Weekly Economic Update — July 1, 2017

Markets Reach the Year’s Half-Way Point, End on Flat Note

• Stock markets reached the year’s half-way point with very positive returns, despite ending the week mixed
• The S&P 500 ended the week marginally lower, the DJIA was down just a bit and NASDAQ dropped by about 2%, as volatility in the technology sector continued to persist
• The financial services sector turned in a good week, reversing its five-week decline. The reversal had a lot to do with the results of the Fed’s annual stress test, which showed that all 34 US banks that were tested kept capital ratios above the Fed’s minimum required levels
• Oil prices recovered some of their recent losses, rising to $45.40 from $42.65 last Friday
• Yields on U.S. Treasuries increased in reaction to comments from global central bank officials, an increase in oil prices and general US dollar weakness
• Volatility, as measured by the Chicago Board Options Exchange Volatility Index, ticked up to 10.9 from 10.6 and still remains at historically low levels
• The fed funds futures market still points to the December Fed meeting as the most likely time for the next rate-hike announcement, with an implied probability of 54.4%, up from last week’s 51.3%

Weekly Market Performance

CloseWeekYTDDJIA21,350–0.2%8.0%S&P 5002,423–0.6%8.2%NASDAQ6,140–2.0%14.1%Bonds*$109.51–0.5%2.4%10-Year Treasury Yield2.30%0.16%-0.14%

*Source: Bloomberg. Bonds representedby the iShares Core US Aggregate Bond ETF

Half-Way Through the Year

Investors should feel pretty good about the stock markets closing out the first half of 2017. Supported by strong corporate earnings and the promise of market reforms, the S&P 500 Index is up a healthy 8%. Mid-caps stocks are up 7.7% and small caps advanced 5.1% through Friday, June 30th.

For a myriad of reasons, including improving developed economies and a declining US dollar, international stocks have done even better. Through Friday, developed markets were up over 14% (MSCI EAFE) and emerging markets equities (MSCI Emerging Markets Index) were up almost 19%, in US dollars.

US GDP Revised Higher — Again

For the second time this year, US economic growth for the first-quarter was revised higher. According to the US Bureau of Economic Analysis, gross domestic product expanded at a 1.4% annual rate, which is up from 1.2% in the last revision, which had been revised from the first report of 0.7%. Improved consumer spending was the main force behind the revised numbers, according to the report.

Eurozone Confidence Spikes to Nearly 10-year high

The Eurozone Economic Sentiment Indicator jumped to a nearly 10-year high of 111.1 in June from 109.2 in May, according to a report by the European Commission. The last time the index was so high was when it reached 111.8 in August 2007, just before the global financial crisis began to bloom.

Illinois: The Land of Lincoln or The Land of Junk?

Several states are scrambling to reach last-minute budget deals, but the state of Illinois is weighing heavily on the municipal bond market because it appears as if Illinois is heading for their third straight fiscal year without passing a full-year budget.

When Illinois ended its regular legislative session on May 31st without a budget, both Moody’s Investors Service and S&P Global Ratings downgraded Illinois’s general obligation debt to the lowest investment-grade level. The rating agencies further warned that additional downgrades were on the way if a deal wasn’t reached by the end of June.

As a result, municipal bonds and Treasuries have declined recently as investors are trying to sort out what’s happening. If the Illinois general obligation debt is downgraded to junk status, it will be the first time that has ever happened to a US state.

Lots of Data Reported

This week saw lots of economic data being reported, including:

• Personal income increased 0.4% in May after a downwardly revised 0.3% increase (from 0.4%) for April
• Personal spending was up 0.1%, following an unrevised 0.4% increase in April
• The core PCE Price Index, which excludes food and energy, increased 0.1%
• The Chicago Business Barometer, otherwise known as the Chicago Purchasing Managers Index, jumped to 65.7 in June from 59.4 in May
• The University of Michigan’s Index of Consumer Sentiment was revised from the preliminary reading of 94.5 for June to 95.1 with the final reading

Sources

federalreserve.gov; ism-chicago.org; ec.europa.eu; msci.com; bea.gov;sca.isr.umich.edu; thomsonreuters.com; dowjones.com; tiaa.org; morningstar.com;edwardjones.com; mfs.com; bloomberg.com