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Week in Review: Strong US Data Counter China Fears

For the week ended 28 August 2015

  • US Q2 GDP revised up to 3.7%
  • US housing, durable goods orders strengthen
  • US consumer spending up, inflation tame
  • China cuts rates, reserve requirements
  • Mining giant BHP Billiton falters

Market volatility spiked dramatically early this week as fears about the depth of China’s economic downturn escalated. Asian markets were hit the hardest: Through Wednesday, the Shanghai Composite Index lost 26% of its value in just eight trading days. European shares were also unstable, and Japan’s Nikkei 225 and US stock indices had six-day stretches of losses before rallying as strong US economic data countered worries about China’s weakness.

The VIX index, which measures US stock market volatility, hit 53 intraday on Monday, then dropped back below 27 on Friday. The yield on the 10-year US Treasury note touched 1.9% Monday, the lowest since April, then rebounded to settle around 2.18% Friday. US West Texas Intermediate and Brent crude oil prices recovered from Monday lows near $38 and $42 per barrel, respectively, ending the week close to $45 and $49 per barrel.

US and global economic news

US GDP growth raised to 3.7% for Q2
Second-quarter US gross domestic product growth was revised up to 3.7% from an initial estimate of 2.3%, driven by increased consumer spending, business investment and exports. A substantial buildup in inventories also contributed, but that could weigh on third-quarter growth. Strengthening labor and housing markets and inexpensive gasoline boosted consumer spending, though the energy sector subtracted from growth as spending on mining exploration, wells and shafts plunged 68%.

Core US durable goods orders advance
Nondefense capital goods orders excluding aircraft rose 2.2% in July. This was the largest monthly increase for more than a year in these core orders, which are a key gauge of US business investment plans. Total durable goods orders rose 2.0% in July.

US housing market on the rise
US new home sales rose 5.4% in July to a seasonally adjusted annual rate of 507,000 units. Sales were 25.8% above last July. The S&P/Case Shiller composite index of 20 metropolitan areas increased 5.0% in June from a year earlier. The Pending Home Sales Index increased 0.5% to 110.9, suggesting further housing market improvements.

US consumption up, inflation tame
US consumer spending rose 0.3% in July. Spending on durable goods rose 1.1%, with automobile purchases driving half of the increase. The personal consumption expenditures (PCE) measure of inflation rose 0.1% for the month, 0.3% for the year. The core PCE index, excluding food and energy, increased 1.2% for the 12 months through July.

US consumer readings mixed
The Conference Board’s gauge of consumer confidence rose from 91.0 in July to 101.5 in August, the highest reading since January. However, the University of Michigan’s consumer sentiment reading fell from 93.1 in July to 91.9 in August, reflecting the impact of increased financial volatility at month-end.

Weekly jobless claims still below 300,000
Initial jobless claims rose 6,000 to 271,000 for the week ended 22 August. The four-week moving average rose 1,000 to 272,500. The four-week average has been below 300,000 for 22 straight weeks. Continuing claims climbed 13,000 to 2.27 million for the week ended 15 August.

China cuts rates, eases reserve requirements
China’s central bank acted to stimulate economic activity and calm extremely volatile markets by announcing another 0.25% interest rate cut and a 0.5% reduction in the reserve rate requirement for banks. The one-year lending rate is now 4.6%. The central bank also removed the ceiling on interest rates for fixed-term deposits beyond one year.

German business confidence rises
The business climate index published by Germany’s Ifo Institute for Economic Research rose from 108 in July to 108.3 in August

US and global corporate news

Schlumberger to buy Cameron for $12.7 billion
France’s Schlumberger, the world’s biggest oil-field services company, agreed to buy Houston-based Cameron International for $12.74 billion. Cameron makes drilling equipment and supplies maintenance equipment to pipelines, refineries and wells. The price of $66 a share was a 56% premium to the previous day’s closing price.

Mining giant BHP Billiton profit tumbles 86%
Australia’s BHP Billiton, the world’s largest mining company, reported its weakest annual earnings since 2003 and cut its long-term forecast for China’s steel demand. Billiton’s fiscal year profit fell 86%. Results have been hurt by waning demand for iron ore, copper, coal, oil and gas as the Chinese economy has slowed, with the focus shifting toward consumer-led economic growth and away from manufacturing and infrastructure investment.

Monsanto drops $46 billion bid on Syngenta’s rejection
Agribusiness giant Monsanto is abandoning its rejected $46 billion bid to buy Swiss pesticide maker Syngenta, ending four months of aggressive pursuit. Instead, Monsanto plans to focus on building its core business.

Canadian bank profits stay solid
Canada’s five major banks reported strong quarterly earnings despite the weak domestic economy, which has been hurt by the downturn in global oil demand and pricing. Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce all beat earning expectations or increased their profits. All said they were closely monitoring their lending to the oil and gas sector and would set more money aside for bad loans.

The week ahead

  • China’s manufacturing purchasing managers' index is released on Monday, 31 August.
  • US manufacturing data are published on Tuesday, 1 September.
  • The US Federal Reserve releases its Beige Book of regional economic data on Wednesday, 2 September.
  • The European Union’s composite PMI is announced on Thursday, 3 September.
  • The US Department of Labor reports the Employment Situation on Friday, 4 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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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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