August 31, 2020

Weekly Market Commentary August 24th to August 28th 2020

This week’s top story for the US economy was Fed Chair Jerome Powell’s comments that the Federal Reserve will change from “targeting” to “averaging” inflation at 2%. Until we get some guidance on what this actually means, it’s safe to assume that the Fed will keep rates lower for longer. In theory, by keeping rates low after seeing signs of an improving economy, this should boost inflation. In the past, at the slightest signs of a strengthening economy, the Fed generally would look to boost rates as they target 2% inflation. The change could lead to the potential of an overheating economy, but it seems to be a risk the Fed is willing to take to stimulate stubbornly low inflation.

Economic data releases for the week started with strong housing numbers. New Home Sales beat estimates by 14%, while Pending Homes Sales surprised to the upside and came in at +5.9% compared to a -1.9% consensus. Durable Goods and Capital Goods were both strong with durables coming in at 11.2% vs. a 4.8% estimate; and capital goods beating by 0.6%. Second quarter GDP was revised to -31.7% from -32.5%, Personal Income came in at +0.4% compared to a -0.4% consensus, and consumer spending bested the median forecast by 0.3%, coming in at +1.9%.

On the downside, Weekly Initial Jobless Claims, while lower than last week, are no longer falling at the pace of a couple weeks ago. It seems we have been rangebound now for some time around one million initial claims. Weekly Continuing Claims also are not improving and came in at 14.54 million. Both results are likely due to the coronavirus flair ups that are happening as businesses try to reopen.

Lastly, core inflation came in, once again, lower than expected. As mentioned above, look for the Fed to continue with the message of low rates for the foreseeable future as they pursue their new mandate of ‘averaging’ 2% inflation while keeping unemployment low.

Right in line with the positive economic news, equity markets finished the week strong and at new historic highs. The S&P500 was up 3.26% and the NASDAQ finished up 3.39%. In bond markets, the yield curve steepened with the 2-year US Treasury dropping to 0.14%, the 10-year US Treasury increasing to 0.73%, and the 30-year climbing to 1.51%.

Key economic releases for next week include the August Employment Report, Factory Orders, Construction Spending, ISM Manufacturing, and the Weekly Initial/Continuing Jobless Claims.