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IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Steigerwald, Gordon & Koch, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Steigerwald, Gordon & Koch, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Steigerwald, Gordon & Koch, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Steigerwald, Gordon & Koch, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: Steigerwald, Gordon & Koch, Inc. does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Steigerwald, Gordon & Koch, Inc.’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

 

Markets End Quarter on a Choppy Note  

June 30, 2017 

**An unexpected decline in U.S. orders for business equipment in May indicates cooling capital-goods investment may weigh on second-quarter economic growth, Commerce Department data showed Monday. Orders for non-military capital goods excluding aircraft fell 0.2% (the estimate was for a 0.4% gain) after a 0.2% increase in the prior month. Shipments of those goods, which are used to calculate gross domestic product, fell 0.2% after 0.1% gain the prior month. Bookings for all durable goods fell 1.1% (the estimate was for a 0.6% drop) following 0.9% decline in the previous month.   Excluding transportation equipment demand, which is volatile, orders rose 0.1% (the estimate was for a 0.4% gain). The broad slowdown in equipment orders and shipments raises the risk that business investment will provide less of a boost than anticipated to the economic rebound this quarter, leaving the heavy lifting to household spending. The outlook for capital-goods production is clouded by cooling automobile sales, while overseas markets -- though improving -- are yet to show the kind of demand acceleration that would spur exports of U.S. made goods. In addition, some companies may be waiting for clarity on more favorable tax policies from Congress before stepping up investment. 

We had a couple of Fed governors giving speeches this week with comments that were worthy of note. New York Fed President William Dudley indicated that easier financial conditions support the Fed tightening policy. A muted market response to plans to shrink Federal Reserve’s balance sheet “suggests that these communications have generally been effective in fostering an orderly adjustment in expectations about how we are likely to normalize our balance sheet,” he went on to say. “Monetary policymakers need to take the evolution of financial conditions into consideration,” Dudley said in remarks delivered Sunday at the Bank for International Settlements’ Annual General Meeting, in Basel, Switzerland and posted online Monday. “For example, when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease, as has been the case recently, this can provide additional impetus for the decision to continue to remove monetary policy accommodation.” Additionally, Federal Reserve policy maker John Williams also spoke this week indicating he sees interest rates rising as inflation moves up. He made the case Monday for further gradual increases in interest rates, saying he expects inflation to rise to the central bank’s 2 percent target next year as unemployment edges lower. “Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time,” Williams said in remarks prepared for delivery at the University of Technology Sydney. The comments by the president of the Federal Reserve Bank of San Francisco suggest that he’s lining up with Fed Chair Janet Yellen, his predecessor at the bank, in an emerging debate on how to respond to an easing in inflation during the last few months. While some Fed officials have argued for a pause in the rate-hiking campaign to wait for clearer signs that inflation is indeed headed higher, Yellen has played down the significance of recent weak price data and suggested that the Fed remains on course for higher rates. Williams seemed to agree. “Some special transitory factors have been pulling inflation down,” he said. “But with some of these factors now waning, and with the economy doing well, I expect we’ll reach our 2 percent goal sometime next year.” 

Those special factors include a steep drop in the cost of mobile-phone services. That helped pull down the Fed’s favorite inflation gauge to 1.7 percent in April from 1.9 percent in March and 2.1 percent in February. Williams also saw a danger in the Fed allowing the unemployment rate to fall too far. “The very strong labor market actually carries with it the risk of the economy exceeding its safe speed limit and overheating, which could eventually undermine the sustainability of the expansion,” he said. At 4.3 percent in May, the U.S. jobless rate was already below what Williams thinks is its long-run sustainable rate of 4.75 percent. And he sees it dropping some more. “Given the strong job growth we’ve been seeing in the United States, I expect the unemployment rate to edge down a bit further and remain a little above 4 percent through next year,” Williams said. The Fed earlier this month raised interest rates for the second time this year. Policy makers have penciled in one more rate increase for 2017 and three more for 2018, according to projections released after their June 13-14 meeting. Williams is not a voting member of the Federal Open Market Committee this year but will vote in 2018. Williams affirmed the Fed’s intention to begin trimming its $4.5 trillion balance sheet this year, saying the central bank would start off “nice and easy.” The aim will be to gradually reduce bond holdings in a widely telegraphed and predictable fashion, he said. “I hope I’ll not be perpetuating an unfair stereotype about economists if I say that ‘boring’ is a virtue,” Williams said. “Indeed, my new mantra is, ‘Boring is the new exciting.’”  It’s nice to see a Fed governor with a sense of humor! 

In European Central Bank news, Mario Draghi called for continued euro-area stimulus this week even as the economy enters a new phase in its upturn, saying support is still needed to entrench the trend. “All the signs now point to a strengthening and broadening recovery in the euro area -- deflationary forces have been replaced by reflationary ones,” the European Central Bank president said on Tuesday in Sintra, Portugal. “However, a considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining. So for us to be assured about the return of inflation to our objective, we need persistence in our monetary policy.” The comments at the annual ECB Forum reflect the intensifying public debate over whether the central bank should continue pumping liquidity into the financial system after more than four years of economic growth and improving resilience.  Policy makers didn’t use their latest policy meeting to discuss whether to wind down their 2.3 trillion-euro ($2.6 trillion) bond-buying program, which is scheduled to run until the end of this year, meaning investors may get relatively short notice of any change. The euro jumped as Draghi said that most factors damping inflation are temporary. The Governing Council used its June 8 meeting to say that risks to growth are now broadly balanced instead of tilted to the downside, and dropped its expectation that interest rates might be cut again. Draghi acknowledged that further changes in the policy stance are coming, but said they should be slow. “In the past, especially in times of global uncertainty, volatility in financial market prices has at times caused an unwarranted tightening of financial conditions,” he said. “So in the current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary-policy parameters, even when accompanying the recovery. Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure.” The ECB president did leave room for policy steps that would signal a reduction in the pace of stimulus, without necessarily tightening financial conditions. That could encourage more hawkish members of the Governing Council to push for action. “As the economy continues to recover, a constant policy stance will become more accommodative,” Draghi said. “The central bank can accompany the recovery by adjusting the parameters of its policy instruments -- not in order to tighten the policy stance, but to keep it broadly unchanged.” We respect Mario Draghi and his position – traders seem to also have a great deal of confidence in his ability to lead the central bank. 

In other European news, euro-area economic confidence jumped to the highest level in a decade as the European Central Bank edged toward unwinding unprecedented stimulus. An index of executive and consumer sentiment rose to 111.1 in June from 109.2 in May, the European Commission in Brussels said Thursday.  The reading is the strongest since August 2007 and compares with a median estimate of 109.5 in a Bloomberg survey of economists. The report comes two days after ECB President Mario Draghi confounded investors by arguing that there’s room to adjust stimulus measures as the economy improves, even though he called for prudence and patience.  A gauge for private-sector activity signaled the euro-area economy recorded its fastest expansion in six years in the second quarter as business confidence in Germany hit a record and consumer sentiment in France surged. 

The job market continues to boost U.S. consumer confidence as expectations rise. An unexpected rebound in U.S. consumer confidence reflects a buoyant labor market and improved business conditions, though Americans are slightly less optimistic about where things will be in six months, data from the New York-based Conference Board showed Tuesday. The Confidence index rose to 118.9 (the estimate was for 116) from 117.6 in May. The present conditions measure increased to 146.3, highest since July 2001, from 140.6 the prior month. The gauge of consumer expectations for the next six months fell to 100.6, the lowest level since January, from 102.3 the previous month. Americans are drawing encouragement from an economy that continues to provide jobs, rising stock and home prices and steady pay gains, as the share of respondents expecting higher incomes was the second-highest since 2002. At the same time, the easing of the overall expectations index adds to other sentiment figures that suggest mounting skepticism about the ability of Washington lawmakers to enact economic policies that will drive growth. “Expectations for the short-term have eased somewhat, but are still upbeat,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement. “Overall, consumers anticipate the economy will continue expanding in the months ahead, but they do not foresee the pace of growth accelerating.” 

Sustained increases for home prices in 20 U.S. cities in April indicate the housing industry is juggling stable demand with a shortage of inventory, figures from S&P CoreLogic Case-Shiller showed Tuesday. The 20-city property values index rose 5.7% year-over-year (the estimate was for a 5.9% gain). The national price gauge increased 5.5% year-over-year. The seasonally adjusted 20-city index climbed 0.3% month-over-month (the estimate was for a 0.5% increase). Stubbornly low inventory in housing, particularly for more affordable properties, has helped drive steady home-price gains. While rising property values are helping cushion homeowners’ balance sheets, they also are inhibiting lower-end buyers, especially first-timers, from getting a piece of the action, as wage gains haven’t kept pace. At the same time, industry demand remains healthy, with solid job gains and low mortgage rates supporting purchases. “Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up,” David Blitzer, chairman of the S&P index committee, said in a statement. “The supply of homes for sale has barely kept pace with demand and the inventory of new or existing homes for sale shrunk down to only a four-month supply. All 20 cities in the index showed year-over-year gains, led by a 12.9 percent advance in Seattle and a 9.3 percent rise in Portland, Oregon.  

The U.S. economy’s first-quarter growth was less tepid than previously reported, as consumer spending and trade added more to expansion, Commerce Department data showed Thursday. Gross domestic product rose at a 1.4% annualized rate (the forecast and previous estimate were for 1.2%). Consumer spending, the biggest part of the economy, rose 1.1% (the forecast and previous estimate were for 0.6%). Exports grew at a 7% rate, which was revised up from the prior estimate of 5.8% growth. While the revision was more positive than most analysts anticipated, the report still underlines a relatively weak start to the year, with consumer spending growing at the slowest pace since 2013.  Weather and other temporary factors in the period, along with rising wages and salaries, support the idea of a consumer-led rebound in the second quarter.  Federal Reserve policy makers raised interest rates earlier this month, seeing the first-quarter slowdown as transitory as the labor market improves further. The Commerce Department attributed the latest upward revision to spending data for financial services, insurance and health care.  Exports of industrial supplies and materials were higher than previously reported, boosting trade’s contribution to expansion in the period. Analysts estimate the U.S. economy will grow at a 3 percent rate in the April-to-June period, though the slowdown in equipment orders and shipments reported earlier this week raises the risk that business investment will provide less of a boost than anticipated.  Cooling automobile sales and a housing sector limited by a scarcity of affordable homes also remain headwinds for the economy this year. 

As always, stay tuned!

Fed Keeps Rates on Hold as Slowdown in Growth Deemed Temporary

 

Federal Reserve officials left interest rates unchanged while signaling they’ll look past a recent deceleration in U.S. economic growth and stay on a gradual path of policy tightening. “The committee views the slowing in growth during the first quarter as likely to be transitory,” the Federal Open Market Committee said in a statement Wednesday following a two-day meeting in Washington.  “Near-term risks to the economic outlook appear roughly balanced.” Central bankers provided little direction on when they might next change the policy rate, giving themselves flexibility to raise or hold at their June meeting. Fed officials have penciled two more rate hikes into their 2017 forecasts in addition to the one increase they made in March.  Inflation is closing in on the Fed’s 2 percent goal and the jobless rate has fallen to a level officials see as consistent with their maximum-employment mandate. “Inflation measured on a 12-month basis recently has been running close to the committee’s 2 percent longer-run objective,” according to the statement.  Household spending rose “only modestly” but the fundamentals underpinning consumption growth “remained solid.” Headline price gains stood at 1.8 percent in March, though a core measure that strips out food and fuel fell to 1.6 percent, based on Commerce Department data.  

The decision to leave the target federal funds rate unchanged in a range of 0.75 percent to 1 percent was unanimous and widely expected by investors.  Fed Chair Janet Yellen doesn’t have a press conference scheduled after this meeting, but she and at least five other Fed officials are scheduled to speak on Friday, giving policy makers a chance to explain their decision more fully if they so choose. Ahead of the release, traders saw about a 70 percent chance of a rate increase at or by the Fed’s June meeting, based on trading in fed funds futures.  That would mark a pickup in pace from 2016, when the Fed’s sole quarter-percentage point increase came at its December meeting. The Fed didn’t signal any change to its balance sheet policy.  It is discussing how to begin shrinking its $4.5 trillion in holdings, and officials have said they hope to release a plan this year.  They may start unwinding by the end of 2017, though that hinges on economic conditions. 

U.S. payroll gains rebounded in April by more than forecast and the jobless rate unexpectedly fell to 4.4 percent, signaling that the labor market remains healthy and should support continued increases in consumer spending. The 211,000 increase followed a 79,000 advance in March that was lower than previously estimated, a Labor Department report showed Friday.  The median forecast in a Bloomberg survey of economists called for a 190,000 gain.  While the unemployment rate is now the lowest since May 2007, wages were a soft spot in the report, climbing 2.5 percent from a year earlier. The brighter figures follow a weaker-than-expected reading in March, when payrolls were partly depressed by a snowstorm that slammed the Northeast during the survey week.  Strengthening business sentiment might be translating into hiring, and the data should keep Federal Reserve policy makers on track to raise interest rates in the coming months after officials declared the first-quarter slowdown to be temporary. 

The unemployment rate compares with economists’ projection for 4.6 percent.  It’s now below the 4.5 percent level where Fed policy makers in March had forecast it would reach in the fourth quarter, based on their median estimate. Employment gains were broad-based though concentrated in services in April. Leisure and hospitality registered a 55,000 increase, education and health services was up 41,000 and financial activities rose by 19,000.  Retail rebounded with a 6,300 increase following a revised loss of 27,400. Manufacturing and construction jobs rose but at a weaker pace than at the start of 2017.  Factories added 6,000 jobs after a 13,000 gain, while construction workers rose by 5,000 following 1,000 in March. Total private employment, which excludes government agencies, climbed by 194,000 in April, following a 77,000 advance the prior month.  Government payrolls rose by 17,000 in April, including a 6,000 decline at federal agencies and 23,000 increase at state and local governments. Wage growth accelerated on a monthly basis to 0.3 percent from a revised 0.1 percent gain in March.  At the same time, the 2.5 percent year-over-year gain in average hourly earnings was the weakest since August, following a 2.6 percent rise in March. Absent faster wage growth, consumers have retained a healthy outlook as they’ve largely socked away savings from income gains including stronger stock and housing prices.  Weaker household purchases in the first quarter reflected a slowdown in automobile sales, which are easing to a more sustainable rate, and smaller home-heating bills owing to unusually warm weather. 

America’s service industries expanded more than projected in April as a measure of orders reached the highest level since 2005, a survey from the Institute for Supply Management showed Wednesday. The non-manufacturing index rose to 57.5, the second-highest since October 2015 (the forecast was for 55.8) from 55.2 in March. Readings above 50 indicated the sector is expanding. The gauge of orders climbed to 63.2, which was the highest since August 2005, from 58.9 the prior month. The measure of business activity increased to 62.4 from 58.9 and the index of services employment slid to 51.4, an eight-month low, from 51.6. The results are in sync with projections for a rebound in economic growth this quarter coming off the weakest pace in three years, which was partly due to transitory restraints.  The surge in non-factory orders also extended to customers beyond U.S. borders as a gauge of export demand climbed to the highest level in nearly a decade.  Recent data from the euro area showed manufacturing growing the most in six years, a development that can benefit U.S. service providers. Steady job growth, healthier household finances and rising confidence help explain the pickup in services, which account for about 90 percent of the economy and span industries such as utilities, retailing, health care, and construction.  

America’s factories expanded less than forecast in April as measures of orders and employment pulled back, Institute for Supply Management data showed on Monday. The ISM’s index eased to 54.8 (the forecast called for 56.5) from March’s 57.2; readings above 50 indicate expansion. A measure of orders dropped to 57.5 in April from 64.5. Even with the retreat last month, the gauge remains well above the 51.5 average for all of 2016 and indicates healthy optimism among factory managers. The data show manufacturing is settling into a more sustained pace of growth after expanding in February by the most since mid-2014. The decline also brings the factory diffusion index back toward levels that are more in line with so-called “hard data,” including industrial production and manufacturer orders and shipments. The Federal Reserve’s latest production report showed factory output dropped 0.4 percent in March on weakness in the auto sector. While the ISM’s April measures of new orders and factory employment cooled from a month earlier, the report showed overseas markets are doing better. The group’s index of export orders climbed in April to the highest level since November 2013. What’s more, a gauge of customer inventories dropped to the lowest level since July 2015, a sign bookings and production will remain strong. From a policy perspective, the Trump administration’s recent release of a tax-cut plan may provide a glimpse into eventual legislation, giving businesses a bit more clarity for future investments and hiring.     
 
We have not focused on China recently but there are interesting developments there and we like to remind folks periodically it is the world’s second largest economy! China’s run of solid economic indicators proved little consolation for its shaky financial markets in April. The dichotomy stems from a shift in the leadership’s focus toward reducing leverage -- one that’s set to determine whether growth joins asset prices in heading down. Economists are practically unanimous in saying that reduced debt loads would be good for China’s longer-term health. The big unknown is whether officials can manage that without a dose of short-term pain. If the authorities’ initiatives are not managed well, it could lead to a rise in credit events, excessive liquidity tightening, faster-than-intended slowdown of credit growth, and greater market volatility. What started in the fall of 2016 as a tightening in money market liquidity has intensified to a broader attack by policy makers on the shadow-banking system, where patchy regulation has allowed investors to make leveraged bets. When President Xi Jinping last week warned top officials to crack down on financial risks, the benchmark equities index at one point gave up gains for the year, while bonds suffered their biggest tumble of 2017. 

While past regulatory shifts -- especially pricking a stock bubble and letting the yuan depreciate in 2015 -- have sometimes spooked international investors, this time around the reaction has been muted. The positive economic backdrop has helped, along with the conviction that Xi and his lieutenants won’t allow turmoil to disrupt a key, once-in-five-years Communist Party leadership gathering this autumn. The imperative of heading off disorderly moves in financial markets is a backdrop to the slew of regulatory initiatives over the past two months. Besides broad increases in money-market rates, the list includes: the People’s Bank of China incorporated off-balance-sheet wealth-management products in its macro-prudential assessment of banks’ risks, putting lenders on notice that shadow banking is facing deeper scrutiny; the China Banking Regulatory Commission, under new leadership since February, stepped up scrutiny of entrusted investments -- funds that banks farm out to external managers; the CBRC issued guidelines to enhance liquidity risks at banks, including all of lenders’ interbank and WMP business in their monitoring; and authorities stepped up inquiries about wholesale funding after smaller banks sold a record amount of negotiable certificates of deposit. In our view, these are all critical steps to monitoring and controlling risk in that nation. And we quote a professor at Jeff and John’s alma mater: “We must keep in mind the 19th Communist party Congress slated for later this year, when Xi will preside over a reshuffle of leadership positions below him. It’s unlikely that the government will allow the economy to veer off script,” said Minyuan Zhao, an associate professor of management at the University of Pennsylvania’s Wharton School. “This is not unlike injecting strong medicine into a patient -- make sure you kill the disease before killing the body," she said of the deleveraging push. Amen to that! 

As always, stay tuned!



INDEX
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  • Janet Yellen Speaks and Markets Like What They Hear
  • Jobs, Jobs, Jobs
  • Markets End Quarter on a Choppy Note
  • Health Care Reform Vote Next Week
  • Fed Raises Rates as Expected
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  • Markets Set New Records
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