All in all, last week we saw modest equity market gains as a result of a singular theme; the reemergence of the tax reform narrative in Washington. That lift to the broader market was largely the result of outperformance by financials/banks. Tax reform narrative aside, markets also managed to glean some support from the energy sector at the conclusion of last week as a result of concerns over the impact of Hurricane Harvey.
Update here on Reuters by Chuck Mikolajczak:
U.S. crude futures fell as refinery shutdowns could reduce demand for American crude.
“Refining is where it is at because that is where you have pricing power, this just underscores the significance of that pricing power,” said Peter Kenny, senior market strategist at Global Markets Advisory Group, in New York.
As we have discussed, much of our recent equity market weakness has been as a result of the lagging tech sector. Last week was no exception. Apart from Apple, the large cap tech space, and the Nasdaq by proxy, remains susceptible to further downward price action. Energy should continue to provide a degree of lift to the S&P 500, and as long as the tax reform narrative remains in play, financials and the Dow should benefit. We enter the last week of August with our uptrend under pressure, volume contracting and equity traders wishing they were anywhere else other than on the desk…like at the beach.
Trending: Housing and Employment
In something of a counter trend reading, last week’s release of the Chicago Fed National Activity Index, released Monday, reflected an incremental slowdown in activity. For the month of July the reading came in at -0.01, versus consensus that was calling for an uptick to 0.22. The previous month was raised from 0.13 to 0.16. At its core, the measure is considered a pure and multifaceted gauge of inflation at a national level. As we know, July was a solid month for employment gains––particularly in the retail sector. That said, housing permits provided a negative drag to the reading, more than offsetting the lift provided by the jobs narrative. The FHFA House Price index also was a bit underwhelming. On a month-over-month basis consensus was calling for 0.5%, it came in at 0.1%. Year-over-year the index reading was 6.5%.
As expected and as telegraphed by the prior week’s Empire State manufacturing reading, both the Richmond Fed’s Manufacturing Index and the Kansas City Fed’s Manufacturing Index reflected expansion. Richmond came in at 14 versus consensus of 11. Kansas City came in at 16 versus July’s 10. The Markit Economics PMI Composite Flash for August was 56 versus consensus calling for 54.3 and up from July’s 54.2. The strength provided by the services vertical in the report (56.9) provided much of the lift.
Weekly Jobless Claims continue to reflect a tightening job market. For the week of August 19, claims inched lower to 234k (c. 237k). Any further gains from these readings will be increasingly more difficult as the US economy has clearly achieved full employment. Theoretically, this level of employment should begin pushing on wage inflation but that has been the assumption for much of the past four months, if not longer, and we have not seen much follow through on the inflation front.
New Home Sales data released midweek definitely triggered a bit of caution for investors in that the reading came in well below consensus expectation. For July it was 571k versus consensus calling for 610k and against the backdrop of June’s revised 630k. Clearly, rising prices and tight housing markets across much of the country have both acted as drags on sales.