Presented by Mark Gallagher 

General Market News  
• Last week, the 10-year Treasury went up to 1.90 percent late, but it pulled back after the news from Saudi Arabia over the weekend and opened at 1.80 percent on Monday. The rest of the curve had similar moves. The 2-year Treasury was as high as 1.80 percent and opened at 1.75 percent, and the 30-year Treasury was as high as 3.37 percent and opened at 2.26 percent.
• Global equities rallied last week following speculation of an interim U.S.-China trade deal, as well as a rate cut and economic stimulus from the European Central Bank (ECB). The de-escalation in trade tensions came on both sides, as the week began with President Trump delaying tariffs on the $250 billion in Chinese imports until October 15. Later in the week, China announced that it would exempt some of the tariffs on soybeans and pork. On Thursday, the president of the ECB, Mario Draghi, announced that the ECB would cut its deposit rate by 10 basis points to –0.5 percent. The ECB also announced that it would restart its quantitative easing program by buying 20 billion euros per month in securities, beginning in November. This decision was met with dissent from several of the other European central bankers. Finally, we saw a large rotation from growth to value, with financials, energy, and materials among the top performers. Those that underperformed included REITs, consumer staples, and technology.
• We started off the week with Wednesday’s release of the Producer Price Index for August. Producer prices increased by 0.1 percent during the month and 1.8 percent year-over-year, as expected. Core prices, which strip out the impact of volatile food and energy prices, came in higher than expected, with 0.4 percent monthly growth and 2.3 percent year-over-year growth. This increase in core producer inflation largely offset a surprise 0.3 percent decline in July. Producer inflation appears to be picking up, and there may be more upward pressure coming, as additional tariffs on Chinese goods came into effect on September 1.
• Thursday saw the release of the Consumer Price Index for August. As was the case with producer prices, consumers saw prices rise during the month, with 0.1 percent monthly and 1.7 percent year-over-year growth. Headline consumer inflation came in slightly below expectations for 1.8 percent year-over-year growth, but this was largely due to a drop in gasoline prices. Core consumer inflation came in higher than expected, with 0.3 percent monthly growth and 2.4 percent year-over-year growth. This result represents the highest annual core consumer inflation rate in 11 years. Consumers are starting to feel the negative effects of the ongoing trade war, as prices for home furnishings and recreational goods have grown notably over the past year. Going forward, the new September tariffs will likely add more pressure on consumer prices, as this round includes tariffs on additional categories of retail goods.
• Despite the rise in consumer prices this year, spending has been a bright spot in the economy. On Thursday, that trend continued with the release of the August retail sales report. Sales came in better than expected, with 0.4 percent growth against expectations for 0.2 percent. This result follows a strong 0.7 percent increase in July. This is the sixth straight month of growing retail sales, as consumers have been powering the ongoing economic expansion. Consumer confidence has remained strong in the face of rising inflation and trade war-related uncertainty, and consumers have been more than willing to translate high confidence levels into additional spending.
• Speaking of confidence, we finished the week with Friday’s release of the University of Michigan consumer sentiment survey for September. The survey rose from 89.8 in August to 92 in September, against expectations for a modest increase to 90.8. Confidence dropped in August, in large part due to market volatility during the month. So, it is encouraging to see this rebound now that markets are approaching all-time highs. Lowered gas prices and continued low jobless claims also likely helped support this rebound in confidence. Despite the increase in September, the survey remains well below levels seen earlier in the year, so this will be an important data series to monitor.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
Tuesday will see the release of the August industrial production report. It is set to show 0.2 percent growth following a 0.2 percent decline in July. A rebound in manufacturing output, a major driver of the July decline, should offset lower-than-expected utilities production. If manufacturing output shows the growth that economists forecast, it would help calm fears of a larger slowdown in manufacturing following recent declines in manufacturer confidence.

Also on Tuesday, the National Association of Home Builders Housing Market Index is set to be released. Home builder confidence is expected to remain steady at 66 in September. Although home builder confidence has recovered well from a plunge at the end of 2018, the index still sits below recent highs seen at the end of 2017 and the beginning of 2018.

Wednesday is set for the release of August’s building permits and housing starts data. Housing starts are expected to increase following an increase in permits in July. This increase would be welcome given the shortage of new homes in key markets.

The Federal Open Market Committee (FOMC) is meeting this Tuesday and Wednesday to discuss the state of the economy and set the federal funds rate. The FOMC rate decision will be released Wednesday afternoon. Economists widely expect the FOMC to lower the upper bound of the federal funds rate from 2.25 percent to 2 percent at this meeting, as the Federal Reserve continues to cut rates in order to support the economy in the face of slowing international trade. Markets have priced in two more rate cuts this year.

Thursday will see the release of August’s existing home sales report. It is expected to show sales declining by 0.9 percent in August, following a surprisingly strong 2.5 percent increase in July. Despite the anticipated monthly decline, sales are expected to show growth on a year-over-year basis. This would mark the second straight month that year-over-year existing home sales have grown following 17 months of declines.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2019 Commonwealth Financial Network ®

Presented by Mark Gallagher 

General Market News
• Last week, rates backed up across the curve as the 10-year Treasury moved from 1.42 percent to open at 1.59 percent early this Monday morning. The 30-year Treasury opened at 2.07 percent and the 2-year opened at 1.56 percent. The volatility in the rate market continues and should be expected going forward, with the longer-term trend likely to the downside.
• Global equities rallied following easing of political and trade tensions. The chief executive of Hong Kong announced the formal withdrawal of the extradition bill, which had sparked months-long protests in the region. Turning toward trade, the possibility of a no-deal Brexit declined, as the U.K. Parliament approved a bill to postpone the exit if there is no agreement in place by October 19. The British pound climbed following the lower probability of a no-deal Brexit. Finally, the U.S. and China set a date for their October meeting. The result was a risk-on rally, which saw energy, consumer discretionary, and technology among the best performers on the week. Utilities, health care, and materials were among those sectors that trailed in this rally.
• Last week started with Tuesday’s release of the Institute for Supply Management (ISM) Manufacturing index. It showed an unexpected decline from 51.2 in July to 49.1 in August. This is a diffusion index, where values above 50 represent expansion and values below 50 represent contraction. August’s reading is the lowest reading for the index since January 2016 and marks the first time the manufacturing sector has experienced a contraction since August 2016. This is the fifth straight month of decline for the index, as the slowdown in global trade and the uncertainty created by the ongoing U.S.-China trade war have negatively affected manufacturers.
• On Wednesday, July’s international trade report was released. The trade deficit narrowed slightly, from $55.5 billion in June to $54 billion in July. This result was in line with expectations for a shrinking trade deficit during the month. Exports rose during the month, while imports declined slightly. The trade deficit has widened slightly on a year-over-year basis, as a narrowing of the deficit with China has been offset by widened deficits with other countries, such as Mexico and Vietnam.
• On Thursday, the ISM Nonmanufacturing index for August was released. Service sector confidence increased by much more than expected. It rose from 53.7 in July to 56.4 in August, against expectations for a more modest increase to 54. The service sector accounts for roughly seven-eighths of the economy, so this result helps calm concerns raised by the drop in manufacturer confidence. All in all, this was a very positive report. It showed that the service sector is currently weathering the uncertainty caused by the trade war far better than manufacturers.
• Finally, we finished the week with the release of August’s employment report. Headline job creation disappointed, with only 130,000 new jobs added against expectations for 160,000. The underlying data was much better, however. The participation rate moved up, and unemployment remained unchanged at 3.7 percent. Wage growth also came in stronger than expected, with year-over-year average hourly earnings growing by 3.2 percent against expectations for 3 percent. Although the headline figure was disappointing, the increase in participation, along with faster-than-expected wage growth, indicates that the jobs market still remains healthy.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
The week will begin with Wednesday’s release of the Producer Price Index for August. Producer inflation is expected to come in at 0.1 percent for the month and 1.8 percent year-over-year. Core producer prices, which strip out the impact of volatile food and energy prices, are set to show monthly growth of 0.2 percent and year-over-year growth of 2.2 percent. Rising price pressure created by the imposition of 25 percent tariffs on $200 billion in Chinese goods has largely been offset by a decline in import prices, keeping producer inflation muted for the time being.

On Thursday, the Consumer Price Index is set to be released. Economists expect to see a similar August for consumers as for producers, with 0.1 percent monthly inflation and 1.8 percent year-over-year growth. As was the case with producers, core consumer inflation is set to come in higher than headline inflation, with 0.2 percent monthly growth and 2.3 percent annual growth expected. Rising labor costs are starting to be reflected in higher consumer prices, as annual core consumer inflation of 2.3 percent is the highest reading in more than a year. Despite the anticipated uptick in core consumer prices, overall inflation remains below the Federal Reserve’s stated 2 percent inflation target.

Thursday will also see the release of the August retail sales report. Sales are expected to increase by 0.2 percent in August, following a 0.7 percent gain in July. Retail sales growth has been one of the bright spots in the economy so far this summer, so continued growth here would be positive. This would mark the sixth straight month of sales growth.

Finally, we will finish the week with the first estimate of the University of Michigan consumer sentiment survey. It is set to increase to 90.5 in September following a sharp drop to 89.8 in August. Market volatility in August likely caused much of this drop, but equity markets have been able to rebound to near all-time highs to start the month. As such, a rebound in consumer confidence would make sense. Lower gas prices and low jobless claims should also help support an increase in consumer confidence for the month.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2019 Commonwealth Financial Network ®

Presented by Mark Gallagher 

General Market News
• The rates market saw some volatility after the long weekend. The 10-year Treasury opened at 1.53 percent early Tuesday morning but quickly dropped to 1.46 percent. The 2-year Treasury opened at 1.49 percent, and the 30-year Treasury is back below 2 percent at 1.94 percent. The markets will be anticipating a rate decision from the Federal Reserve (Fed) again this month, as it meets on September 18.
• Global equities rallied last week as trade tensions waned slightly. The week began with President Trump claiming that China called the U.S. trade team and stated that it wanted to restart trade discussions. This call was not confirmed by Chinese officials but was followed by a comment from Chinese Vice Premier Liu that China is willing to resolve the trade dispute with calm negotiations. As of Thursday, the next round of in-person trade talks was set to take place this month, although no date has been set.
• The calming of the trade dispute saw a risk-on trade, as the sectors that have sold off (industrials, communication services, and financials) were among the top three performing sectors on the week. The worst performers were the bond proxies in consumer staples, REITs, and utilities.
• We kicked off the week with Monday’s release of the July durable goods orders report, which showed 2.1 percent growth in orders. This result was better than expectations for 1.2 percent growth; however, much of this outperformance was due to an increase in volatile aircraft orders. The core durable goods figure, which strips out transportation orders, declined by 0.4 percent, against expectations for no growth. Core durable goods orders are seen as a proxy for business confidence for the future of the economy. So, this decline in the core figure is disappointing but not entirely surprising, given the ongoing uncertainty from increasing trade tensions.
• On Tuesday, the Conference Board Consumer Confidence Index was released. The index declined slightly, from 135.7 in July to 135.1 in August, beating expectations for a larger decline to 129. This result was driven by increased optimism about the current economy, as the present situation portion of the index rose to highs last seen in 2000. Expectations for the future declined slightly but still remain high compared with the past few years.
• On Friday, July’s personal income and consumer spending reports showed that spending grew by 0.6 percent in July, against expectations for 0.5 percent growth. This result is in line with the strong retail sales we saw during the month. Income growth was disappointing, coming in at 0.1 percent versus the 0.3 percent growth that was expected. Both income and spending have shown consistent growth this year, so this miss in income is nothing to be concerned about for the time being.
• We finished the week with the second and final release of the University of Michigan consumer sentiment survey. This survey fell from 92.4 midmonth to 89.8 at month-end, even though economists had expected the index to increase slightly. The escalation of the China-U.S. trade war and continued market volatility likely played a part in the decline in confidence. Although both major consumer confidence surveys declined during the month, the good news is that consumers have shown impressive spending growth through most of the year. Hopefully, these declines in confidence will have little effect on August’s consumer spending data.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
The week started with Tuesday’s release of the Institute for Supply Management (ISM) Manufacturing index. It showed an unexpected decline from 51.2 in July to 49.1 in August. This is a diffusion index, where values above 50 represent expansion and values below 50 represent contraction. August’s reading is the lowest reading for the index since January 2016, and it marks the first time the manufacturing sector has experienced a contraction since August 2016. It also marks the fifth straight month of decline for the index, as the slowdown in global trade and the uncertainty created by the ongoing U.S.-China trade war have negatively affected manufacturers.

Speaking of trade, Wednesday will see the release of July’s international trade report. It is expected to show the trade deficit shrinking from $55.2 billion in June to $54.3 billion in July. Previously released trade reports showed growth in goods exports rising by more than expected during the month, as well as a decline in goods imports, which led to a narrowing of the goods deficit. This combination of rising exports and declining imports for goods is expected to lead to a narrowed deficit in overall trade.

On Thursday, we’ll receive the ISM Nonmanufacturing index for August. Economists expect to see increased confidence for the service sector of the economy, with the index set to increase from 53.7 in July to 54 in August. This survey fell unexpectedly in July to a three-year low, so a rebound would help dispel concerns about lowered business confidence.

Finally, we’ll finish the week with Friday’s release of the August employment report. Economists expect 168,000 new jobs during the month, which is slightly better than the 164,000 we saw in July. Unemployment is expected to remain unchanged at 3.7 percent. Despite the expected growth in August, job growth remains well below the roughly 225,000 per month rate we averaged in 2018. This will be an important area of the economy to monitor going forward, especially if we continue to see further weakness in employment growth while the Fed considers further interest rate cuts.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2019 Commonwealth Financial Network ®