Monday, August 1, 2016

Mixed markets on weakening economic data

Dow was off 2, decliners over advancers about 5-4 & NAZ added 23.  The MLP index rose 3  to the 317s & the REIT index climbed 4+ to the 376s (record high territory).  Junk bond funds were lower & Treasuries pulled back.  Oil & gold slid lower.

AMJ (Alerian MLP Index tracking fund)

Crude Oil Sep 16

Gold Futures,Aug-2016

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US manufacturing expanded in Jul, though at a slower pace, indicating gradual improvement that could help the economy emerge from a weak H1.  The Institute for Supply Management index cooled to 52.6 from a one-year high of 53.2 a month earlier (readings above 50 indicate growth).  The forecast was 53.  Factories cut back on employment even as orders & production remained strong last month, indicating producers are focused on cost-cutting as the economy struggles to gain speed.  Stronger consumer spending is helping to limit the impact of weaker global demand & cutbacks in corp investment.  The ISM's gauge of new orders was little changed at 56.9 after 57 in Jun & a measure of production picked up to 55.4 from 54.7.  The employment index decreased to 49.4 from 50.4 a month earlier, contracting for the 7th time in the past 8 months, while factory inventories shrank in Jul & prices climbed at a slower pace.  Overseas economies have been treading water, limiting demand for American merchandise.  While a gov measure of manufacturing in China contracted, private gauges showed growth in Jul.  Euro-area manufacturing slowed in Jul as uncertainty following Britain's vote to leave the EU damped orders, according to Markit Economics.

U.S. Manufacturing Growth Cooled in July From One-Year High

Federal Reserve Bank of Dallas pres Robert Kaplan said a rate increase at the next policy meeting in Sep is still possible even after a report last week showed Q2 growth was weaker than expected.  Growth data will be revised & Fed policy makers will get 2 more employment reports before the next meeting, Kaplan, who will have a vote on monetary policy next year, said.  He added the Dallas reserve bank's 2016 growth forecast will still probably call for an expansion of just less than 2%.  "September is very much on the table but I think we’ll have to see how events unfold and so it’s too soon to jump to a conclusion," Kaplan said.  "We still believe the consumer will be strong in 2016, but it makes us also be very watchful for the next number of data releases to see what trend we’re on."

Fed’s Kaplan Says September ‘On the Table’ If Data Support

UK manufacturing shrank more than initially forecast in Jul, suffering its biggest drop in more than 3 years.  A Purchasing Managers' Index slumped to 48.2, below the one-off flash reading of 49.1, Markit Economics said.  The index has only fallen below the 50 mark, which separates expansion from contraction, one other time since early 2013.  The index was at 52.4 in Jun.  The report suggests that Britain's decision to leave the EU may have a harsher impact on the economy than initially expected.  Markit’s flash estimates published last month had already signaled that business activity was shrinking at its fastest pace since the last recession 7 years ago.  That prompted Bank of England official Martin Weale to change tack & back his colleagues' call for stimulus this week.

BOE policy makers kept the benchmark rate at a record-low 0.5% in Jul & signaled that loosening was likely in Aug.  “The weak numbers provide powerful arguments for swift policy action,” Markit said.  “The downturn was felt across industry, with output scaled back across firms of all sizes and across the consumer, intermediate and investment goods sectors.”  The decline in production was the steepest since Oct 2012.  New orders also contracted, suggesting uncertainty in the domestic market offset any boost to exports from the weaker £.  While manufacturing exports were the only bright spot in the initial report, Markit said that the improvement was “less marked than previously estimated” due to sluggish overseas demand.  The drop in the currency pushed input-cost inflation to a 5-year high.

Brexit Hit U.K. Factories Harder Than Initially Estimated

The first reports for Jul were  not encouraging.  Dow was up 500 last month, not bad when there was little good news to back it up (other than the EU did not collapse after the Brexit vote).  Aug may not be so kind.

Dow Jones Industrials


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