We have a very light data calendar. It is a short week with some post-vacation (ahem) attitude adjustment. There is little fresh news, but plenty of data from last week. FedSpeak is on high. It is a perfect setup for pundit pontification. Expect lots of navel gazing, with an emphasis on flaws. Many will be asking what can go wrong? 


 Last Week Recap

My expectation that last week would focus on jobs in the pre-Labor Day was pretty accurate, but also easy. There was plenty of competition from Harvey coverage. The economic news was solid leading into Friday’s payroll numbers. While that report was viewed as weak, it had little market effect.

The Story in One Chart

I always start my personal review of the week by looking at a chart of the overall market on a day-by-day basis.

Once again, we had a low-volatility, gentle climb. The avalanche of data and geopolitical news is not apparent from the chart.

The Silver Bullet

As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. I hope that readers and past winners, listed here, will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news generally positive. The employment report miss is the possible exception.

The Good

  • Q2 GDP was revised upward to 3%, beating expectations and suggesting a higher base for the rest of the year.
  • Global profit margins are higher. (Topdown Charts).
  • ADP employment showed a gain in private employment of 237K, up from 201K in July and beating expectations of 190K. I have frequently suggested that this report should be treated as an independent estimate of employment, not a forecast for the BLS announcement. I am working on a project to show why this is important.
  • Personal income increased 0.4% in July versus unchanged in June.
  • Bullish investor sentiment continues. David Templeton (HORAN) explains this contrarian indicator.
  • Core PCE Prices were 0.1% higher. This is the inflation indicator favored by the Fed. The continuing low reading suggests that the pace of interest rate increases will be modest.
  • The ISM manufacturing index improved to 58.5, a “sizzling” number according to Bespoke. The Chicago index showed similar strength.
  • Consumer Confidence remains high. The Conference Board – 122.9. Michigan sentiment – 96.8. Jill Mislinski has a nice update of the entire picture. Here is just one of the charts:
  • The Bad

  • Consumer spending increased 0.3%, up from June but trailed expectations of a 0.4% gain.
  • Construction spending had a surprising decline of 0.6% despite a positive expectation. Steven Hansen (GEI) reports, including his regular interesting comparison between spending and construction jobs.
  • Harvey effects. While everyone’s main concern is the human cost — loss of life, injuries, and destruction of homes – there have already been stories about the effects on various stocks and sectors. (Thanks to our friends in Texas – especially Houston – for letting us know how you are doing). I’ll stick to a couple of observations about the economic effects on the indicators we track. Despite the massive losses, perhaps $150 billion, the effect on GDP may actually be positive. It measures production without regard to the purpose. The immediate effect on gasoline prices was a spike higher, up about twenty cents per gallon at $2.54. Estimates call for another 15-20 cents before a plateau is reached. (MarketWatch). Bespoke says that it may be the End of an Era for the records in initial jobless claims.
  • Payroll employment dropped to a net gain of 154K and missed the 180K expectation. Average hourly earnings gains were also a bit light. As usual, the small “miss” was deemed by many to be major news. I wish more folks would read my guide for interpreting the employment report. Here are a few interesting takeaways. Please note that the results are from data collected before Hurricane Harvey.

    • CNBC collects a range of viewpoints from Wall Street economists. Goldman’s Jan Hatzius thinks that wages are on the path to improvement. Some others question the effect on the underlying trend. Diane Swonk (DS Economics) noted that the manufacturing increase was the best since 2012. (CF. Steven Hansen below).
    • Disappointing says Calculated Risk. Bill is especially unhappy with the meager wage growth.
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