September 6, 2017

Stocks opened higher this morning, rebounding from yesterday’s dip. The Dow is currently up 66 pts and the SPX is up .16%. Energy producers, transports, and retailers are leading the charge. The VIX Index is up a bit to trade around 12.5 (from 10 a week ago), but with Hurricane Irma and North Korea tensions, you’d think it would be higher. The dollar is weaker today, and off nearly 10% year-to-date. The dollar has been a quiet support to US multi-national companies selling goods abroad. Commodities are mostly higher on the day, with WTI crude oil up around $49.20/barrel. Oil prices have risen from about $42/barrel near the end of June but many energy stocks haven’t really kept pace. They may begin to catch-up. The bond market has strengthened over the past two months as yields have fallen. The 5-year and 10-year Treasury yields are hovering around 1.65% and 2.07%, respectively. Speaking of yields, CNBC interviewed Mark Grant of Hilltop Securities yesterday. He said global “central banks now have $19 trillion in assets and they’re adding $300 billion per month. They keep growing it, and that’s driving equity prices up, and bond yields down.” Unless central banks change their policy actions, the trend will continue. Of course, we know that the US Federal Reserve would like to tighten monetary policy, but low inflation & interest rates are making that difficult. 

Goldman Sachs’ Jan Hatzius believes “the real economy continues to be quite strong.” He notes second quarter GDP (that is, economic growth) accelerated to 3% growth. And Goldman’s proprietary economic forecasting model predicts third quarter GDP growth just above 3%. Additionally, the Atlanta Federal Reserve’s GDPNow forecasting tool is tracking similarly. Mr. Hatzius concludes, “Seems to me that we’re still growing above trend in an environment where we’re already at full employment. And I don’t think the Fed will want to abandon the normalization process in that context.”

US factory orders decelerated a bit in July, but the recovery trend is still intact. Orders for manufactured goods grew 4.9% from year-ago levels vs. 10% in the prior month. Even so, 5% growth is higher than anything we saw in 2015 or 2016. Another derivative measure—new orders for capital goods excluding defense equipment & aircraft—accelerated to 6.3% growth in July, pretty close to a 5-year high. This measure is closely watched by investors because it is a proxy for nation-wide corporate capital spending. So the takeaway is that after a couple of years in the doldrums, businesses are investing for growth again. 

ISM’s Non-Manufacturing Index, which measures business activity in the services sector, improved to 55.3 in August from 53.9 in the prior month. This report confirms that July’s slowdown in business activity was temporary. Digging into the details, the index’s “new orders” component surged to 57.1 from 55.1. And the “employment” component rose to 56.2 from 53.6. Remember, any reading above 50.0 indicates expanding activity. ISM believes we may see some temporary negative effects from Hurricane Harvey over the next couple of months. 

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