Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury tested its floor of 2.20 percent last week. Rates dipped to 2.18 percent for the first time in over a month and for only the third time since the November election. The 10-year opened this Monday at 2.20 percent. For just the second time since the election, the 30-year yield was as low as 2.76 percent last week. It opened Monday at 2.81 percent.
• Markets were down across the board last week as tensions between the U.S. and North Korea flared. The Nasdaq Composite suffered the worst performance, falling 1.44 percent. The S&P 500 Index and the Dow Jones Industrial Average dropped 1.37 percent and 0.91 percent, respectively. Except for consumer staples, all sectors within the S&P 500 were down on the week. Financials, energy, and materials fared the worst. Performance was hindered by declining oil prices and below-target inflation.
• In fact, consumer prices increased just 0.1 percent in July, which was below expectations. Following the news, futures markets projected only a 40-percent chance of another rate hike this year. Previously, the Federal Reserve (Fed) had stated that it viewed the softness in inflation data as “transitory,” but this marks the fifth straight month that inflation has fallen below the forecasted moves.
• Only a handful of economic data points were released last week. On Thursday, the Bloomberg Consumer Comfort Index, a measure of consumer optimism, increased from 49.6 to 51.4, primarily due to low gas prices. Also on Thursday, we saw Producer Price Index data. This is a measure of the prices that producers pay and is one of the most widely followed measures of inflation. Unfortunately, the numbers were disappointing, with both the headline and core figures coming in below expectations on a monthly and annual basis.
• As mentioned above, we also saw data on the Consumer Price Index last week. As was the case with producer prices, the numbers disappointed, showing lower-than-expected levels of growth for both the headline and core figures. Given the current Fed-tightening course and the importance of maintaining price stability, low inflation figures could lead the Fed to pause before raising rates again.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to

This will be a busy week for economic data, offering looks at all major sectors of the economy. Although the data is expected to be mixed, it should suggest continued growth overall.

On Tuesday, the retail sales report will tell us whether consumers are willing to spend again. After last month’s 0.2-percent decline, headline sales are expected to bounce back by 0.4 percent on more stable gasoline prices and a recovery in auto sales. Core retail sales, which exclude autos, are also expected to bounce from a 0.2-percent drop to a 0.4-percent gain. That said, there are downside risks, and the results might come in below expectations. If so, the gap between confidence and spending behavior will continue as a worry point.

The National Association of Home Builders survey, released Tuesday, is expected to rebound from 64 to 65 after a surprising decline last month. This would be a positive sign of moderating industry sentiment. On Wednesday, housing starts are expected to show a small increase from 1.215 million to 1.225 million. Recent strong building permit data suggests that there might be some upside to this number. If both reports come in as expected, that would be positive for both the housing sector and the economy as a whole.

Also on Wednesday, the Federal Open Market Committee will release the notes from its July meeting. Markets will be looking for details on how concerned the Fed is about low inflation, as well as any comments on the pending debt ceiling debate. Most important, though, will be language that suggests a likely September start for the Fed’s balance sheet reduction plan. This would be considered a vote of confidence in the economy as a whole.

On Thursday, we get a look at the business side of the economy with the industrial production numbers. Industrial production is expected to drop back slightly, from growth of 0.4 percent in June to 0.3 percent in July, still a strong result. Growth will come once again from increases in oil production and gains in manufacturing. Manufacturing is expected to maintain solid growth, at 0.2 percent for July, supported by a weaker dollar and stronger economies around the world. Continued growth in the business sector would help offset weaker consumer spending growth.

To conclude the week, we will get another look at the consumer with the University of Michigan Consumer Confidence survey. This is expected to tick up from 93.4 in July to 94.0 in August after three straight months of declines. Despite weaker expectations recently, this index has remained at a healthy level that is consistent with continued growth.

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 7^th 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.

© 2017 Commonwealth Financial Network^®

Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury slowly ground its way back to 2.22 percent last week before selling off on Friday. It opened early Monday at 2.27 percent. The 30-year yield behaved similarly over the past week, moving back to 2.79 percent on Friday before opening at 2.84 percent on Monday. The 2-year yield stayed in the tight range of 1.34 percent to 1.35 percent over the past seven days.
• The U.S. markets were mixed last week. The Dow Jones Industrial Average led the way, posting a 1.22-percent gain as it cleared the 22,000 level. The Nasdaq Composite lagged, posting a weekly loss of 0.34 percent. The S&P 500 Index fell between the two, ticking up by 0.23 percent. The U.S. dollar weakened last week as the euro reached an 18-month high. This move provided support for commodity prices, as oil topped $50 per barrel at the beginning of the week. But it later declined, leading to poor performance for the energy sector as a whole. Materials and health care also struggled while financials, utilities, and industrials had strong showings.
• Company earnings reports continued to come in strongly. Apple (AAPL) moved up by more than 5 percent following its announcement of stronger-than-expected iPhone sales. Tesla (TSLA) stock also moved higher after it reported that losses came in lower than expected. Meanwhile, investors continue to focus on the rollout of Tesla’s new Model 3 as the company enters what chief executive Elon Musk refers to as “manufacturing hell.”
• Like the markets, the economic data released last week was also mixed, with declining business confidence offset by stronger-than-expected jobs data. On Tuesday, the ISM Manufacturing Index increased slightly, as expected. But the Nonmanufacturing Index, released later in the week, declined by more than expected. Despite the decline, this measure is still in healthy expansionary territory at levels that have historically been consistent with gross domestic product growth of 3 percent.
• The week ended with better-than-expected jobs data. The economy added 209,000 new jobs in July, and the headline figure from June was revised up. The underlying data was also positive, with the unemployment rate dropping to a 16-year low. Additionally, average hourly earnings growth ticked up to 2.5 percent year-over-year. Given low unemployment levels, wage growth is expected to accelerate in the second half of the year.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
After a busy week, the only major economic report we’ll see this week will deal with consumer prices. It will be released on Friday.

Headline consumer price inflation, including food and energy, is expected to rise by 0.2 percent for July, up from flat in June. On an annual basis, headline inflation is expected to rise to 1.8 percent, up from 1.6 percent. These numbers would still be below the Federal Reserve’s (Fed) inflation target of 2 percent per year, but a rebound would be considered healthy.

Core prices, which exclude food and energy, are also expected to increase by 0.2 percent for July, up from an increase of 0.1 percent in June. On an annual basis, core inflation is expected to remain steady at 1.7 percent.

There appears to be more upside than downside risk to these numbers. So, although there are concerns about low inflation dropping even lower, prices will likely moderate if these reports come in as expected. This, in turn, would make the Fed more likely to start reducing its balance sheet in September.

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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• Treasuries sold off last week. The 10-year yield moved from 2.22 percent at the start of the week to 2.33 percent by Tuesday afternoon. It moved lower later in the week and opened this Monday at 2.27 percent. The 30-year yield was as low as 2.79 percent last Monday before jumping to 2.94 percent midweek; it opened this Monday at 2.87 percent.
• The U.S. equity markets were mixed last week. The S&P 500 Index was flat, the Nasdaq Composite Index ticked down 0.19 percent, and the Dow Jones Industrial Average gained 1.17 percent. The Dow benefited from a nearly 10-percent gain in Boeing following its second-quarter earnings call, during which the company announced that it beat expectations and was raising its forecast due to increased demand for aircraft in India. With about half of S&P 500 companies reporting earnings at this point, the estimated earnings growth rate has increased to 10.7 percent for the second quarter. This week, earnings announcements from Apple (AAPL), Tesla (TSLA), and Pfizer (PFE) have the potential to move markets.
• Outside of company earnings, other major news last week included the Federal Open Market Committee (FOMC) announcement that it would begin trimming the balance sheet “relatively soon” and the first estimate of second-quarter gross domestic product (GDP), which came in at 2.6 percent. Both of these announcements were largely expected, which may explain why the markets didn’t react significantly.
• A number of other important economic indicators were released last week. On Monday, we learned that existing home sales decreased by 1.8 percent. Although this was below expectations, much of the slowdown can be attributed to lack of supply, not demand, as home prices continued to increase. New home sales, released on Wednesday, increased 0.8 percent, which was in line with expectations. On Thursday, durable goods orders, a sign of business demand, came in much better than expected, growing 6.5 percent—against expectations for 3.9-percent growth. Much of this strength was due to increases in non-military airline sales. After a slight decline in May, this return to growth is encouraging.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
We will see a wide range of economic news this week, including consumer income and spending; the state of business confidence in both the manufacturing and service sectors; the international trade report; and, most important, the July jobs report.

Personal income, released on Tuesday, is expected to show strong growth of 0.4 percent in June, the same as in May. Continued job and wage growth have been pushing incomes up. Personal spending, on the other hand, is expected to show growth of just 0.1 percent in June, the same as in May. Despite positive income growth, ongoing weakness in spending growth suggests that the economy may remain steady in the second half of the year, rather than accelerate.

Also on Tuesday, the Institute of Supply Management (ISM) will release its manufacturing survey, which is expected to drop from 57.8 in June to 56.2 in July. This is a diffusion survey, where values over 50 indicate expansion. June’s figure was the highest in nearly three years, so even with a decline, manufacturing will remain at a healthy level. Faster global growth and a weaker dollar have supported U.S. manufacturing, so there may be some upside here.

On Thursday, the ISM will release the nonmanufacturing, or service sector, survey. This survey is also expected to show a small decline—from 57.4 to 56.8—although this too would still be a healthy level. Although we have seen weakness in retail sales, and some surveys have pulled back a bit, activity picked up in the second quarter overall, and the expected result would be positive for the economy.

On Friday, the International Trade report is expected to show a small narrowing of the trade deficit, from $46.5 billion to $45.5 billion. Strengthening exports have benefited the goods trade deficit, while the service trade balance has remained roughly constant. A lower deficit is better for U.S. economic growth, so any improvement would be constructive.

The highlight of the week will be Friday’s employment report. It is expected to show job growth of 183,000 in July, down from 222,000 in June. There is upside risk here, as jobless claims remain quite low, and temporary help growth has been strong. The unemployment rate is expected to drop from 4.4 percent to 4.3 percent. Meanwhile, wage growth may pick up from 0.2 percent to 0.3 percent while the average workweek remains constant. This will be a strong report, and very positive for the economy, if it comes in as expected.

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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury continued to move lower last week and opened Monday morning at 2.24 percent. The 30-year yield also moved lower, ending last week at 2.81 percent and opening on Monday at 2.83 percent.
• Both the Nasdaq Composite and S&P 500 reached new all-time highs last week after posting gains of 1.20 percent and 0.56 percent, respectively. The Dow Jones Industrial Average lagged, losing 0.22 percent as a 12-percent drop in revenue from GE weighed on the stock and index. GE’s revenue woes were the result of weakness in the company’s energy connections business and have pushed the stock to its lowest level in 19 months. The MSCI World Index also posted a record high last week after European Central Bank President Mario Draghi said the bank had not discussed tapering asset purchases.
• In earnings news, roughly 20 percent of S&P 500 companies have reported earnings so far. On average, among companies reporting, earnings have increased 8.6 percent and revenue has increased 5.4 percent. This week, we will see results from technology companies such as Alphabet (GOOG/GOOGL), Facebook (FB), and Amazon (AMZN), as well as energy firms Exxon Mobil (XOM) and Chevron (CVX).
• The calendar was light on economic news last week, with most data related to the housing market. On Tuesday, the National Association of Home Builders Housing Market Index came in at 64 for July. This was below the consensus range of 65–69, as well as the prior reading of 67. Increasing lumber costs were cited in the report. The West region was the strongest, while the rest of the country lagged far behind. On Wednesday, we saw housing starts and building permits data. Both came in above expectations and beat numbers from the prior month. Starts jumped 8.3 percent in June to 1.215 million (annualized), and permits were up 7.4 percent to 1.254 million (annualized). Despite June’s gains, the second quarter showed a decline from the first quarter. Nevertheless, these reports are positive overall for the housing market.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week, we get a look at the housing market, with reports on sales of existing and new homes. Plus, we’ll learn about consumer confidence, industry and business confidence, and the growth of the economy as a whole.

Sales of existing homes for June will be reported on Monday. They are expected to remain steady at 5.62 million, after an upside surprise in May. Given the lack of available inventory, though, there is some downside risk, with a drop in pending sales in May also supporting that possibility. Although demand remains strong, there simply may not be enough houses available to keep sales rising.

New home sales, released on Wednesday, are expected to do better, with a small uptick from 610,000 to 615,000. Here, strong demand, combined with a better available level of inventory, suggests there may be some upside. Strong sales of new homes would be a positive signal for the economy.

The Conference Board survey of consumer confidence, released on Tuesday, is expected to drop somewhat, from a very high level of 119.9 down to 116.0, which is still healthy. This pullback would mirror declines in other surveys. Interestingly, while current confidence remains quite high, future expectations have declined, pulling down the index. The change in trend is worth watching.

The durable goods orders report, released on Thursday, is expected to be quite strong. The headline number, which includes commercial aircraft, is expected to improve from a 0.8-percent decline in May to a 3-percent increase in June on strong aircraft orders from Boeing. The core orders index, which excludes transport, is also expected to improve, moving from a gain of 0.3 percent in May to a gain of 0.5 percent in June. The core number is a better indicator and suggests business confidence and investment continues to improve. This would also be a good sign for the economy.

Finally, the first estimate of economic growth for the second quarter will be released on Friday. Gross domestic product growth is expected to be 2.5 percent, well above the first quarter’s 1.4 percent, with the gain coming from faster growth in consumer spending. Despite some apparent weakness in business investment, there is upside to this estimate as well. If the number comes in as expected, it will demonstrate that the recovery continues and economic conditions remain solid.

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.

© 2017 Commonwealth Financial Network®