August 30, 2017

The major stock market averages opened mixed this morning. The Dow and SPX are currently down 10 points and up .2%, respectively. Cyclical sectors are rebounding today (energy, financials, tech). Utilities, which recently hit a 1-year high, are fading. The dollar is a bit stronger today after some encouraging economic data, but is still down 9% year-to-date against a basket of foreign currencies. Commodities are mostly lower; WTI crude is hovering around $46/barrel. Bonds are slightly lower in price, higher in yield. The 5-year and 10-year Treasury yields ticked up to 1.72% and 2.13%, respectively. 

The government upwardly revised second-quarter US economic growth. Whereas the initial report had gross domestic product growing 2.6% in the quarter, the revision places it at a very healthy 3.0%. Key drivers of the revision we're better than expected consumer spending (+3.3%) as well as business investment. That's a very good sign. This is quite an acceleration from the 1.2% growth we saw during the first quarter, and encourages us to think that economic momentum is back on track. There were, however, a couple of troubling details in the report. First, the bump in consumer spending came at the expense of savings, and of course that’s not sustainable over the long-term. The consumer savings rate dipped to 3.7%, whereas the long-term average rate is around 5%. In addition, we’re still not seeing any signs of a pick-up in inflation. The Federal Reserve’s preferred inflation measure, the PCE Price Index, rose only .9%. The Fed’s inflation target is 2%.   

Payroll processor ADP says the US economy generated 237,000 new private sector jobs during the month of August. That’s far better than economists’ consensus forecast of 185,000 jobs. Bloomberg points out that layoffs are down around a three-decade low and job openings are at a record high. These factors suggest labor market strength will continue. We’ll get the Bureau of Labor Statistics’ official figures on Friday. 

The deadline on raising the federal debt ceiling is fast approaching. That means the federal government will run out of money to fund current operations unless congress passes an increase in the statutory debt limit. Investors are just beginning to worry a bit, recalling the brief government shutdown of 2013 that resulted from political fighting that prevented a timely debt ceiling hike. Bloomberg notes the cost for investors to protect (using credit-default swaps) against a US debt default over the next 5 years has risen to 26 basis points, from 20 basis points a month ago. So this is part of the reason bond yields are depressed despite better economic data. 

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