Market Update

• Market decline continues following biotech and oil weakness. U.S. markets opened lower today as traders are dialing down risk ahead of Federal Reserve Bank (Fed) Chair Janet Yellen’s speech tomorrow at the Jackson Hole Symposium. All three averages declined yesterday; the healthcare sector slipped 1.6% as biotech headline risk came back into focus. Materials also lost over 1%, while the top performing sector, utilities, posted a flat return. European shares are also lower on healthcare weakness, reversing strong gains from earlier in the week. Asia was also red overnight as the Nikkei, Shanghai Composite, andHang Seng all lost ground. Meanwhile, WTI crude oil continues to digest a Department of Energy report that confirmed a 2.5 million barrel build-up in inventories. Despite the risk-off sentiment, COMEX gold is down this morning to $1324/oz., while weakness in Treasuries has boosted the yield on the 10-year note to 1.57%.

Macro View

• Initial claims remain low. At 261,000, new claims for unemployment insurance remained at 40-year lows in the week ending August 20, 2016, another reminder that the labor market post-Brexit is little changed from pre-Brexit. But as usual, the weekly claims data are beset by distortions. At this time of the year, the annual auto plant shutdowns and the start of the new school year are the likely culprits. Claims are down 3,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate a recession, so there is no recession signal from claims.
• July durable goods report suggests some acceleration in manufacturing and business capital spending in Q3.Core durable goods orders posted a solid month-over-month gain of 1.6% in July after the 0.5% gain in June. The gains in June and July were the first back-to-back gains in core orders since late 2014, another sign of stabilization in business capital spending. Core orders in July were running 7% ahead of their Q2 average, suggesting that capex will add to gross domestic product (GDP) growth in Q3 2016 for the first time in a year. As we noted in our Midyear Outlook 2016, we continue to expect that business capital spending will add to GDP growth in the second half of the year, aided by a lower dollar, higher oil prices, and an uptick in oil and gas exploration after a two-year decline.
• Yellen’s upcoming Jackson Hole speech, “The Federal Reserve’s Monetary Policy Toolkit.” The speech is set for tomorrow, Friday, August 26, at 10 a.m. ET. As of this morning, the market is pricing in a 30% chance of a rate hike at the September Federal Open Market Committee (FOMC) meeting and a 55% chance of a hike at the December meeting. Yellen is likely to talk up the U.S. economy, sound cautious on the global economy, suggest that any rate hike is data dependent, and to again encourage fiscal policymakers to join the fight against slow growth and deflation.

Monitoring the Week Ahead

Thursday

• Durable Goods Orders and Shipments (Jul)
• Germany: Ifo (Aug)
• Japan: CPI (Jul)

Friday

• Goods Trade Balance (Jul)
• GDP (Q2 – Revised)
• Fed Chair Yellen speaks at Jackson Hole Policy Symposium

Click Here for our detailed Weekly Economic Calendar

 

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