Last week was busy for domestic economic data and an eventful week for global markets, with equities experiencing their sharpest decline in several months. The initial estimate of second-quarter GDP released Wednesday showed the U.S. economy grew at a 4% annual rate, sharply ahead of consensus expectations for 3% growth. First-quarter GDP growth was also revised up to a -2.1% rate from the prior estimate of -2.9%, resulting in 1% average annualized growth in the first half of the year.
Wednesday’s policy statement from the Fed provided no new details regarding its tightening schedule and little mention of inflationary pressures other than noting that low inflation is becoming less of a concern having “moved somewhat close to the Committee’s long-run objective.”
After the S&P 500 fell 2% on Thursday (its 3rd largest drop of 2014), and turned U.S. equities negative for the month of July, a potential crisis in Portugal's banking system helped push European stocks into the red for 2014. Stronger U.S. and European Union sanctions against Russia this week added additional uncertainty to European equities.
For the week, the S&P 500 fell -2.69%, the Dow Jones Industrial Average dropped -2.69%, and the MSCI EAFE (developed international) declined -2.13%.
Here are the 3 stories this week that rose above the noise:
Millennials Are Dragging Down Home Ownership
Last quarter, home ownership fell to its lowest level in 19 years and it may fall even lower because of the millennial generation’s low rate of household formation. Soaring student loan debt, weak employment prospects, and rising home prices are among the several factors that have kept the millennial generation’s home ownership rate low relative to prior generations.
The combination of these factors is having a strong ripple effect on both the housing market and the economy. Homeownership should eventually improve for millennials, but at a later age compared to previous generations.
Eurozone Nears Deflation
A recent article from The Guardian details the latest inflation data from the Eurozone. The flash estimate of inflation for the 12 months ended in July showed just a 0.4 percent rise, an almost five-year low. The persistently low and falling inflation figures are renewing concerns that Europe is close to slipping into Japanese-style deflation, and some countries such as Spain are already reporting falling prices.
The deflation fears are prompting speculation that the European Central Bank (ECB) will soon announce its own version of quantitative easing, but in the author’s view this is unlikely in 2014. The data from Europe and the ECB’s response will be important factors for global markets over the remainder of 2014.
Correction Coming for the Shanghai Stock Rally?
Since the middle of June, China’s Shanghai's Composite Index has risen by 9.7 percent (close to an eight-month high) compared with the S&P 500 which has traded flat. However, despite the recent rally many analysts are skeptical that this outperformance will continue. Much of the concern centers on slowing GDP as well as questions around the efficacy of government reform initiatives.
One recent economic data point, the services purchasing manager's index (PMI), fell to 50 in July, its slowest pace in nearly nine years. However, bearish sentiment is not universal, as Erwin Sanft, the head of China & Hong Kong equity research at Standard Chartered, expects the Shanghai Composite will outperform global markets for the rest of the year, mainly due to a pickup in money supply.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
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