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Friday, July 29, 2016
Markets drift lower on weak GDP data
Dow was down 35, advancers a little ahead of decliners & NAZ added 1. The MLP index fell 2+ to the 312s & the REIT index rose 4 to the 376s. Junk bond funds were flattish & Treasuries went up. Oil has fallen to just above 40 & gold gained again.
The US economy expanded less than forecast in Q2
after a weaker start to the year than previously estimated as companies
slimmed down inventories & remained wary of investing amid shaky
global demand. GDP rose at a 1.2%
annualized rate after a 0.8% advance the prior qtr, according to the Commerce
Dept. The forecast called for a 2.5%
increase. The report raises the risk to the outlook at a time
Federal Reserve policy makers are looking for sustained improvement.
While consumers were resilient, businesses were cautious,
cutting back on investment & aggressively reducing stockpiles amid
weak global markets, heightened uncertainty and the lingering drag from a
stronger dollar.
Private
fixed investment, which includes residential & business spending,
dropped at a 3.2%, the most in 7
years. The Commerce Dept also issued
its annual revisions. The Q1 reading was revised from a previously reported 1.1% gain. The
new breakdown shows a more pronounced slowdown in the economy heading
into 2016. Year-over-year growth rate cooled from 3.3% in
last year's Q1 to 1.9% in Q4-2015, rather than the previous downshift from 2.9% to 2%. The
easing in growth continued into H1 of this year. The
year-over-year pace for Q1-2016 was revised down to
1.6% from 2.1%. That revised
trajectory has implications for Fed officials, as they’re faced with an
expansion that has been steadily losing steam. The report also showed that in Q2, GDP expanded at a 1.2% rate from the same period a year earlier.
The growth estimate is the first of 3 for the
qtr.
Consumer confidence slid in Jul from the prior month on dimmer
views of the US economy's prospects & lingering concerns among
higher-income earners about global market conditions. The University of Mich said that its final index of
sentiment declined to 90 this month from 93.5 in Jun. The
projection was for a reading of
90.2 after the preliminary Jul figure of 89.5. A record share of households with incomes in the top 1/3 mentioned
the UK decision to leave the EU was weighing on
outlooks. The gap between current views of the economy and expectations
last month widened in Jul. “While concerns about Brexit are likely to quickly recede, weaker
prospects for the economy are likely to remain,” Richard Curtin, the survey’s director, said. The sentiment survey's current conditions index, which measures
Americans’ assessment of their personal finances, fell in Jul to 109
from 110.8 last month & the measure of expectations six months from now
decreased to 77.8 from 82.4. Americans anticipated an inflation rate of 2.7% in the next
year, up from 2.6% in Jun. They expect prices to rise 2.6% over the next 3-10 years, the same as in the previous
month. Despite the setback in sentiment this month, consumers have shown
they’re more willing to spend than they were at the start of the year.
The Institute for Supply Management’s gauge of factory activity in the
Midwest region fell to 55.8 in Jul from 56.8 the month prior. The forecast expected a larger decline to a reading of 54.0. Readings above 50
point to expansion, while those below indicate contraction.
The economic news was not good while earnings are coming in varied. The lack of strength in the economy makes the bulls feel better concerning extending low interest rates. But this is not the behavior expected when popular stock averages are essentially at record highs. This disconnect between economic performance & stocks prices is not new, but it still should be a cause for worry.
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