THE KEY ECONOMIC LANDMARKS WE PASSED
1. ISM Non-manufacturing: 58.7 vs. 56.5 est.
The latest report on the service industry smashed expectations and hit the highest level in nearly a decade (December 2005). With yet another print above 50, services have expanded for 54 straight months. The new orders subset also hit decade highs with a reading of 64.9 in July. The spring rebound is starting to show in data points such as these.
2. Trade Balance: -$41.5B vs. -$44.8B est.
An unexpected narrowing of the trade balance in June will likely cause Q2 GDP to be revised higher. Consensus estimate seems to be an additional 0.3% will be added. The change came as as a result of a drop in imports for the following categories of goods seen in Figure 1.
3. Nonfarm Productivity: 2.5% vs. 1.6% est.
After the steepest drop in the last 30+ years during Q1, productivity was better than forecast in Q2. Workers were able to squeeze more output (5.2%) in their hours worked (2.7%) during the quarter. On a YoY view, productivity is only up 1.2% and the story remains the same there: more output than hours. Manufacturing productivity lead the way with a 3.6% annual increase. The important piece of information to watch alongside productivity is wage growth. As long as increases in productivity remain above increases in hourly compensation, labor costs will remain low. Unit Labor Costs slowed sharply in Q2 (0.6%) after rising 11.8% in Q1 as the increase in productivity helped mostly offset a 3.1% rise in hourly compensation.
LAST WEEK’S MARKET IN THE REAR-VIEW: “Risk off”
The market took a slide as worries about geopolitical tensions gave reason to take profits and maneuver into more defensive positions. Sentiment was largely negative Tuesday-Thursday with a possible de-escalation of tensions in Ukraine propelling stocks higher on Friday. Investors and traders used last week’s dip as an opportunity to enter a market many are still abstaining from. We have seen a “buy the dip” mentality throughout much of the year. The S&P 500 toyed around with its 100 day moving average which is a major technical indicator. It bounced sharply off that level on Friday. Gold bugs awakened on Wednesday to send the precious metal comfortably back above the $1300/troy oz mark.
LOOKING THROUGH THE WINDSHIELD
- We will have an opportunity to gauge the health of the consumer heading into the end of the year with July Retail Sales and University of Michigan Confidence reports due on Wednesday and Friday, respectively. I am more interested in the Industrial Production and Capacity Utilization numbers also due on Friday. These should give more insight on whether the domestic manufacturing machine is truly coming back to life.
- After Friday’s buying spree, all eyes will be focused on whether it was a case of short covering or a false bounce before lower prices. A close below last week’s lows in the S&P 500 could signal further weakness. Small caps fared better than large caps, but still remain near year highs in terms of return spread differential.