Domestic equities enjoyed a positive start to open the month of August. The S&P 500 index posted a 0.65% return for the week, mainly on the back of a strong monthly increase in nonfarm payrolls for July that came in at 255,000, which was above the consensus of 180,000. This positive news arrived after a healthy 292,000 in June and a very poor 24,000 in May. The unemployment rate remained at 4.9%. Many market participants now believe that odds have now increased for interest rate hikes sometime before the end of the year.
The rate hike crowd has company in William Dudley, vice chairman of the US Federal Reserve's Federal Open Market Committee. Dudley opined on Monday that, although there are lingering risks to the US economy (mainly Brexit and a strong dollar), a rate hike can't be ruled out for the rest of 2016. He did, however, urge caution in the application of higher rates in light of the aforementioned risks to the domestic and especially global economy. To wit, the US ISM manufacturing purchasing managers' index, a measure of economic activity, declined to 52.6 in July from 53.2 in June, and global equities fell slightly for the week.
Domestic earnings continue to lag expectations for a recovery. With fully two-thirds of the S&P 500 Index having reported, adjusted earnings (excluding extraordinary items) are down 2.6% from the same period a year ago. This represents the fourth straight year-over-year decline. One bright spot: excluding energy, second quarter earnings are expected to rise 1.8%, while revenues are expected to rise 2.8%.
Sobering economic news across the pond continued last week as well. After posting a June figure of 52.8, the July Markit Eurozone Purchasing Managers Index (“PMI”) declined to 52. However, concerns over Brexit remain for investors looking forward to 2017. The United Kingdom PMI fell from 52.3 in June to 48.2 in July. In a supportive move, the Bank of England cut its base lending rate by 0.25%, to 0.25%. European banking shares, weighed down by negative interest rates, have struggled year to date. The MSCI Europe Bank Index has declined about 26%, and Commerzbank is the latest bank to warn of a drop in profits.
Interestingly, President Obama again stated his support for the Trans-Pacific Partnership (TPP) trade agreement this week, despite weakening support in Congress and opposition from presidential candidates Hillary Clinton and Donald Trump. Expect to hear more about the benefits and costs of global trade as the campaign season drones on.