Economic Notes: August 4, 2014

August
04

Written by: Jon McGraw

  • A busy week of economic data releases boosted by a faster Q2 real GDP growth rate, a stronger ISM manufacturing reading in July and upbeat consumer confidence levels.
  • Housing sales data for June was weaker, while results for July’s payroll numbers and June’s personal income and consumption data were in-line.
  • No significant surprises from last week’s Federal Open Market Committee (FOMC) meeting with another asset purchase reduction of $10 billion each month; Philadelphia Fed President Charles Plosser voted against the guidance language about rates being on hold for “a considerable time after the asset purchase program ends.”
  • Initial jobless claims came in slightly softer than the consensus expectation with a small improvement for the 4-week moving average and slightly higher continuing claims.
  • U.S. equity markets pulled back near the end of the week in reaction to the ongoing geo-political tension in Eastern Europe and the Middle East plus fears of uncertainty after the expected end of the Fed’s QE3 in October.

(+) Despite a strong U.S. Q2 GDP report and several improving economic data, financial markets took a downturn at the end of the week after no significant surprises from last week’s FOMC meeting.  As anticipated, the Fed kept the short-term rate at 0.25% while reducing its asset purchases by another $10 billion to a total of $25 billion starting in August.  U.S. equity markets sold off across the board.  Small cap stocks were deeper into the red zone for the year-to-date performance.  Defensive sectors fared better.  Telecom, healthcare, consumer discretionary and utilities sectors outperformed energy, industrials and financials in the S&P 500 index.

(-) Outside the U.S., international developed stocks outperformed U.S. stocks.  The MSCI Pacific index declined -0.58%, much less than the MSCI Europe index’s -2.91% for the week.  For the year-to-date, Pacific outperformed Europe by 3.72%.  Emerging markets stocks held up surprisingly better than both U.S. and EAFE markets.  Within the emerging markets, the MSCI BRIC index lost 2.08%, 36 bps behind the MSCI EM index.  The EM Asia region as a whole outperformed emerging countries in Europe and Latin America.  Argentina officially defaulted from its coupon payments as the negotiations between the country and a handful number of holdout creditors failed.  Rating agencies downgraded Argentina’s rating to Selected Default at S&P and Restricted Default at Fitch.

(0) BarCap U.S. Aggregate Bond index was slightly down by -12 bps last week.  Bonds outperformed stocks in a down week.  With no major surprises from the Fed’s meeting, the U.S. 10-year Treasury yield edged up 4 bps to 2.52% from a week ago.  Short-term bonds beat long-term bonds.  Government bonds outperformed credit.

(+) Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds were off by -37 bps, but ahead of emerging market bonds by 85 bps.  The U.S. dollar strengthened on the back of robust Q2 GDP numbers.

(-) U.S. REITs declined 2.28%, underperforming foreign REITs by 152 bps in the week. Commodity returns were down 1.71% as measured by the Bloomberg Commodity Index (BCOM), beating a total return of -2.63% from the energy-heavy S&P GSCI Commodity index as energy lost ground.