With no sign of wage inflation on the horizon, the Fed once again skirted around the interest hike “when” question. The lead bank’s late-July FOMC meeting brought few surprises, as the status quo was maintained with respect to interest rates and the bank’s overall economic outlook. Although most observers are pricing in a September meeting increase, some believe it may be 0.35% vs. the more widely held 0.25% view. GDP for the second quarter rose 2.3%, slightly below expectations. Inflation remains in check and housing continues to be a serious factor in a comeback. Overall, this core sector is on the mend, with late-spring and early summer gains in housing starts, building permits, existing home sales and prices. Despite some profit-taking on Friday, the market appeared to have liked what it heard and sent equity averages higher for the week. The Dow and the NASDAQ moved ahead by about 0.7%, while the S&P 500 rose 1.2%, or 24 points. With crude oil futures off by about $1.00 on the week, energy stocks were the sole losers, led by declines in Exxon-Mobil and Chevron. All other sectors gained, led by interest sensitive utilities, industrials and some of the telecom plays. Gold moved higher by about $9.00, but is still in a downward spiral. Goldman Sachs believes the yellow metal can fall to the $900 mark in the not too distant future. Transportation stocks moved nicely higher by some 4%, thanks to lower oil and a decent earnings report from United Parcel Service. The transports are off about 18% for the year, however. Meanwhile, earnings season has been an uneven affair, to say the least. Initially, the surprises were largely to the upside. But as July rolled on, a number of high-profile names weighed in with disappointing results and/or warnings about coming quarters. Looking ahead, China will be in the news again as the Shanghai Composite got walloped this past week, with a one day decline of 8.5%; the worst daily percentage drop since early 2007. ADP will signal some employment forecasts with their July survey and U.S. non-farm payroll numbers will come out on Friday, expected to rise by a healthy 225,000 and a possible down-tick in the unemployment rate to 5.2%. We will also hear about second quarter results from CVS Health on Tuesday with estimates at $1.20 per share vs. $1.13 last year.
Here is the answer to last week’s trivia question: A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates is known as: M-1 Money Supply Indicator; Yield Curve; Floating Exchange Rate Scale; or Confidence Index? Answer: Yield Curve. Specifically, the yield curve shows the relation between the level of interest rates and time to maturity. The shape of the yield curve is closely scrutinized because it helps to give an idea of future interest rate change and economic activity. A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A flat yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates.
Today’s Trivia Question: Financial weekly Barron’s is published by? Hearst; McGraw-Hill; The Washington Post; or Dow Jones & Co.?