In the markets:
Stocks ended the week lower despite what some saw as a pep talk by Federal Reserve Chair Janet Yellen, who said that global growth is strong enough to withstand turmoil in emerging markets and elsewhere. Most of the major stock indexes ended the week in the red. The Dow Jones Industrial Average gave up 69 points to close at 16314. The Nasdaq composite lost 140 points and ended the week at 4686. The LargeCap S&P 500 declined -1.36%, the MidCap S&P 400 index lost -1.75%, and the SmallCap Russell 2000 was the worst of the US indices at -3.49%.
International markets were also mostly down. Canada’s TSX declined -1.97%, Germany’s DAX was down for a second week, losing -2.3% (and now in Bear territory, more than 20% lower than its high). France’s CAC 40 similarly declined -1.22%. In Asia, Japan’s Nikkei also declined a second week down -1.05%, while China’s Shanghai composite declined only fractionally at -0.18%.
In commodities, a barrel of West Texas Intermediate crude oil gained +$0.02 to $45.34 a barrel. The price for an ounce of gold increased +$6.40 to $1,145.50, a gain of +0.56%. Silver declined -0.36% to $15.10 an ounce. Copper has now entirely reversed its huge surge two weeks ago, declining -4.14%.
In US economic news, the economy expanded +3.9% in the second quarter’s final estimate. That’s up +0.2% from the earlier estimate and a healthy rebound from the first quarter’s puny +0.6% gain. Exports, residential and non-residential fixed investment, and state and local government spending all increased.
On the jobs front, there were 267,000 initial claims for unemployment last week, an increase of 3,000 but still below estimates of 275,000. There were 2.142 million continuing claims, about the same as last week.
The US housing market showed signs of weakness as sales of existing homes declined -4.8% to an annual rate of 5.3 million in August, according to the National Association of Realtors. Forecasts had been for a rate of 5.5 million. Compared to last year, existing home sales are still up +6.2%. Prices were +4.7% higher versus a year ago. The Federal Home Finance Agency (FHFA)’s price index rose +0.6% in July as house price gains accelerated. FHFA’s index, which includes only mortgages guaranteed by Fannie Mae or Freddie Mac, stands just 1.1% below its 2007 peak. Contrary to existing-home sales, new-home sales ran at an annual rate of 552,000 in August, beating expectations of 515,000, and are +22% higher than year-ago levels.
Retail reporting service Redbook reported that same-store sales rose +0.9% versus a year ago last week. This was a sharp deceleration from the +1.7% annual gain the previous week. New orders for durable goods also disappointed as orders dropped -2% in August, matching forecasts. Ex-transportation, orders were flat, which missed estimates of a 0.3% gain—and down 3.9% versus this time a year ago. Manufacturing has suffered as energy producers hold back on capital expenditures. Core capital goods orders, considered a proxy for business investment plans, dipped -0.2%.
Bloomberg’s most recent weekly reading of consumer confidence increased +1.7 points to 41.9, the highest reading in a month. Consumers’ views of their personal finances rose to the highest level in 2 months. Likewise, the University of Michigan’s consumer confidence reading for September rose +1.5 point to 87.2, beating expectations but still the weakest reading since last October.
The US Purchasing Managers Index (PMI) for factory output remained unchanged at 53, the lowest reading since October 2013. Output rose at a slightly faster pace in September, but new business, and employment weakened. The employment component was the weakest in 15 months.
The Richmond Fed’s regional factory index hit a 32-month low and fell into contraction to -5 in September, down from zero. Expectations had been for a gain to three. The worst component was new orders, which plunged to 12, a bad sign for future activity. Manufacturing has struggled with a stronger dollar, which makes US exports less attractive. The Chicago Fed’s National Activity Index declined to -0.41 in August from 0.51. All 4 categories within the index declined.
In Canada, wholesale sales were flat in July, missing expectations of a +0.7% rise. Machinery, equipment, and supplies rose +1%, but sales of construction, forestry, mining and industrial machinery fell -3%. Canadian retail sales rose +0.5% in July, missing expectations of a +0.8% gain, but the third straight monthly rise nonetheless. Sales growth was driven by motor vehicle and parts, clothing and accessories.
In the Eurozone, the September composite PMI from Markit ticked down to 53.9 from 54.3, but that closed out the best quarter in four years. New orders were at a five month high and order backlogs improved, signaling probable higher future economic activity.
The Asian Development Bank (ADB) said that the Chinese economy will grow less than its government’s 7% target this year, and that the country’s slowdown could ripple throughout Asia. The ADB forecasts growth of 6.8%, down from 7.2%. China’s factory PMI from Caixin is now at a 6 ½ year low, declining -0.3 point to 47. Output, new orders, new export orders and employment gauges all declined at faster rates.
Finally, this week we take a closer look at the declining fortunes of “the world’s factory” — China. Unlike other Purchasing Managers Index (PMI) readings around the world, in China the PMI readings are from two sources: the official state-issued PMI, and the Caixin PMI. The difference between them is that the official state-issued version covers state-owned and very large enterprises, whereas the Caixin version is a gauge of nationwide manufacturing activity that focuses on smaller, medium-sized and privately-owned companies.
As seen on the chart below, both the state-issued and the Caixin PMI values show declines year-over-year, but the Caixin PMI has fallen hard and fast in the last few months. Both are now in the sub-50 area, signaling contraction. The Caixin version is now lower than the state version by a very significant 2+ points, indicating greater trouble in the small-medium-private sector…or perhaps indicating misrepresentation by the Chinese government in the state-issued version.
(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.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; Figs 3-5 source W E Sherman & Co, LLC)