August 30, 2018

Stocks opened lower this morning after breaking to fresh highs earlier in the week. The Dow is currently off 112 pts and the SPX is down .28%. The materials sector is down 1.3% in early trading on weakness in gold miners and chemical producers. Banks and transports are down about .5%. Healthcare stocks are roughly flat and utilities are up modestly. The VIX Index—a common gauge of fear among traders—is back up to 12.5 but that’s still a very low level. For context, during the correction last January/February, the VIX spiked briefly to 37. European stock markets will close about .5% lower in today’s session and most of Asia was down overnight. The US dollar is a bit stronger today against a basket of foreign currencies, reacting to strong economic data (see below). Most commodities are not surprisingly trading lower. But WTI crude oil is holding steady at $69.66/barrel. Bonds are higher in price, lower in yield today. The 5-year Treasury note yield backed down to 2.76% and the 10-year yield is at 2.86%. 

The Bureau of Economic Analysis released July data on consumer incomes & spending. Compared with year-ago levels, personal spending is up 5.2%. That’s a pretty healthy number. Personal incomes are up 4.7%. The personal savings rate ticked down to 6.7%, but that’s still higher than average. The American consumer is clearly healthy. The report’s inflation gauge accelerated to 2.3% y/y from 2.2% in the prior month. Core inflation—excluding food & energy—accelerated to 2.0%. Remember, this core inflation index is the Federal Reserve’s preferred inflation gauge. Two percent inflation is considered fairly low, but it also hasn’t been this high since 2012. So the takeaway is that inflation remains in a gradual upward trend. This report essentially vindicates the Federal Reserve’s monetary policy tightening and confirms inflation is on target. 

News overseas during the past 24 hours hasn’t been great. We know that Argentina and Turkey are facing tough financial realities. Argentina’s central bank just raised short-term interest rates to 60% in order to stop the sharp decline in the peso. The weak currency means high inflation and speaks to weak government finances. Argentina has asked the Int’l Monetary Fund (IMF) for a bailout line of credit. Stock markets all around the emerging world are down in sympathy. In other news, a European Union official warned that the UK’s withdrawal from the union could be messy. And again some are wondering aloud if Brexit might encourage other countries like Italy or Sweden to abandon the EU. Separately, Canada’s second quarter economic growth continued to slow amid signs of weaker business investment. On a year-over-year basis, GDP grew 2.4% in the quarter and that’s not bad, but it is significantly slower than Canada experienced last year. 
 


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