developments, which have historically been volatile. Single-family starts held their ground. Although multi-family starts are expected to decline even more in August, strong demand and limited supply for single-family homes should keep that sector increasing.
On Wednesday, existing home sales are likewise expected to tick up—from 5.44 million in July to 5.47 million in August. Once again, despite strong demand, low inventory is expected to constrain sales. This means there is some downside risk to this number. The July number was the lowest in almost a year, and the trend is likely to continue.
Also on Wednesday, the FOMC will conclude its regular meeting. Although the Fed is likely to continue viewing the economy in a positive light, uncertainty around inflation, as well as the unknown impacts of the hurricanes, will likely result in no change to interest rates. The Fed is expected, however, to start the process of reducing the balance sheet by slowing the reinvestment of maturing securities and payments. This has been well telegraphed to markets, and reaction should be minimal. Still, markets will be watching to make sure that the actual plan is the same as described previously.
Overall, if the news comes in as expected, the signal for the rest of the economy will be positive.