August 25, 2016

Stocks gapped down at the open but quickly recovered (Dow +7 pts; SPX +.1%). Financials, materials and utilities are leading the way. Retailers and transports are in the red. Semiconductors (SOX Index) continue to power ahead, now up 15% this quarter. European markets will close down today and Asia was lower overnight. WTI crude oil is trading up slightly to $47.14/barrel and other commodities are mixed. Copper is down 7% this month and gold is down 2%. Treasury bonds are unchanged but corporate bonds continue to rise. 

Durable goods orders jumped 4.4% in July vs. June. Results were considerably better than expected partly due to higher aircraft orders (which are pretty volatile month-to-month). But other categories showed some life, including fabricated metals and electrical equipment. That’s really good news. Core capital goods orders jumped 1.6% in July after a better-than-expected .5% gain in June. Barron’s says “New orders in this report together with last week’s strong showing for manufacturing in the industrial production report point to second-half possibilities for the factory sector and its contribution to the nation’s growth.” At issue here is whether businesses have just begun to invest in growth again. Capital spending has been very weak for some time, and even with the recent pick-up, capital goods orders are down 4.9% from year-ago levels.

Markit Economics’ measure of business activity in the services sector unexpectedly fell this month. The PMI index dipped to 50.9 from 51.4 in the prior month. This is a bit worrisome since the service sector represents the lion’s share of our economy, and a reading of 50.9 indicates essentially zero growth in business activity. So this report is directly at odds with other indices (i.e. the Atlanta Federal Reserve’s GDP Now growth forecast) that anticipate a significant pick-up in economic growth this quarter.   

The number of people collecting unemployment insurance continues to fall, suggesting further strengthening in the job market. The total number is down to 2.145 million vs. about 6.6 million at the height of the Great Recession. In addition, new claims for unemployment benefits have been below 300,000 for 77 straight weeks, the longest stretch since 1973. 

Investors will listen closely to Federal Reserve Chair Janet Yellen’s speech today in Jackson Hole regarding monetary policy. By the way, Vice Chair Stanley Fischer recently said he believes the economy is close to hitting full employment as well as 2% inflation. Those metrics are, of course, the Fed’s major requirements for resumption of interest rate hikes. “We are close to our targets,” he said. 

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