In the markets:
U.S. Markets: A strong surge on Monday carried many major U.S. benchmark indexes to new highs this week. Monday’s strong move came as initial damage reports from Hurricane Irma were not as severe as many estimates had projected. For the week, the Dow Jones Industrial Average added 470 points to close at 22,268, a gain of 2.16%. The tech-heavy Nasdaq Composite was also strong rising 88 points to 6,448, a 1.39% increase. Smaller cap indexes outperformed their large cap brethren with the S&P 400 mid cap index and Russell 2000 small cap index rising 2.03% and 2.31%, respectively, while the large cap S&P 500 rose lesser but still quite handsome 1.58%.
International Markets: Canada’s TSX rebounded from last week’s loss by rising 1.25%. In the United Kingdom, the FTSE fell for a second week, hammered by a soaring British pound, this time down -2.20%. On Europe’s mainland, major markets finished in the green with France’s CAC 40 adding 1.96%, Germany’s DAX rising 1.75%, and Italy’s Milan FTSE up 2.10%. In Asia, China’s Shanghai Stock Exchange slipped -0.35%, while Japan’s Nikkei surged 3.30%, and Hong Kong’s Hang Seng finished up 0.50%. As grouped by Morgan Stanley Capital International, emerging markets outperformed developed markets this week. Emerging markets rose over 1.56%, while developed markets added 0.81%.
Commodities: It was a strong week for energy as the price of a barrel of oil surged over 5%. West Texas Intermediate crude oil ended the week at $49.89 a barrel, rising $2.41. However, precious metals lost some of their luster. Gold was off -1.9%, to $1325.20 an ounce, while Silver fell over -2.3% to $17.70. The industrial metal copper, seen by some analysts as a proxy for global economic health due to its variety of industrial uses, ended the week down -3%.
U.S. Economic News: The number of Americans who sought initial unemployment benefits last week declined by 15,000 to 284,000, according to the Labor Department. Initial claims count the number of people who apply for unemployment benefits for the first time after losing their jobs. Many businesses were forced to close in the aftermath of hurricanes Harvey and Irma. Even so, claims remain below the key 300,000 threshold that analysts use to indicate a healthy jobs market. The less-volatile four-week moving average of claims rose by 13,000 to 263,250. Although that’s the highest level in a year, analysts expect it to turn lower by the end of September. Continuing claims, the number of people already receiving benefits, fell by 7,000 to 1.94 million.
Job openings in the United States hit another record in July, continuing to climb despite the lowest unemployment rate in years. The Labor Department reported that openings rose by 50,000 to 6.17 million in July. It’s the first time that job openings have been over 6 million for two months in a row since 2000. Employment has surged dramatically since the depths of the Great Recession, when job openings fell to just 2.2 million. Nearly 17 million new jobs have been created over the last 7 years, though the number of people hired has continued to lag behind job openings. Nearly 5.5 million people were hired, an increase of 69,000, but employers continued to struggle finding workers with the job skills they need.
Sentiment among the nation’s small business owners rose last month as plans to boost spending on capital equipment offset weaker hiring plans. The National Federation of Independent Business (NFIB) sentiment index rose 0.1 point to 105.3. The index initially surged following the election of Donald Trump as businesses expected less regulation and more business-friendly policies, but as Washington gridlock set in the index has since remained little changed. In its statement, the NFIB attributed the slight rise to a ‘relief rally’ based solely on “relief that they did not get another four years of costly federal regulations.” In the details of the report, five subcomponents weakened while five gained. Owners continued to cite the familiar problem of being unable to find qualified employees to fill vacant spots.
Consumer sentiment retreated slightly this month on concerns over the future, according to the University of Michigan’s consumer-sentiment index. The index fell 1.5 points to 96.8, exceeding economists’ expectations of 94.5. In the details of the report, almost 9% of survey respondents mentioned that impacts from the recent hurricanes would weigh on the economy as a whole. However, while consumers anticipated a slight rise in gasoline prices and inflation, they felt better about their financial situation than at any time in the last decade. Richard Curtin, chief economist for the survey stated, “Given the current resilience of consumers, recent events are unlikely to derail confidence.”
Inflation at the wholesale level rose at the end of summer, but most of that was due to rising gasoline prices. The Bureau of Labor Statistics reported its producer price index rose 0.2% in August, with a nearly 10% jump in the cost of gasoline accounting for most of the increase. Food costs, on the other hand, had their biggest decline in over two years. Aside from the surge in fuel, most other goods and services were little changed. Given the tame inflation data, the Federal Reserve can be patient before raising interest rates again. Most analysts don’t think the central bank will increase the cost of borrowing again at least until the end of the year. Over the last 12 months, the rate of wholesale inflation rose 0.5% to 2.4%--a tick below a five-year high. However, the core rate of inflation, which strips out food and energy, remained unchanged at 1.9% over the last 12 months. The core rate is viewed as a more stable barometer of price trends.
At the consumer level, higher housing costs and rising gas prices fueled a 0.4% surge in the Consumer Price Index (CPI), also known as the cost of living index, according to the Bureau of Labor Statistics. Gasoline prices continue to rise as refining operations in the Houston area were damaged from Hurricane Harvey. In addition, the index that tracks the cost of shelter posted its biggest monthly increase in 12 years, rising 0.5%. The rise in consumer prices lifted the 12-month increase in inflation to 1.9%, still slightly below the Federal Reserve’s 2% target. Core inflation, a measure that strips out the volatile food and energy categories, rose just 0.2% last month. The 12-month core rate of inflation remained relatively subdued at 1.7% for the fourth consecutive month.
Sales at the nation’s retailers fell last month, the second decline in three months. The Commerce Department reported Retail Sales dropped 0.2%, marking their biggest decline in six months. Analysts note that the slower pace of retail spending is predominantly due to the decline in auto sales, as auto sales makes up roughly 20% of all sales. Last month, sales at auto dealers fell by 1.6%. Ex-autos, U.S. retail sales rose 0.2%, but that was due almost entirely to rising gasoline prices. Sales at gas stations were up 2.5%, the largest increase in nine months. Over the past year, retail sales have increased 3.2%.
International Economic News: Canada’s Finance Minister Bill Morneau stated that the Canadian dollar’s recent sharp gain in value is a “clear reflection of the country’s economic strengths.” “My view is that the economy is showing continued strength even at our current dollar valuation,” he said. The Canadian dollar has rallied more than 13% since early May and hit its highest point in more than two years last week.
Across the Atlantic, the United Kingdom’s Bank of England (BoE) said it’s “likely to raise interest rates” in the coming months if the economy and price pressures keep growing. It’s the clearest signal given thus far that Britain’s first rate hike in more than a decade is approaching. Recent data has shown prices rising faster than expected along with unemployment falling to a forty-year low. Comments from the Bank of England indicated it had less tolerance for above-target inflation than for the potential negative impact of the country’s departure from the European Union. Policymakers voted 7-2 this week to keep rates on hold at a record-low 0.25%, as widely expected, but the new guidance from the BoE pushed the pound sterling to a one-year high versus the U.S. dollar.
A European Union plan to raise more tax from multinational digital companies hit a roadblock when smaller members of the bloc warned of the economic impact of such a move. France, Germany, Spain, and Italy want to tax companies like Google and Facebook on their turnover, rather than profits, to increase revenue from global online companies. Companies like Google, Facebook, and Amazon have been accused of paying too little in taxes in Europe. More than a third of the countries in the 28-member bloc backed Paris at a meeting of EU finance ministers, but the move needs the agreement of all states to reduce the risk of legal challenges. French Finance Minister Bruno Le Maire said the turnover tax was necessary to allow the European Union to collect taxes from major internet firms based in the United States but doing business in the European Union. Internet corporations have been able to cut their tax bills dramatically by declaring profits overseas instead of in the countries where their consumers are located. A turnover tax would recoup some of what these companies should be paying in corporate tax, according to finance ministers.
The amount of bad debt held by Italian banks fell by a record amount in July, a sign that Italy’s financial sector is starting to recover on stronger economic growth. The total volume of bad debts shrank by 18 billion euros or nearly 10% from the previous month. The amount of non-performing loans is back to levels not seen since 2014. Italy’s significant amount of non-performing loans has weighed on banks over the last several years, making it difficult for them to extend credit and spur the economy.
In Asia, China’s economy weakened in August but policymakers in Beijing stated it wasn’t unexpected. Both industrial output and retail sales saw slowing growth, though the weaker figures are believed to be due to reforms that the country has begun instituting. China’s President Xi Jinping stated that he is intent on finding cleaner and greener ways for China to manufacture its goods, and that environmental protection would be a priority in the future, along with poverty reduction and controlling financial risk. Following a strong first half of the year, the government was able to shut down some of its worst polluting industrial plants and should still be able to achieve a growth target of 6.5% for the year.
Former Trump White House chief strategist Steve Bannon spoke at a Hong Kong investment conference hosted by the Chinese government-backed CLSA, focusing on economic issues facing the US and Asia-Pacific regions. Bannon stated that the U.S. was in an “economic war” with other countries, including Japan, China, and South Korea, but Bannon did praise the Chinese economic system and spoke about the “affinity” between the U.S. and China going back to World War 2. Bannon has generally been considered more protectionist, but he took a very conciliatory tone when talking about China. Bannon said China’s “way of running their economic system is quite brilliant.”
Finally: The cryptocurrency Bitcoin generated considerable interest in mainstream financial media as it neared $5000 per “coin” at the end of August. With a 500% increase over the past year, many naïve buyers have rushed in recently. But over the past two weeks they have discovered that “what goes up can go down”. Bitcoin plunged -38% from September 1 to September 14 (see the following chart). The precipitous decline followed comments from Chinese officials that the government was looking to ban exchanges dealing in Bitcoin, and JP Morgan Chairman Jamie Dimon called Bitcoin a “fraud” during an appearance on CNBC. So, if you are tempted to invest in Bitcoin, just be aware that eye-popping rises can be followed by stomach-churning declines! The following chart (from coinbase.com) tells the story of 9/1 to 9/14 - the two weeks in Bitcoin hell.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)