As China has reeled from stock volatility and weak economic data, the US Markets managed to snap back last week on a flurry of positive data.
US Data
The economic data last week pumped life into a stock market that had slid into correction territory. Even better than strong data, was data that supported a delay in Federal Reserve Board (FRB) action on interest rates[1]:
- Core Durable Goods (a proxy for Capital Spending) increased 2.2% in July
- S&P/CS 20 City home price Index increased 5% year over year in June.
- Core Personal Consumption Expenditures (PCE), the FRB’s preferred inflation gauge, increased 1.2% year over year in July; a far cry from the FRB’s 2% mandate.
- CB Consumer Confidence improved to 101.5 in August from 91.0.
- Consumer spending rose 0.3% in July supported by low fuel costs.
- 4 week average of initial unemployment claims came in under 300,000 for the 22nd straight week.
Impact on the FRB
All of the above data, with the exception of PCE, supports an FRB rate increase in September. Given their dual mandate of full employment and 2% inflation, September is still likely. Contrary to that belief, Federal Reserve Bank President of New York, William Dudley, made a statement last week that market volatility and foreign concerns have created a less compelling case for a September rate increase[2].
International
Germany provided a strong slate of data last week. German Q2 GDP came in at 1.6%, the business climate improved to 108.3 from 108.0, business expectations beat estimates at 102.2, and current assessment improved to 114.8[3]. As the strongest economy of the EU, this provides a positive outlook for the union.
China took measures last week to stop the bleeding and hopefully start improving its economic state. The Peoples Bank of China (PBOC) decreased short term rates to 4.6%, a .25% change, and decreased bank reserve requirements from 18.5% to 18%. The first change allows for cheaper borrowing which will hopefully stimulate investment, while the latter frees capital for banks to lend more money. Both measures should stimulate economic activity.
Conclusion
The markets swung into correction territory last Monday. By Wednesday it was already out of correction territory. Even with that good news, remember that nowhere in the FRB mandate does it call for a stable stock market. If economic data continues to improve and unemployment continues to fall, the FRB is still likely to raise rates in September.
The only cause for pause would be the slowing impact the strengthening dollar could have on manufacturing and subsequently jobs. It is likely that the strengthening dollar environment is not transient as a rate increase would signal a strengthening dollar as well. The domestic consumer will likely be expected to carry the weight of offsetting a strengthening dollar through heavy 4th quarter spending.
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[1] www.mfs.com – week in review
[2] www.troweprice.com – weekly market wrap-ups
[3] www.investing.com – economic calendar