August 21st, 2017 - Market Commentary
U.S. stock markets jarred by North Korea two weeks ago and social unrest in Charlottesville last week produced the first back to back losing weeks since May. The S&P 500 lost 1.5% on Thursday, the second largest one-day decline of the year.
Many market participants attributed Thursday's red ink to rumors of Gary Cohn, head of the National Economic Council, possibly resigning. He is viewed as one of the most favorable and sensible economic policy voices in the current administration and a leading candidate to replace Janet Yellen as Fed Chair.
Fed minutes released last week were dovish, indicating that rate hikes may be on hold until Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) begin to pick up from their recent low levels. The most recent core PCE print was just below 1.5%, well below the 2017 forecast of 1.7%. A September hike is seemingly off the table and futures markets currently show the likelihood of a December hike at 40%.
Perhaps one of the most interesting anecdotes in the FOMC minutes was conversation about the reliability and usefulness of Fed 'models' in forecasting inflation. Prior to 1993, the Fed did not mention or comment on the use of 'models' much at all. They have since become commonplace but Fed officials are really questioning how effective they have been in this 'model era'.
Predictit betting markets are currently pricing odds of the next Fed chair as follows: Yellen 31%, Cohn 30%, Warsh 5%, someone else 34%. With her term ending in February 2018, there is no real clarity on Yellen's successor at this stage.
The NY Fed updated their quarterly consumer credit data panel, highlighting several notable trends including a second consecutive all-time high in consumer credit outstanding, tightening lending standards, and a noticeable uptick in delinquencies.
The S&P 500 ended a 196-day streak of staying out of 'oversold' levels (1 standard deviation below its 50-day moving average). This was the ninth longest such streak on record and the longest since 1993-94.
July retail sales came in very strong at 0.6%, exceeding top expectations and coming with sizable upward revisions to May and June figures. Housing starts missed expectations and fell back to the disappointing April/May range. Starts are -5.6% year on year but forward-looking permits are up 4.1%, somewhat offsetting the disappointing print. Industrial production for July missed expectations and revealed outright contraction in the manufacturing output, weighed down by disappointing activity in autos and business equipment.
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