Our view this week is that the recent small business data further affirms the idea that the U.S economy is not poised to shift into high gear with consumers and businesses ramping up spending. Also of note is the gradual, but significant improvement in the fiscal position of the Federal government. As a result, we see little pressure on short or long term interest rates well into 2015. Small Business, Big Impact The U.S. budget deficit declined in July driven by income from the Fed’s massive asset portfolio. Receipts from employment taxes and corporate income tax were also up. These numbers suggest fiscal conditions for the Federal government are on track for continued improvement. The National Federation of Independent Business (NFIB) Small Business Optimism Index barely increased in June, with most components flat. There was modest improvement in hiring plans as the number of firms planning on staff increases ticked up 1% to 13% in July, the highest reading since September 2007. The percentage of firms granting pay raises over the past three months remained unchanged at 21%, the second best reading since Q1 2008. Although improved, these numbers are historically low at this point in a recovery. The NFIB’s leading economist was unsparing in his commentary – (to paraphrase) capital spending continues to remain weak, inventories remain large, and more businesses are reporting sales trends deteriorating than improving. It’s questionable at the moment if small businesses will be able to pull their weight in the recovering economy – that is a huge concern as they provide the bulk of US jobs. With housing also still weak, we are unlikely to witness inflationary growth. UK Continues Out Perform the Euro Zone The Bank of England (BOE) reported that GDP and consumer price forecasts were little changed over the medium term. The more significant changes came in the labor market. Employment and labor force participation numbers are strong in the UK as the recovery picks up steam, but wage growth remains weak. Markets have shifted expectations of an interest rate hike out to Q1 2015. We are seeing convergence between the US and the UK as the data in both have been strengthening with little inflation pressure, which is lessening the need for hawkish interest rate policy. The main concerns are in the euro zone where data continues to weaken, inflation remains well below targets, and the European Central Bank (ECB) could be forced into quantitative easing (QE) next year. Adding to fears of financial instability, Portugal’s biggest bank had to be bailed out, calling into question the value of past ECB stress testing of Europe’s largest banks. Continuing Geopolitical Troubles Escalating tension in Ukraine, strife in the Middle East and North Africa near major oil suppliers, and the fear of the Ebola virus leading to a major health/economic/social disaster in north-west Africa are all compounding an already grim economic outlook in Europe. And increasing investor appetite for safe-haven assets. The Week Ahead Tuesday, August 19th The Consumer Price Index (CPI) for July is released measuring the average change in price for a fixed basket of goods purchased by the consumer. The Fed follows a slightly different indicator, but the data can be a leading indicator of shifts in interest rate policy. New housing starts for July are released. This report is closely watched because new home activity is a powerful economic multiplier and a precursor of consumer spending on furnishings and appliances. Wednesday, August 20th The Federal Reserve releases the minutes from the July Federal Open Market Committee (FOMC) meeting. The minutes can be a market mover as analysts parse the economic analysis and the words of Fed official looking for clues to future policy direction. Thursday, August 21st Existing Home Sales figures for July are released. This is the number of existing homes sold during the month. Sales trends in the housing market indicate consumer confidence and the overall health of the economy. While Opes Advisors, Inc. uses all reasonable efforts to ensure that the information contained on in this email is current, accurate and complete at the date of publication, no representations or warranties are made (express or implied) as to the reliability, accurate or completeness of such information. Opes Advisors, Inc., therefore, cannot be held liable for any loss arising directly or indirectly from the use of, or any action taken in reliance on, any information appearing in this email.
Posted on: Fri, 15 Aug 2014 23:22:21 +0000
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