Weekly Economic Updates: July 8, 2017

Goldilocks Jobs Report &
the Fed Lead the Markets This Week

Weekly Economic Updates – July 8, 2017

  • The major US stock markets turned in mixed performance for the holiday-shortened week, which is also the first week of the third quarter. The S&P 500, DJIA and technology-heavy NASDAQ all squeaked out small gains
  • It’s interesting to note that the narrowly defined DJIA and the more broad-based S&P 500 have returned about the same performance year-to-date
  • The week brought investors another Goldilocks jobs report but it was somewhat tempered by news from the Federal Reserve that they intend to scale back their $4.5 trillion balance sheet as early as the end of the summer
  • The yield on the US 10-year Treasury note rose 9 basis points this week to 2.39%
  • The price of West Texas Intermediate crude oil went the other way and dropped to $44.50/barrel from $45.40/barrel, still in official bear-market territory (defined as 20% off a recent high)
  • Volatility, as measured by the Chicago Board Options Exchange Volatility Index, rose to 11.75 from 10.9 last week
  • The fed funds futures market still points to the December FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 59.1%, up from last week's 54.4%

Weekly Market Performance

 CloseWeekYTD

DJIA21,4140.3%8.4%

S&P 5002,4250.1%8.3%

NASDAQ6,1530.2%14.3%

Bonds*$108.90-0.4%2.0%

10-Year Treasury Yield2.39%0.08%-0.6%

*Source: Bloomberg. Bonds representedby the iShares Core US Aggregate Bond ETF

June’s Employment Report – Not Too Hot, Not Too Cold

The US Bureau of Labor Statistics released the Employment Report for the month of June and showed that employment increased in health care, social assistance, financial activities, and mining. More specifically, the Report showed the addition of 222,000 nonfarm payrolls, which was significantly higher than estimates of about 173,000. The Report was largely seen as another “Goldilocks Report,” pointing to a job market that is sustaining a modestly-growing economy without much fear of inflation.

Those 222,000 new jobs added in June bring the 2017 monthly average to 180,000 – another positive indicator for the economy. It’s true that the unemployment rate inched up from a 16-year low to 4.4%, but only because more individuals are returning to the work force, which is a good thing.

June's Report also showed that wages are rising at a 2.5% rate, higher than the average of 2.0% from the 2010-2015 time-period. Finally, the Report showed upward revisions to April and May payrolls of another 47,000 jobs to the numbers reported earlier in the year.

The Fed Has Other Tools Besides Raising Short–Term Rates

The Fed has raised short-term rates three times since the end of 2015 and expectations are that rate raising will continue in a measured way. Last week, the market digested the minutes from the recent Fed meeting, which outlined the next tool the Fed uses to manage economic growth – paring back its balance sheet. Besides the ability to raise/reduce short-term rates, the Fed has a $4.5 trillion balance sheet and they intend to reduce this amount over the next few years, which will also have the effect of allowing longer-term rates to rise gradually.

The minutes of the June Federal Open Market Committee meeting show that some of its members want to begin reducing the Fed’s $4.5 trillion balance sheet as early as September.

Geopolitical Uncertainties Heightened Amid the G20 Meeting

World leaders from the G-20 countries gathered in Hamburg, Germany this week amid growing tensions over North Korea and Syria, among other agenda items. It is widely expected to be a cordial, but tense first meeting between US President Donald Trump and Russian President Vladimir Putin.

While increased political uncertainties around the globe can certainly disrupt the markets somewhat, most US market watchers are more concerned that events outside the US will risk delaying President Trump’s domestic pro-growth agenda. Only time will tell.

Lots of Data Reported

In addition to June’s jobs report, this week saw several other data points released:

  • U.S. manufacturing activity jumped to 57.8 in June, its highest level in nearly three years, as measured by the ISM Purchasing Managers’ Index.
  • Factory orders fell by 0.8% in May, their biggest drop in six months.
  • Service-sector activity picked up in June to 57.4, according to ISM’s non-manufacturing gauge.
  • The U.S. trade deficit narrowed by 2.3% in May, to $46.5 billion, as exports hit their best level in more than two years.
  • The Eurozone’s manufacturing and services sector concluded their best quarter in six years, according to Markit’s Purchasing Managers’ Index.

Sources

federalreserve.govtiaa.orgbls.govmarketwatch.combea.govinstituteforsupplymanagement.orgdowjones.comtiaa.orgmorningstar.comedwardjones.commfs.combloomberg.com