U.S. markets likely to see more volatility in September
Solid U.S. economic data helped create a bounce in equity markets last week. Market volatility continues to draw the lion’s share of attention and volatility appears to be driven more by uncertainty around potential Federal Reserve actions and the implications of market declines in China. Our view is there is likely more volatility ahead until we reach some clarity around these two key issues. If we look through the next couple of weeks until the next Federal Open Market Committee (FOMC) meeting Sept. 16–17, we believe the underpinning for the economy, and ultimately for markets, remains solid.
Some key data points from last week:
- Second quarter gross domestic product (GDP) revised up to 3.7% annualized from 2.3% based on upward revisions to consumer spending, investment, and government spending. Some of the lift to investment was driven by inventory accumulations, which now seem to be near average levels. We think the positive revisions lend support to possible further positive trends through the last half of 2015.
- Durable goods orders in July rose 2% (0.6%, excluding transportation). Transport orders jumped 4.7% and autos rose 4%. This type of data on orders points to some acceleration in business activity into the third quarter.
Consumer data looked solid, with incomes and spending rising and firming confidence. However, consumer attitudes appear to remain prudent regarding their balance sheet, with a meaningful proportion of income growth diverted to savings as evidenced by a current savings rate of 4.9%.
This week we will get the August employment report, which will be a key in the Fed’s September interest rate decision. Current consensus expectations are for a gain in nonfarm payrolls of 220,000 and a small drop in the unemployment rate to 5.2%.
Non-U.S. markets also saw rebounds after the sell-off from last Monday. The story abroad remains one of stimulus by central banks. With a debt deal for Greece in place, economic activity in Europe appears to be improving. Data from Japan appears mixed, with the weaker yen supporting export activity and monetary stimulus lifting inflation and also consumer activity. In China, we expect growth to slow but remain positive, with stimulus acting as an incentive for rebalancing from investment to consumption. We believe the developed economies remain in the best position for growth following the recent market crisis. Emerging market economies will remain more mixed due to the pressure on commodity producers.
For more information, please go to: https://reserve.usbank.com/insights/market-economic-update.
Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.
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