European stocks started last week in the red after German industrial production was reported by the country’s statistics agency Destatis. Industrial production in the largest Eurozone economy dropped at the fastest pace in more than two years during May, falling at a 1.8% seasonally-adjusted clip vs. expectations for a flat reading.
The minutes from the June Fed meeting released on Wednesday revealed widespread agreement to end the quantitative easing (QE) bond-buying program in October. Under this approach, the Fed will scale back $10 billion per month for the next three months with a final $15 billion reduction in October. Perhaps most importantly, the minutes also provided little indication that the committee was preparing to increase rates ahead of mid-2015, despite improving economic data and both inflation and unemployment nearing the Fed’s stated targets.
For the week, the S&P 500 dropped -0.9%, the Dow Jones Industrial Average lost -0.73%, and the MSCI EAFE (developed international) fell -2.4%.
Here are the 3 stories this week that rose above the noise:
Retail Sales in U.S. Showed Broad-Based Increase in June
The Commerce Department reported that overall U.S. retail sales increased 0.2% in June down slightly from a 0.5% advance in May. The June reading came in below the 0.6% the median estimate of 83 economists surveyed by Bloomberg.
Core sales, the figures used to calculate gross domestic product and which exclude such categories as autos, gasoline stations and building materials, increased 0.6% last month, after rising by an upwardly revised 0.2% in May. Sales receipts at auto dealerships fell 0.3 % which is surprising given automakers recently reported a surge in motor vehicle sales in June (16.9 million annual pace, the strongest since July 2006). Overall, the report adds evidence that the economy may be continuing to recover pointing to stronger growth in the second half of the year.
Yellen Says Continued Easing Needed Amid Job-Market Slack
It is a newsworthy week for Fed watchers, with Fed Chair Janet Yellen testifying before lawmakers on Tuesday and Wednesday and a monetary policy report being released prior to her testimony. An article from Bloomberg provides a good summary of Yellen’s prepared remarks and the Fed’s policy report.
As expected, in her prepared remarks the Fed Chair was careful to emphasize that policy accommodation could be withdrawn more rapidly or more cautiously than currently expected based on incoming data. Market participants are monitoring Fed statements for any clues that rate hikes will be brought forward in response to recently improved data and lawmakers are likely to focus their questions on the Fed’s exit strategy. Also of note, the monetary policy report flagged lower-rated corporate debt for having stretched valuations but generally seemed comfortable that most asset prices remain in line with historical norms.
Budget Gap Shrinks to Narrowest Since 2008 So Far in Fiscal Year
The U.S. budget deficit continues to shrink and is now at the lowest level since 2008, according to the Treasury Department. The Federal government is getting a boost in tax revenue from an improving labor market and an uptick in corporate profits.
The budget deficit from October through June is nearly $145 billion lower compared to the same period last year. The Congressional Budget Office (CBO) projects the deficit at the end of the current fiscal year will drop to 2.8% of GDP from 4.1% in 2013. We believe this is an encouraging sign, especially in light of how far the deficit has shrunk since the depths the recession that ended in 2009.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
