Market Review & Preview 8/18/19

REVIEW

Economic Calendar:

TIME (ET)REPORTPERIODACTUALFORECASTPREVIOUS
MONDAY, AUG. 12
2 pmFederal budgetJuly-$120 bln-$77 bln
TUESDAY, AUG. 13
8:30 amConsumer price indexJuly0.3%0.3%0.1%
8:30 amCore CPIJuly0.3%0.2%0.3%
WEDNESDAY,AUG. 14
8:30 amImport price indexJuly-0.1%-0.3%
THURSDAY, AUG. 15
8:30 amWeekly jobless claims8/10220,000212,000211,000
8:30 amRetail salesJuly0.7%0.3%0.3%
8:30 amRetail sales ex-autosJuly1.0%0.5%0.3%
8:30 amProductivityQ22.3%1.7%3.4%
8:30 amUnit labor costsQ22.4%2.5%-1.6%
10 amBusiness inventoriesJune0.0%0.3%
FRIDAY, AUG. 16
8:30 amHousing startsJuly1.191mln1.250mln1.241mln
8:30 amBuilding permitsJuly1.336mln1.287mln1.232mln
10 amConsumer sentiment indexAug.92.196.898.4

Consumer Price Index(CPI) is the most frequently used statistics for gauging inflation. The data that came in Tuesday via the Bureau of Labor Statistics, was in line with expectations, and puts the US economy at a 1.8% inflation rate for 2019. This number is slightly below the Fed’s target 2.0% rate. The Fed can reduce the federal funds rate(currently 2.25%) to spur growth and inflation. As of today, Chicago Mercantile Exchange(CME group), suggests there is a 78.8% chance of a 25 basis point cut(0.25%) and a 21.2% chance of a 50 basis point cut on the September 18th FOMC. 

Retail sales data is released by the US Census Bureau once a month. Retail sales increased 0.7% nearly doubling the expected 0.3%. Some notable statistics as compared to June’s numbers:

Motor vehicle & parts dealers ………………….. -0.6 %

Sporting goods, hobby, musical instrument, & book stores ……………………….. -1.1 %

Food services & drinking places ………….. 1.1 %

Nonstore retailers …………………….………….. 2.8%

These numbers show that the US consumer is still in great shape and continues to spend. As mentioned in last week’s write up consumer spending accounts for 68% of the economy. Currently the 10% tariff on 300 billion of Chinese goods has yet to directly affect the consumer or at least enough to slow spending. 

Yields:

US Treasury yields3 Mo2 Yr10 Yr20 Yr30 Yr
08/01/192.071.731.92.212.44
08/02/192.061.721.862.162.39
08/05/192.051.591.752.072.3
08/06/192.051.61.732.032.25
08/07/192.021.591.712.012.22
08/08/192.021.621.722.022.25
08/09/1921.631.742.032.26
08/12/1921.581.651.922.14
08/13/1921.661.681.942.15
08/14/191.961.581.591.842.03
08/15/191.911.481.521.81.98
08/16/191.871.481.551.822.01
2 Week Change-.2-.25-.35-.39-0.43

Last week the flow of money into bonds continued. Yields fall as bonds are bought up, as yields fall, the value of the bond increases. With the current market volatility and fears of economic slowdown investors are seeking safer places to keep their money. When there is talk about a “CRAZY INVERTED YIELD CURVE,” this means that long term yields are lower than short term yields. The gap between the 2 year bond and 10 year bond is what the market pays most attention to. For a short period of time, no more than a few hours, the 10 year yield dropped below the 2 year yield on 8/14, inverting the yield curve. This same inversion happened in March of 2019 and we saw all three major US indexes drop about 2%. The Fed pays closer attention to the gap between the 3 month and 30 year yield. Looking at the chart above, the 30 year bonds yields have been dropping the fastest meaning more investors are seeking to put their money into long term bonds as opposed to short term, raising concerns about the condition of the market in the short term. The 30 year yield dropped below 2 on 8/15 for the first time in a long time. An inverted yield curve has signaled a recession within 6-18 months. The market rallies more than 15% on average in the 18 months following the inversion.

Market Performance:

Another volatile week determined by news headlines. Early in the week markets responded well to news that about half of the additional 10% tariffs on 300 billion of Chinese goods that were supposed to go into effect September 1st, were suspended until December 15th. Trump feared the tariffs on electronics including cellphones and laptops would hinder holiday shopping. Economic data released Wednesday on Germany and China indicated slowing growth. Investors piled into bonds, inverting the yield curve, sending dow down 800 points, its worst day of the year. Stocks rallied on Friday to recover some of the losses.

PREVIEW

Economic Calendar:

NEXT WEEK’S MAJOR U.S. ECONOMIC REPORTS & FED SPEAKERS
TIME (ET)REPORTPERIODFORECASTPREVIOUS
MONDAY, AUG. 19
 None scheduled   
TUESDAY, AUG. 20
6 pmRandal Quarles speaks   
WEDNESDAY,AUG. 21
10 amExisting home salesJuly5.39mln5.27 mln
2  pmFOMC minutes   
THURSDAY, AUG. 22
8:30 amWeekly jobless claims8/17216,000220,000
10 amLeading economic indicatorsJuly-0.3%
FRIDAY, AUG. 23
All dayJackson Hole symposium   
10 amJerome Powell speaks   
10 amNew home salesJuly650,000646,000
SATURDAY, AUG. 24
All dayJackson Hole symposium   

Next week’s lack of data release is made up for the annual Economic Symposium in Jackson Hole, WY. Each year since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium on an important economic issue facing the U.S. and world economies. Symposium participants include prominent central bankers, finance ministers, academics, and financial market participants from around the world. The participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion.

USD to Yuan Conversion:

In response to the tariffs President Trump has been imposing, China recently devalued their currency. Currency devaluations makes China’s exports cheaper. When they can offer cheaper products & materials than US companies, consumers as well as producers purchase more Chinese goods. For over a decade, China has kept its currency below the 7.0 USD to Yuan conversion ratio. Two weeks ago they crossed this line showing they are willing to self-inflict their own economy even if it brings down the rest of the world with them. 

Economic Calendar:

Earnings season is starting to near its ends. A handful of retail companies report as well as home improvement giants, Home Depot & Lowes. Splunk and Salesforce are two large cloud computing companies, an industry that has been performing very well over the last few years. 

Word of the week:

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

KEY TAKEAWAYS

  • Generally, a high P/E ratio means that investors are anticipating higher growth in the future.
  • The current average market P/E ratio is roughly 20 to 25 times earnings.
  • Companies that are losing money do not have a P/E ratio.

Definition provided by Investopedia.com

Earnings calendar by Earnings Whispers

Economic calendars by Market Watch

Market performance by Barrons

Yields by the US Treasury

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