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Week in Review: Fed Uncertainty, China Weigh On Markets

For the week ended 4 September 2015

  • US jobless rate falls to 5.1%
  • US productivity improves, trade gap shrinks
  • China’s manufacturing output contracts
  • Canada posts negative growth for second quarter
  • ECB ready to add more stimulus

Global market volatility persisted, as investors remained nervous about China’s slowing economy and a possible interest rate increase at the US Federal Reserve’s mid-September meeting. Stocks fluctuated substantially day to day, with major market indices down overall. A positive US jobs report added to rate-hike jitters Friday.

The VIX index, which measures US stock market volatility, stood near 27 Friday, down from a midweek peak above 33. The yield on the 10-year US Treasury note mostly traded above then dipped below 2.15% on Friday’s employment report. Crude oil prices fluctuated, with US West Texas Intermediate crude oil futures ranging between $44 and $49 per barrel and Brent crude oil prices ranging from $50 to $54 per barrel. Both ended the week in the middle of their ranges.

US and global economic news

US unemployment rate falls to 5.1%
The US economy added 173,000 jobs in August, fewer than expected, but initial estimates for that month tend to be revised up substantially. The nation’s unemployment rate fell to 5.1%, the lowest in more than seven years. Average hourly earnings increased 8 cents and average weekly hours worked rose to 34.6. The broader U6 measure of joblessness, including discouraged workers and those working part-time for economic reasons, fell to 10.3%, the lowest since June 2008.

US trade deficit shrinks to five-month low
The US trade deficit fell to a five-month low in July, shrinking 7.4% to $41.9 billion from $45.2 billion in June. July exports expanded 0.4% while imports fell 1.1%.

US second-quarter productivity up 3.3%
US nonfarm productivity rose 3.3% in the second quarter, its strongest pace since the fourth quarter of 2013, after contracting 1.1% in the first quarter. However, the longer-term trend in productivity remains weak, increasing just 0.7% from a year ago. Unit labor costs remain well contained, falling at a 1.4% annual rate in the second quarter and rising only 1.7% from a year earlier.

Service sector grows faster, manufacturing slows
US services sector growth improved from 55.7 in July to 56.1 in August, according to the final Markit purchasing managers’ index, while the manufacturing PMI fell from 53.8 in July to 53.0 in August. The composite PMI was flat month over month. The Institute for Supply Management’s index fell from 52.7 in July to 51.1 in August.

Weekly US jobless claims rise to 282,000
Initial jobless claims increased 12,000 to 282,000 for the week ended 29 August. The four-week moving average rose 3,250 to 275,500. Continuing claims fell 9,000 to 2.26 million for the week ended 22 August.

China’s manufacturing sector contracts, services growth slows
China’s official PMI fell from 50.0 in July to 49.7 in August, a three-year low. New export orders shrank for an 11th straight month. The Caixin/Markit PMI fell to 47.3, the weakest reading since March 2009. The official services gauge slowed slightly to 53.4, still indicating growth. The private services index fell sharply to 51.5. The country’s labor market worsened in August for the 22nd straight month.

Canada’s GDP shrinks for second quarter
Canada’s gross domestic product contracted another 0.5% at an annual pace in the second quarter after shrinking a downward revised 0.8% in the first quarter. Some consider two straight quarters of negative economic growth to be the definition of a recession. However, Canadian GDP expanded at a 0.5% pace in June. Canada is the biggest trading partner of the United States, accounting for 19% of all US exports.

Eurozone business activity grows
Business activity in the eurozone accelerated in August. The final August Markit Composite PMI increased to 54.3, its highest reading since May 2011.

ECB ready to add stimulus if needed
European Central Bank President Mario Draghi said the ECB is ready to expand its stimulus program if needed, as inflation is expected to remain far below its target of 2%. Eurozone economic growth is also forecast to be slower than previously expected. The ECB’s quantitative easing program is being modified to allow a higher percentage of each member country’s debt to be purchased.

German retail sales rebound, factory orders down
Germany’s retail sales rose 1.4% in July, recovering from a decline in June and indicating a strong start to the third quarter for the eurozone’s largest economy. Sales were 3.3% higher than a year earlier. However, a decrease in foreign demand led to a 1.4% drop in factory orders.

Japanese salaries rise
Japanese salaries rose by 0.6% year on year in July, or 0.3% adjusted for inflation, the first increase in two years.

UK manufacturing index dips
UK manufacturing growth slowed in August, hurt by the strong British pound, weak eurozone sales and China’s economic slowdown. The Markit manufacturing index fell from 51.9 in July to 51.5 in August. Employment fell for the first time in more than two years.

US and global corporate news

General Mills sells processed food brands for $765 million
General Mills will sell its Green Giant frozen foods and Le Sueur canned vegetables business to snack food company B&G Foods for $765 million in cash. The Green Giant brand, which includes more than 160 products, has struggled as consumer preferences have shifted to fresh foods.

US auto sales strongest in a decade
US auto sales increased to an annualized rate of 17.8 million vehicles in August, the best performance since July 2005. The six largest automakers all sold more vehicles than forecast. Ford Motor had particularly strong results, with sales rising 5%.

The week ahead

  • The European Union’s revised second-quarter GDP is released on Tuesday, 8 September.
  • China reports consumer and producer price indices on Wednesday, 9 September.
  • The Bank of England announces monetary policy on Thursday, 10 September.
  • The University of Michigan consumer sentiment index is reported on Friday, 11 September.
  • China releases industrial production and retail sales on Sunday, 13 September.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

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