The week started with a whimper until a major bond sell-off started Wednesday. The week ended with a report that the “U.S. economy grew at an annualized rate of 2.9% in the third quarter, but underneath the better-than-expected headline (Wall Street economists were looking for growth of 2.6%) we see a number boosted by two of the least-reliable elements of this report: inventories and trade,” said Yahoo Finance on October 28, 2016.
According to me, if you want to keep your eye on the ball, it’s all about earnings. Look to see if there are more earnings surprises to the upside or earnings disappointments to the downside. With demographic headwinds it appears to me that a majority of earnings surprises may be difficult to achieve.
Thanks to Dent Research, provided here is our weekly information roundup ending the weekon October 28, 2016. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news
U.S. Third-Quarter GDP Increased 2.9%... That’s the highest growth rate since the third quarter of 2014.
What it means – Don’t break out the party hats just yet. Remember that this number, which is still below 3% and is a first estimate, follows 0.8% growth in the first quarter, and 1.4% in the second. That makes our average growth in 2016 a whopping 1.7%. Better than 1%, not quite 2%, and nowhere near high enough to be a cause for celebration.
Still, the trend from the dismal readings at the end of 2015 to now gives the Fed the ammo they need to bump rates in December. This will put further upward pressure on bonds over the next two months.
Affordable Care Health Exchange Premiums Up 25% for 2017… This rise represents the price increase for the second-cheapest silver plan in states across the country.
What it means – A 25% bump is ugly, but that’s not the worst of it. This is just the average. The cost jumped even more in many places, like the 53% hike in Philadelphia, and the 118% boost in Arizona. Along with higher prices, consumers get the joy of fewer choices and bigger deductibles. This is a product that most people love to hate. It does provide coverage to those who previously could not get insurance, but at a cost that is proving to be anything but affordable.
Adding insult to injury, the government is assigning policies to consumers with insurance companies that exit the marketplace who fail to sign up for a new one. There’s no doubt the replacement policy will be a tad more expensive than the old one.
No matter who gets elected, this issue will be a headache for the next administration.
S&P CoreLogic Case-Shiller 20-City Home Price Index Up 5.1% Over Last Year… The gain was expected, and is in line with the rest of 2016.
What it means – This index is reported on a two-month lag, so these are the numbers from August. In September, we’ll compare current numbers to the strong results from last year, so the annual gains should fade. With housing in England, Canada, and Australia starting to crack, it seems like just a matter of time before falling prices wash up on our shores.
The Chinese Yuan Drops Below 6.78 per U.S. Dollar… That’s the lowest level since the currency started trading outside of the mainland in 2010.
What it means – Do you hear that sound? It’s the sound of nothing. Zilch. Nada. There was no knock-on effect from the Chinese yuan joining the IMF’s Special Drawing Rights (SDRs) on October 1.
Many people forecast the change would lead to the death of the dollar and the rising supremacy of the yuan. I didn’t think it would mean more than a temporary positive blip for the Chinese currency. I was wrong. It’s downward spiral continued uninterrupted. Looks like the yuan will cross through 7.00 per U.S. dollar in just a matter of months.
As for outcomes, just ask Caterpillar. The maker of big yellow earth-moving equipment just posted 46 straight months of falling revenue, courtesy of crashing commodities and a strong U.S. dollar.
New Home Sales Up 3.1% in September, August Numbers Revised Down 5.5%... The Census Bureau reported August’s sales at 609,000, but revised them to 575,000. September showed 593,000 new homes sold.
What it means – In addition to taking a chunk out of August sales, July’s numbers also saw a downward revision. The overall effect is a slower growth rate over the summer, but it still puts new home sales up 30% over last year. Prices also popped, up 6.7% in September, putting the annual gain back into positive territory at 1.9%.
There’s no question that the new home market remains solid, and it’s important because this sector creates construction jobs. But it’s less than 10% of the overall housing market, and existing home sales aren’t shooting to the moon. We’ll see if new home sales can keep up the current pace of gains.
Foreign Central Banks Liquidate $346 billion of U.S. Treasurys… China led the move, selling $34 billion.
What it means – This is one of those times when there is less here than meets the eye. Yes, other countries cut their U.S. bond holdings, and yes, the Chinese traded our government bonds for Japanese government bonds, but there are a couple of good reasons for all this.
As the dollar rises, consumers and investors in other countries try to get their capital out of their home currency. Their central banks have to buy it, which means expending dollars. At the same time, U.S. interest rates appear to be headed higher, so it makes sense to lighten up on U.S. bonds before they dip in value.
What this does not mean is a wholesale move away from the buck. The dollar is still king, no matter how many times people declare that its reign is over.
Durable Goods Orders Down 0.1% in August, Up 1.6% Over Last Year… Core capital goods orders fell 1.2% and slipped 4.1% over last year.
What it means – The headline number was dragged down a bit by transportation, specifically a drop in defense aircraft orders. The number got a boost of 1.2% from vehicle orders, but that should turn into a headwind for October as Ford and other manufacturers slow down their lines due to softening demand.
Overall, this report reflects continued stagnation in the U.S. economy. We’ve been here a long time and don’t show any signs of change in the near future.
Next Week – The first few days of November bring two significant economic events – the latest Federal Reserve meeting, and the U.S. Employment Situation.
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