Last week was a typical late August summer snoozer in the markets. In a light news week, the narrative was dominated by a widely anticipated global central bank event in Jackson Hole Wyoming, hosted by the Kansas City Fed. Economic reports were relatively light and skewed slightly to the positive side of the ledger. Overall, equity markets softened, taking August returns back to flat. Interest rates increased across the curve, particularly in the short end of the yield curve as markets priced in a higher likelihood of Fed rate hikes this year. The U.S. dollar strengthened while commodity markets softened exhibiting the normal negative correlation between the USD and commodity markets.
Yellen’s address on Friday at Jackson Hole covered many things but was most notable in two specific areas. First, the short term trajectory for Fed policy was clearly intended to put both September and December rate hikes in play, with the usual hedging caveats interlaced. Second, longer term policy comments addressed the issues of lower long term equilibrium levels of interest rates as well as the differences between pre-financial crisis policy tools versus today. She acknowledged the limitations and accuracy of economic forecasting tools as it pertained to the market’s desire for forward explicit policy guidance as a challenging proposition. She also openly addressed the need for more comprehensive stimulus beyond standard monetary tools including fiscal initiatives, education investment, productivity enhancements, regulation implications, and the promotion of capital investment. Bond market reaction to Yellen’s testimony was a relatively bearish reversal intraday as evidenced by the 10yr UST bond yield moving from 1.53% to over 1.60%, the first time in August it closed outside of the 150 handle.
Economic activity reports last week were moderately positive. U.S. Q2 GDP was revised slightly downward from 1.2% to 1.1% as expected. There were both positive and negative anecdotes therein. Consumption and corporate profits were encouraging. Last week was the end of Q2 earnings season and the GDP report showed corporate profits as a percentage of GDP rising from 8.48% to 8.82%. This measure is up 1% in the past two quarters which is the biggest increase since 2012, possibly suggesting the end of the profits recession that has plagued U.S. markets. Other economic highlights included the 77th consecutive week of sub-300k jobless claims, the longest sub-300k streak since 1970. New home sales of 654k marked a post-recession high and follows closely to the 1963-1995 average level of 601k. Of note is the housing bubble ‘average’ level of new home sales ran at a ‘normal’ level of 937k from 1995-2007. The negative side of the economic ledger last week included deterioration in the UofM consumer sentiment reading, a softening of existing home sales, and a decline in manufacturing activity in both the Richmond Fed and PMI readings.
