LAST WEEK’S HIGHLIGHTS
1. The equity market suffered across the board losses. The biggest driver was the USA/North Korea problem. North Korea missile test trials combined with President Trump’s comments (fire and fury, locked and loaded) gave a reason for the market weakness. The DJIA was off 1.1%, the S&P down 1.4% and Nasdaq dropped 1.5%. The South Korea market plummeted 3.2%. There was a flight to safe havens as Treasury bonds were up in all maturities.
2. Economic data was weaker than expected. July CPI (Consumer Price Index) inched up only 1.7%, below the 2% inflation level desired for the Federal Reserve to raise short-term interest rates and/or decrease their balance sheet. Although the Fed would like to raise short -term rates by end of year the federal funds futures market indicates less than a 30% chance in 2017. The reduced odds of intervention due to weak CPI actually stabilizes equities on Friday after Thursday’s retreat.
3. The weak dollar. The dollar weighted index fell 0.5%. After rising for the past 5 years, the dollar is off 11% vs the euro, 7% vs yen, and 5% vs British pound in 2017. The reduced chance of Fed tightening is contributing to the back up. Still, the 2.19% yield on the 10 year Treasury bond is much higher than that of Germany, Britain or Japan.
THIS WEEK’S EXPECTATIONS
1. Economic data. Very light week. Only July retail sales (expected +0.4% from 0.4) and capacity utilization (exp. 75.7 from 76.6) are released.
2. Geopolitics. How will North Korea situation plays out and how the markets will react. Will North Korea actually fire missiles beyond Japan and how will USA or Japan respond.