Economic Notes: September 2, 2014
- A busy week of economic data releases boosted by an upward revised Q2 real GDP growth rate, a double-digit monthly gain of durable goods orders in July and better than expected consumer confidence going into the back-to-school shopping season.
- Mixed housing sales data in July combined with more modest price appreciation and higher housing inventory will likely boost future sales.
- Slightly better results for the recent week’s claim numbers; modest personal income growth in July, and smaller spending helped improve savings rate.
- U.S. equity markets crossed a historical milestone: The S&P 500 index closed above the 2,000 mark for the first time, fueled by strong domestic economic data and a new M&A transaction between Burger King and Canada-based Tim Horton’s. This was despite the escalating conflict between Ukraine and Russia and investors’ concerns on deflation and low growth in the euro-zone.
(-/0) Sales of new single-family houses in July slipped by 2.4% monthly to a seasonally adjusted annual rate of 412,000, below the consensus expectation of 430,000 new homes. Meanwhile, new home sales in May and June were both revised upward from earlier estimates. By region, the Northeast and the West saw double-digit sales declines. The South was the only region seeing sales growth in July. On a year-over-year basis, new home sales in July were 12.3% higher than the estimate of 367,000 in July 2013.
(+) The Pending Existing Home Sales Index published by the National Association of Realtors rose 3.3% to 105.9 in July (2001 = 100), exceeding the consensus expectation of a 0.5% increase. However, the index is still 2.1% lower compared to the level in July 2013. By region, pending sales were up in the Northeast, South and West, but declined slightly in the Midwest.
(-/0) The S&P/Case-Shiller 20-City Home Price Index increased 8.1% in the 12 months ending June, slightly below the consensus expected 8.3% gain. Compared to May, the 20-City Composite index rose 1%. New York, Las Vegas, Detroit and Chicago saw the largest home price increase, while San Francisco, Charlotte and Cleveland had the smallest price increase. The National index showed a sustained slowdown in home price appreciation.
(+) The Federal Housing Finance Agency (FHFA) Housing Price Index (HPI) was up 0.4% monthly on a seasonally adjusted basis in June, slightly above the consensus expectation of 0.3%. The South Atlantic and Pacific regions showed the highest price appreciation by 1.3% and 0.8% respectively. The Central regions came in with slight price declines. The index gained 5.1% for the 12 months ending June 2014, less than a 7.8% increase for the 12 months ending June 2013. The index level as of June 2014 was roughly the same as the July 2005 index level.
(0) Initial jobless claims for the week ending August 23 came in at 298,000 after seasonal adjustment, which was slightly better than the 302,000 expected by consensus. The 4-week moving average was 299,750, trending down from the previous week’s revised average by 1,250. Continuing claims for the week of August 16 increased 25,000 to 2,527k, a slight negative surprise from the consensus view of 2,520k. The 4-week moving average of continuing claims continued edging lower to 2,524k.
(+) The second of three estimates for Q2 real gross domestic product (GDP) was released with an annual growth rate of 4.2%, slightly faster than the consensus forecast of an initial estimated 4.0 rate. The better estimate resulted from upward revisions in equipment investment, net export and nonresidential structure plus a slight downward revision in the increase of private inventory investment. The price index for gross domestic purchases grew 1.9% in Q2, up from 1.4% in Q1. Excluding food and energy prices, the core price index gained 1.7%, indicating overall benign inflation.
(+/0) New orders for durable goods surged 22.6% month-over-month to $300.1 billion in July, beating the consensus view of a 7% increase. The double-digit gain was mainly fueled by a 318% jump in new orders of nondefense aircrafts, particularly reported from Boeing. Excluding transportation, new orders were actually down by eight-tenths of a percent, lagging the consensus expectation of 0.6%. Aside from the strong new order reading, durable goods shipments, unfilled orders and total inventories all increased in July by 3.3%, 5.4% and 0.5% respectively to new record levels.
(-) Personal income for July was up only 0.2% month-over-month. Meanwhile, personal consumption expenditures (PCE) fell 0.1% mainly in the segments of durable goods (-0.7%) and nondurable goods (-0.1%). Both measurements were lower than the consensus expectation of a 0.3% increase for personal income and 0.1% for PCE. As income grew faster than the spending rate, the personal savings rate improved from 5.4% in June to 5.7% in July. The Fed’s preferred inflation measurement, PCE price index, increased 0.1% in July as expected by the consensus view. The core PCE price index, excluding food and energy, was up 0.1% as well. On a year-over-year basis, the PCE price index and the core index grew 1.6% and 1.5% respectively, still below the FOMC’s target of 2%.
(+) Chicago Business Barometer (Chicago PMI) index sharply rebounded 11.7 points to 64.3 in August from 52.6 in July, significantly beating the consensus forecast of 54.8. After a temporary setback in July’s declining reading, Chicago PMI showed strong growth in key components such as production, new orders and back orders.
(+) The Conference Board Consumer Confidence Index was boosted for the fourth consecutive month to 92.4 (1985=100) in August from a slightly downward revised 90.3 in July. The reading exceeded the consensus expected 88.3. The improvement benefited the most from a 6.7-point jump in consumer confidence for the Present Situation Index, standing at 94.6 in August from 87.9 in July. For example, 18.2% of the surveyed consumers stated jobs are “plentiful”, up from 15.6% last month. However, the Expectations Index edged down a little bit to 90.9 from 91.9 in July, signaling that consumers were slightly less optimistic about the short-term outlook.
(+) The final University of Michigan’s consumer sentiment index in August came in at 82.5, better than the preliminary estimate of 79.2 in mid-August and also ahead of the consensus expectation of 80. Consumers expressed further confidence in current economic conditions as the sub-index rose to 99.8 from 97.4 in July. However, the survey’s gauge on future expectations slipped from 71.8 in July to 71.3, but that was better than the earlier estimate. The one-year inflation expectations edged down to 3.2%, while the five to 10-year inflation outlook creeped up to 2.9%. Both measurements are within the Fed’s inflation ranges.
Amid a week of light trading ahead of the long Labor Day/Back-to-School holiday weekend, domestic equity markets continued marching higher. The S&P 500 index cleared the 2,000 psychological price barrier for the first time, more than 16 years after the index surpassed the 1,000 level in February 1998. The positive week was helped by a stronger Q2 real GDP report, robust durable goods orders, and upbeat consumer confidence reinforced by multiple survey indices. Small cap outperformed mid and large cap stocks as investor sentiments were high. Energy, utilities, and healthcare sectors outperformed industrials, consumer defensive, and technology sectors.
Outside the U.S., things were not so great as investors had renewed concerns about the euro zone’s economic condition and the escalating geopolitical crisis between Ukraine and Russia. International developed stocks underperformed U.S. stocks. The MSCI Pacific index declined -0.68%, 94 bps below the MSCI Europe index’s 0.26% for the week. Emerging markets stocks held up relatively better than the EAFE markets but were quite a bit behind U.S. equity markets. Within the emerging markets, the MSCI BRIC index was flat, underperforming the MSCI EM index. The EM Latin America region as a whole outperformed emerging countries in Europe and Asia.
BarCap U.S. Aggregate Bond index was up 36 bps. Bonds held up well despite strong domestic economic data and new highs in the domestic equity markets. Bonds were supported by the escalating geopolitical risks in Ukraine and the ECB President Mario Draghi’s concern about Japan-like deflation threatening the euro zone. Compared to the above 3% yield level at the beginning of the year, the U.S. 10-year Treasury yield was edging down 5 bps to 2.35% from a week ago. Short-term bonds underperformed long-term bonds.
Measured by the Citi Non-U.S. World Government Bond index, foreign-developed sovereign bonds were up by 49 bps, on par with emerging market bonds’ return of 51 bps.
U.S. REITs were up 52 bps, beating foreign REITs by 98 bps in the week. Commodity returns were strong, up 92 bps as measured by the Bloomberg Commodity Index (former DJ-UBS index), but lagged the energy-heavy S&P GSCI Commodity index’s weekly return of 1.32%, as energy outperformed.