Last week’s data provided a mixed picture of the economy. Businesses produced more, but demand growth was soft. That combination suggests slower future economic growth, not acceleration (but still growth, not recession). Some points to note:
- The NFIB Small Business Optimism Index ticked up from 95.0 to 95.7.
- The Empire State (NY Fed) Index slipped, but remains strong at 14.7.
- Industrial production rose, led by auto production, and capacity utilization ticked up slightly as well.
- Business inventories rose modestly…slightly faster than sales.
- Consumer confidence slipped, despite good job market data…too many war/conflict/disease stories in the paper? That said, retail sales managed a 0.2% increase month over month (m/m) – still below expectations.
- Mortgage applications ticked down week over week (w/w); the generic rate dropped to 4.24%.
- Inflation remains comfortably below trigger levels for Fed tightening
The Budget Deficit Continues to Shrink … for Now
At ten months into the fiscal year, the federal deficit is on track for $460 billion, down about 25% year over year (y/y). Tax receipts are up 8%; spending is up 1%. Individual tax receipts are up 5%; corporate tax receipts are up 14%. Most of those increases are due to rising income, not higher tax rates.
The aging of the baby boomers will drive federal entitlement spending to unsustainable levels over the next decade unless policies are changed.
In Europe: War Is Bad for the Economy – Both Sanctions and Actual Fighting
- Economic data was somewhat disappointing: Eurozone “flash” Q2 GDP was flat quarter over quarter (q/q), +0.7% y/y.
- German Q2 GDP was -0.2% q/q, +1.3% y/y. French GDP was flat q/q, + 0.1% y/y. (Last week, Italian Q2 GDP had been down). On the bright side, Spain, Portugal, and Greece showed accelerating growth.
- Eurozone (EZ) industrial production fell 0.3% in June after falling 1.1% in May (this was reflected in the Q2 GDP number).
- The ZEW survey of German business conditions was weak, likely reflecting sanctions and war fears.
- Fear may be a drag on the EZ economy, but it’s hard to argue that high interest rates are a drag on the economy.
- Things are far better in England vs. the continent: Q2 GDP (second estimate) was essentially unchanged at +0.8% q/q, + 3.2% y/y with inflation remaining comfortably low.
In Japan: Bad News Was No Surprise
- Japanese GDP fell 1.7% q/q … about as expected after the big tax hike.
- Other data continues to be up and down … it will take a while for the picture to clarify.
Last Week in The Capital Markets
Government bonds rallied … but equities didn’t fall.
- Currencies: It was a pretty quiet week: the dollar rose roughly 0.2% against the euro and 0.5% against the Yen. The Chinese Yuan, which bottomed against the dollar in early May, rose 0.1%, reaching its highest level since March.
- U.S. Government Bonds: 10-year Treasury yields ended the week at their lowest level since June 2013, down 10 basis points (bps) to 2.34%; the 10-year TIP yield rose 1 bp to 0.16%.
- International Government Bonds: German 10-year yields fell 10 bps to 0.95%. It wasn’t just a flight to safety within Europe; most other nations’ sovereigns fell as well.
- Corporate Bonds: The sell-off in high yield bonds seems to have ended; after finding a bottom last week, high yield bond funds saw inflows and the BoA Merrill Lynch High Yield Index returned 1% as its spread fell 23 bps to 3.97%.
- U.S. Equities: The S&P 500 Index ended the week up 1.2%. Health Care +2.4% and Information Technology +1.8% led; biotech and social media led on the upside. Energy (-0.2% on soft oil prices) and Telecoms (+0.6%) lagged.
- International Equities: Last Friday’s rally in the U.S. rippled around the world Monday. MSCI Japan was up around 3%, with half the gain coming Monday (Japan had closed before Friday’s U.S. rally). MSCI Europe was up 1.4%, with most of the gain coming Monday. Portugal and Greece, last week’s laggards, led on the upside. MSCI Emerging Markets was up 3%…Russia (+5%) was notably strong.
- Commodities: WTI oil fell from $98 to $97. War fears and lower bond yields couldn’t boost gold prices, which fell about $14 to $1,296.
Data Sources: The Wall Street Journal, Financial Times, Bloomberg.