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Weekly Market Update for September 8, 2017

by J.M. Hanley

The Dow finished up on Friday, rising 13 points to close at 21,798. For the week, the Dow fell 0.86% (S&P 500 -0.61%) and year-to-date is now up 10.2% (S&P 500 +9.9%). This holiday-shortened week brought little corporate news. The major indices declined moderately on worries about Hurricanes Harvey and Irma and changes to the Federal Reserve policy goals, along with concern about North Korea.  The yield on the 10-year Treasury fell ten basis points on the week to close at 2.05%, its lowest level since mid-November.

It was a comparatively light week for major economic indicators. Factory orders declined by 3.3% in July, the most they’ve dropped since August of 2014.  Weak demand for aircraft was to blame. Excluding transportation, orders actually rose.  Likewise, non-transportation durable goods orders also increased in July, at a faster pace than they did in June. This improving manufacturing demand reflects more optimism by American businesses.  In other news, labor force productivity ticked up 1.5% in the second quarter. This was faster than economists had forecast, and marked an acceleration from the first quarter.  Productivity growth has nevertheless remained tepid by historical standards.  GDP growth has suffered as a result.

The price of crude oil was flat this week, at $47 a barrel – down 12% YTD. US crude stockpiles built this week – by 4.3m barrels – while product inventories of gasoline (-3.2m bls) and diesel (-1.4m bls) declined. The effects of Hurricane Harvey are now flowing through the numbers; however, nearly all Texas refining assets are back up and running and previously shut-in oil/gas production is online as well. Hurricane Irma could potentially string these disruptions out for another couple weeks, with Irma possibly having a more lopsided (negative) impact on supply/demand balances than Harvey.

While Harvey had only a moderate impact on major insurers, Irma will likely prove a different story. Much of the Houston metro did not carry flood insurance, so most property losses will unfortunately be borne by individual homeowners.  But insurers have major exposure to hurricane-prone Miami.  Insurers’ losses from Harvey are estimated to be $25 billion; losses from Irma could be five times worse.

News from Washington was mixed.  Congress raised the limit on what the federal government can borrow. The vote ensures that the Treasury will be able to meet the nation’s current financial obligations.  A separate bill necessary to fund the government also passed.  Markets were reassured. However, both pieces of legislation expire in the middle of December, when they will need to be passed by Congress once again.  December negotiations could complicate efforts at tax reform. 

Elsewhere on the policy front, markets are increasingly skeptical that the Federal Reserve will raise interest rates a third time at its December meeting.  The probability of a rate hike had fallen to 31%.  Comments from regional Fed members suggested a more cautious approach given slow inflation and a labor market with apparently more slack than most realized.  The Fed’s Vice Chair Stanley Fischer announced that he would step down in mid-October.  His replacement will have significant influence on Fed policy.  However, there’s no consensus on who it will be.

Highlights on next week’s economic calendar include small business optimism (9/12), inflation figures (9/14), and retail sales (9/15).


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