Economic Perspective

• With Spanish bond yields once again well above 7% and Italian yields on the rise, eurozone leaders signed off on a €100 billion rescue package for Spain’s banks, while the president of the European Central Bank also pledged to do whatever is necessary to preserve the euro. Those measures might include using the region’s rescue fund to make direct purchases of sovereign bonds to ensure that troubled countries aren’t shut out of global credit markets. Meanwhile, Europe’s official statistics agency said unemployment on the continent hit a record 11.1%.
• The U.S. economy grew more slowly during the second quarter. The Bureau of Economic Analysis’s initial estimate showed a 1.5% increase in gross domestic product compared to Q1’s 2% growth. While personal consumption, exports, and business investments in equipment and inventory all rose, the increases were partly offset by higher imports and cuts in state and local government spending.
• The Bureau of Labor Statistics said the 80,000 new jobs added to the U.S. economy in June weren’t enough to affect the unemployment rate, which remained stalled at 8.2%.
• The Chinese economy showed signs of slowing, particularly in manufacturing, which fell to its lowest level in seven months. That prompted the country’s central bank to cut its interest rate on one-year bonds for the second time in two months, lowering it to 6%.
• Inflation remained tame at the consumer level. According to the Bureau of Labor Statistics, a flat June put the increase in the Consumer Price Index at 1.7% for the last 12 months. Meanwhile, wholesale prices edged up slightly in June, but the annual increase remained at only 0.7%.
• Manufacturing data was generally positive during the month. The Federal Reserve’s measure of industrial production was up 0.4%, and the Commerce Department said durable goods orders popped up 1.1%. Also, the so-called “Philly Fed” gauge of manufacturing activity throughout the United States was up 0.2%.
• British regulators launched a criminal investigation of multiple global banks in connection with the deliberate manipulation of the London Interbank Offered Rate (LIBOR), which is used around the world to set interest rates on a wide variety of mortgages and other debt instruments. Barclays PLC was fined £290 million after admitting it had repeatedly submitted false LIBOR-related data since 2005.
• The Commerce Department said consumer spending was down 0.1% while retail sales fell for the third straight month, in part because of lower gas prices. Meanwhile, the Bureau of Economic Analysis said personal income was up 0.5% in June; that’s as much as the previous two months combined.
• With the start of the summer home-buying season, home prices in the 20 cities measured by the S&P/Case-Shiller index rose an average of 2.2% in May; it was the second straight month of higher prices. And after a strong May, the Commerce Department said sales of new single-family homes dropped 8.4% in June despite mortgage rates that Freddie Mac called the lowest on record (the 30-year fixed rate was 3.49%). Also, the National Association of Realtors® said home resales fell 5.4%, though both new sales and resales were substantially higher than a year earlier.

Eye on the Month Ahead

The Fed announcement that kicks off the month could affect investor sentiment. And while eurozone leaders’ verbal support for the shared currency helped calm markets, investors will soon look for concrete actions to prevent interest rates abroad from spiraling higher. Also, another massive redemption of Greek bonds is scheduled on August 20.

Key dates and data releases: Federal Open Market Committee announcement, U.S. manufacturing (8/1); factory orders (8/2); unemployment/payrolls, U.S. services sector (8/3); labor productivity/costs (8/8); international trade (8/9); import/export prices (8/10); wholesale inflation, retail sales, business inventories (8/14); consumer inflation, industrial production, international capital flows (8/15); housing starts, leading economic indicators, options expiration (8/17); Federal Open Market Committee minutes, home resales (8/22); new home sales (8/23); durable goods orders (8/24); pending home sales (8/27); home prices (8/28); second estimate of Q2 gross domestic product, Fed “beige book” report (8/29); personal income/spending (8/30).

Source: Broadridge