Tuesday, August 19, 2014

Perspectives from Above the Noise – Week of August 18, 2014


A solid week for stocks ended with some volatility, as reports of renewed tension in the Russia/Ukraine conflict temporarily sent stocks lower and Treasury yields plunged to new 52-week lows. Domestic data continues to provide conflicting signals about economic momentum. Labor data remains relatively encouraging, with Tuesday’s release of the monthly Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics indicating job openings in June rose to the highest level since February 2001. Fed Chair Janet Yellen has referenced the JOLTS data when discussing indicators she is tracking and the report helps provide context to the monthly nonfarm payrolls figures.

Globally, the Eurozone failed to generate any economic growth in the second quarter. Italy has already slipped back into recession and even the Eurozone’s core economies, such as Germany and France, are showing their own signs of considerable weakness with second-quarter GDP in Germany indicating the economy contracted by 0.2%.

For the week, the S&P 500 added +1.22%, the Dow Jones Industrial Average gained 0.66%, and the MSCI EAFE (developed international) increased +1.71%.

Here are the 3 stories this week that rose above the noise:

Consumer Prices in U.S. Rise at Slowest Pace in Five Months

The Consumer Price Index (CPI) edged up 0.1% in July, its slowest pace in five months as widespread declines in energy prices helped offset a larger-than-expected uptick in food prices. Stripping out the volatile food and fuel components, the so-called core measure also climbed 0.1%, less than the 0.2% consensus economist forecast. For the trailing 12 months ending in July, overall and core CPI are up 2% and 1.9%, respectively. Inflation metrics continue to remain below the Federal Reserve’s targets which should allow policy makers to keep interest rates low throughout the remainder of the year.

Today’s report indicates there are about two unemployed people for each job opening, which is down from 3-to-1 ratio one year ago but not quite back to the pre-recession level of 1.8. Although the headline job numbers remain very encouraging, the article mentions many other employment measures that remain below pre-recession levels, suggesting the Fed is unlikely to bring forward expectations for its first interest-rate hike unless these indicators of slack in the labor market rapidly improve.

Home Builder Confidence Surges despite Slower Sales

Home Builder confidence rose to a seven-month high this month according to the National Association of Home Builders. A number of factors, including tighter lending conditions and housing affordability, have kept a lid on the housing recovery for the first half of 2014. However, there is increased optimism that the housing recovery will accelerate in future months because of improvements in the labor market, historically low mortgage rates, and pent-up demand.

U.S. housing starts and building permits rebounded strongly in July, which hopefully leads to strong momentum in housing activity for the remainder of the year.

Yellen Channeling Slick as Surrealistic Economy Shows ’67 Claims

Many indicators of the health of the U.S. labor market have recently shown the most strength since before the recession of 2008. However, economists remain divided on the true underlying health of the job market. A recent Bloomberg article summarizes this broad range of opinions, with initial jobless claims as a percentage of the population at the lowest level since 1967 viewed as a sign of strength by many economists.

Meanwhile, others point to the remaining number of long-term unemployed as an indication of continued slack. This debate has important implications for Fed policy and interest rates. For now, Fed Chair Yellen remains in the camp that believes considerable slack remains in the labor market and the risk of wage inflation sharply rising is minimal.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.