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Clarksville, TN – The week began with an 8.5% drop in the Shanghai Composite Index, which sent markets down worldwide (but the Chinese market appeared to stabilize later). The Fed made only slight alterations to the wording of the monetary policy statement, and did not provide a strong signal that a September move is coming.
Real GDP rose at a 2.3% annual rate in the advance estimate for 2Q15, a bit shy of expectations, but the first quarter was revised to +0.6% (from -0.2%). Annual benchmark revisions showed a somewhat slower rate of growth in the past few years (mostly in 2013), which implies that the output gap (the difference between GDP and potential GDP) is higher than it was thought to be earlier (an important consideration for the Fed).It’s no secret that the Fed is focused on slack in the labor market, and that slack is reflecting in labor compensation. The Employment Cost Index picked up in the first quarter, but it slowed sharply in the second quarter, bringing the year-over-year pace back below 2%.
A year ago, Fed Chair Janet Yellen highlighted the “lackluster” pace of labor compensation (a 3.5–4.0% is more indicative of a healthy job market). It’s still lackluster. So, the 2Q15 ECI (along with the wider output gap estimate) reduces the odds of a September 17 rate hike considerably.
Next week, fresh July economic data will begin to roll in. The ISM surveys and unit auto sales data will help define the economic picture. However, the focus will be on the employment report. Seasonal adjustment is large in July. Prior to adjustment, we can expect to lose about 1.4 million educations jobs (reflecting the end of the school year) and add about 200,000 non-education jobs.
There is a good chance for a surprise, which is why one should concentrate on the three-month average (which is likely to remain relatively strong). The unemployment rate should hold steady (at 5.3%), while wage pressures are likely to appear modest.
Consumer Money Rates
Treasury Yield Curve – 07/31/2015
As of close of business 7/30/2015
S&P Sector Performance (YTD) – 07/31/2015
As of close of business 7/30/2015
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Tax Equiv Muni yields (TEY) assume a 35% tax rate on triple-A rated, tax-exempt insured revenue bonds.
The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Data source: Bloomberg, as of close of business July 30th, 2015.
Frazier Allen, WMS, CRPS, Financial Advisor with F&M Bank
Web Site: http://www.raymondjames.com/frazierallen
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