Wealth Management Economic Update August 4, 2014

U.S. and World News

  • Negotiations with holdout investors and a last minute Argentine bank proposal fell through this week, triggering a default of Argentina’s sovereign debt. The default will further harm Argentina’s economy which is already in recession. It will also prolong the country’s return to the global credit markets, which it has been isolated from since its $100 billion default in 2002.
  • european_union_flag320The U.S. and now the European Union have placed tougher sanctions on Russia this week, aimed at the finance, defense and energy sectors of the country’s economy. The EU, which is highly dependent on Russia’s energy supplies, had previously been reluctant to impose any real sanctions on the Russians. Russia responded by saying that the sanctions would lead to higher energy prices in Europe and damage cooperation with the U.S. on international affairs. Some of Russia’s largest companies are acting as well, beginning to move their cash reserves to Asian banks in fear that Russia could eventually be completely shut out of U.S. dollar markets.
  • The Federal Reserve met this week and announced they will continue to taper its monthly asset purchases, reducing them from $35 billion to $25 billion as was expected. This makes the central bank on pace to completely cease its purchases in October, which is when discussion about raising short term interest rates will heat up. The Committee’s statement took note of firming inflation data and that “a range of labor market indicators suggest that there remains significant underutilization of labor resources.”
  • A tanker loaded with $40 million of ultralight oil departed from Texas heading to South Korea this week, marking the first unrefined American oil export since the 1970s. Although the U.S. policy on oil exports wasn’t explicitly changed, the Commerce Department announced last month that it would be relaxing its definition of “unrefined oil” to include oil condensate that has been minimally refined.

Markets

  • Markets fell significantly this week amid the sanctions on Russia, deflation worries in Europe and Argentina’s default. The S&P 500 dropped 2.66% and closed at 1,925. The Dow Jones followed suit by falling 2.74% and closing at 16,493. Year to date, the S&P is up 5.36% and the Dow is up 0.78%.
  • Interest rates remained steady this week and the 5 year and 10 year U.S. Treasury Notes are now yielding 1.67% and 2.50%, respectively.
  • The spot price of WTI Crude Oil plunged by 4.40% this week, closing at $97.60 per barrel. Year to date, Oil prices have risen 3.00%.
  • The spot price of Gold decreased by 1.05% this week, closing at $1,293.55 per ounce. Year to date, Gold prices are up 7.65%.

Economic Data

  • Initial jobless claims rose a bit more than expected, coming in at 302,000 vs. consensus estimates of 300,000. The Labor Department noted no special factors in the data. The four week moving average for claims now stands at 297,000, the lowest it’s been since April 2006.
  • Monthly nonfarm payrolls increased by 209,000 in July vs. consensus expectations of 230,000. Despite the modest disappointment in July, the last three months have averaged a solid 245,000 gain.
    • The unemployment rate moved up 0.1% to 6.2% aided by a 0.1% increase to the labor force participation rate, bringing it to 62.9%.
    • Average hourly earnings disappointed, coming in flat on the month vs. expectations of a 0.2% gain. The year over year rate of wage growth stands at a subdued 2.0%.
  • The first estimation of 2nd quarter GDP was released this week, showing growth of 4.0% vs. expectations of 3.0%. A significant bounce back was to be expected given the -2.9% print in the 1st quarter, which now appears to be the result of weather distortion.
  • The Case-Shiller home price index declined by 0.3% in May vs. expectations of an increase of 0.3%, the weakest print since December 2011. Home prices fell in 14 of 20 cities covered by the report which adds to recent mixed housing data.

Fact of the Week

  • Nearly three years ago (8/5/2011), ratings agency Standard & Poor’s downgraded the quality of the debt of the USA from its top rating of AAA to AA+ and has yet to restore the country’s AAA status. At the time, the yield on the 10-year Treasury note was 2.57%. As it stands today, the yield on that same 10-year note has actually fallen (price has gone up), and today sits at 2.50%

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

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