Capital Market Implications for the Week of August 7 - 11, 2017
Economic reports last week were completely eclipsed by geopolitical news, as the Presidents of North Korea and the United States sparred over potential military actions. Nonetheless, last week’s economic releases were strong. For the first time in some time, nonfarm productivity improved in the second quarter and retail sales for July accelerated to their best levels of the year (up 0.5 percent month-over-month). Given the improvement in productivity and the rebound in retail sales, the likelihood of growth accelerating in the third quarter is high. Additionally, two of the major inflation gauges, the Producer Price Index and the Consumer Price Index, continued to signal limited inflation pressures. Over the last 12 months, the PPI excluding food & energy increased 1.8 percent while the CPI excluding food & energy rose 1.7 percent. Global economic news was also positive last week, as Japan’s reported second-quarter real gross domestic product surged 4.0 percent (SAAR QoQ%). This is the fastest growth Japan has experienced in several years.
Last week, as the rhetoric between the U.S. and North Korea heated up, capital markets turned down. The S&P 500 Index fell -1.4 percent while the Dow Jones Industrial Average sank approximately one percent. The week’s best performing equity sector was consumer staples, which ended the week flat overall. The week’s lagging sector was financials, which declined -2.7 percent. International stocks, as represented by the MSCI EAFE Index, lost -1.5 percent while emerging markets were hit the hardest, down -2.2 percent. When volatility picks up, as it did last week, bonds often benefit. Thus, for the week overall, the Barclays U.S. Aggregate Bond Index rose 0.2 percent, U.S. corporate bonds ended unchanged, ten-year municipal bonds gained 0.3 percent while only high yield bonds retreated, off -0.8 percent.
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