Markets kicked off the month of August on an encouraging note in contrast to the sideways price action of the past two weeks. Last week, the NASDAQ was able to join the DJIA and S&P 500 in record territory. In contrast to market drivers of the majority of the year (utilities, telecom, and consumer staples) it was technology and financials that received the strongest bids in the past week. Primary market drivers included a strong policy response by the Bank of England, relatively encouraging economic results in the U.S., and continued capital flows from yield starved investors overseas. Global markets continue to pose challenges for investors as there are few areas that look compelling from a valuations standpoint as evidenced by the S&P 500 sitting at a 20.5x P/E multiple and the 10yr U.S. Treasury yielding 1.60%. Of note is that the S&P 500 is currently yielding 2.1% while European equity market is closer to 4%. Despite valuations, the economic and fundamental backdrop continues to look moderately constructive.
The BoE provided a stimulus jolt to the markets on Thursday that contributed to a strong rally on Friday to end the week. Among the measures announced were rate cuts, QE bond buying, and a new term loan funding program for banks. A 0.25% rate cut (from 0.50% to 0.25%) came with indications of BoE intent to cut again in the future and puts their benchmark rate at its lowest level in its 322 year history. The revival of the QE bond buying program will target £60 of government bonds and £10 of corporate bonds joining the ECB in rare company of central banks purchasing corporate bonds. Lastly, the BoE announced a new term lending facility for banks to access a cheap source of capital, similar to the ECB term lending facility offered to Eurozone banks.
Economic results were strong on balance last week with personal income, personal spending, auto sales, and employment figures all suggesting an encouraging backdrop for the U.S. consumer. Friday’s jobs report showed 255,000 jobs created in July which crushed consensus expectations of 180,000. The report also revealed wage increases of 2.6% over the past year which is the highest annual clip since 2009. The relatively encouraging economic results last week caused bond yields to rise (10yr 1.46% to 1.59%) and expectations of Fed rate hikes in 2016 to climb to approximately 46%. Of note is that crude oil inventories increased in both of the past two weeks when historically they’ve typically declined. Meanwhile, gasoline inventories dropped sharply last week as the U.S. remained on track for record gasoline consumption for 2016.
