Peak second quarter earnings season is being supplanted with peak vacation season as we head into the heart of August. U.S. and international larger companies posted gains while smaller companies and bond yields fell slightly on the week. The S&P is now up over 10% on the year, driven by the technology and healthcare sectors. Seven of eleven economic sectors are either beating or slightly lagging the market which is indicative of decent market breadth. Only energy and telecom sectors are down on the year.

Weekly Anecdotes:

  • Companies are benefiting from a weaker dollar, stronger spending, and several years of cost cutting. Thomson Reuters sees 11% profit growth for the S&P 500 in Q2 after a 15% rise in Q1. FactSet says the revenue ‘beat rate’ of 73% is the strongest pace since they began tracking the data in 2008. Top line strength of that magnitude is certainly a good sign.
  • High yield spreads are under 3.5%, close to post crisis lows. Bloomberg noted caution now that many junk bond yields are below the issuer’s cost of leverage.
  • Republicans will have just 12 working days when they return in September to address the debt ceiling, or risk running out of money to pay its bills. It is estimated that the Treasury will run out of money on September 29th.
  • A surprise build in U.S. oil inventories and an increase in OPEC oil output to 2017 peak levels of 90,000 bpd caused oil prices to fall sharply early in the week from over $50 back to a $48 handle.
  • Mark Carney, the head of the BoE, issued a somber economic forecast citing some pessimistic concerns surrounding Brexit. They kept rates unchanged despite inflation running at 2.6% – markets were expecting a more hawkish tone from Carney. The pound fell in response.
  • The Fed’s Loan Officer Survey improved from 1% at the beginning of Q2 to 3.5% for Q3. More of a lagging indicator, this can be seen as confirmation of the economic/credit cycle turn earlier this year.
  • Perhaps spring loaded from 2 years of QE bond buying, the Euro is now the strongest performing G10 currency this year and sitting at a three year high versus the U.S. dollar. Meanwhile, The U.S. dollar touched a 14-month low last week, now off over 10% from its peak on January 3.
  • ICI and Bloomberg reported that nearly $500b flowed from active to passive strategies in the first half of 2017, a record pace. Paul Singer of Elliott Management voiced concern with this trend. The ‘everyone gets a trophy’ method of allocating capital in a healthy capitalist system does raise questions about the longer-term consequences of passive capital flows.
  • Profit growth and business friendly de-regulation have been driving risk markets. Thus far, the Office of Information and Regulatory Affairs has approved just 41 regulations, on pace for less than 100 all year. This would be less than 20% of the last republican administration (GW). 469 regulatory actions from Obama’s fall 2016 agenda have been withdrawn and the Federal Register of regulations is on pace to fall from 97k to 67k pages, comparable to the full deregulatory push from 1980-1986 under Ronald Reagan.

Economic Updates:

  • ISM manufacturing and non-manufacturing surveys both missed expectations but both remain well in expansionary territory at 56.3 and 53.9 respectively. The ISM Composite did fall significantly on the month but, at 53.9, is still at encouraging levels.
  • The July jobs report tally of 209,000 new jobs handily beat consensus expectations for 180,000 and drove unemployment back to 4.3%. Only 120,000 jobs per month are needed to keep pace with population growth.
  • Core PCE, the Fed’s preferred measure of inflation, registered only a 1.5% annual rate in July.