Wealth Management Economic Update September 8, 2014

U.S. and World News

  • The European Central Bank announced this week a series of surprising and aggressive policy moves intended to stimulate growth in the stagnated region. The ECB announced three rate cuts, lowering its main refinancing rate from 0.15% to 0.05%, lowering the marginal lending facility rate from 0.4% to 0.3% and lowering the deposit facility rate from -0.1% to -0.2% (banks have to pay to hold deposits with the central bank). ECB President Mario Draghi also announced that the central bank would begin to buy bonds (similar to the quantitative easing seen here in the U.S.), specifically covered and asset-back bonds. Draghi hopes the measures will boost inflation by keeping credit markets liquid and interest rates very low.
  • handshake_320Ukraine’s government and pro-Russian separatist leaders signed a ceasefire deal on Friday after talks in Belarus yielded an agreement. There is hope that the deal will bring peace to the eastern Ukraine region that has been embroiled in conflict for nearly five months. Separatist leaders were quick to point out that the ceasefire does not mean an end to the separatists groups like the Dontesk People’s Republic and the Luthansk People’s Republic. European leaders will wait and see how the situation progresses before implementing a new round of economic sanctions on Russia. Some of the proposed restrictions include banning Russian companies from accessing the European capital markets, denying use of European oil companies for deep-sea drilling and possibly boycotting Russia from hosting the 2018 World Cup.
  • The Federal Reserve is increasing its efforts to find an alternative to LIBOR (London Interbank Offered Rate), in a potential transition that would affect trillions of dollars in U.S. and worldwide contracts and derivatives. Many financial products use this rate as a benchmark in their structures and Fed Governor Jerome Powell warns that reliance on this one rate could result in a “horrible mess”. The Fed and large financial firms will meet and discuss this over the next year to work toward an alternative benchmark.

Markets

  • Markets were positive this week despite continued geopolitical turmoil. The S&P 500 closed at a new All-Time High on Friday, gaining 0.24% this week and closing at 2,008. The Dow Jones Industrial Average gained 0.25% and closed at 17,137. Year to date, the S&P is up 10.14% and the Dow is up 5.09%.
  • Interest rates rose this week. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.69% and 2.46%, respectively.
  • The spot price of WTI Crude Oil fell by 2.61% this week, closing at $93.46 per barrel. Year to date, Oil prices have decrease 0.57%.
  • The spot price of Gold decreased by 1.47% this week, closing at $1,268.46 per ounce. Year to date, Gold prices are up 5.56%.

Economic Data

  • Initial jobless claims rose a bit from last week, coming in at 302,000 vs. consensus estimates of 300,000. The level of claims remains near the pre-crisis lows. The Labor Department noted no special factors in the data. The four week moving average for claims now stands at 303,000.
  • The ISM manufacturing index increased to 59.0 in August vs. expectations of 57. This is close to the post-recession high of 59.3 set in February 2011. 17 of 18 manufacturing industries reported growth in August and most of the commentary in the report was very positive.
    • The ISM non-manufacturing index also beat expectations by rising to 59.6 in August vs. the consensus estimate of 57.7. This brings the ISM Composite Index, which incorporates both surveys, to near an all-time high.
  • Monthly non-farm payrolls increased by less than expected in August, rising by 142,000 vs. consensus estimates of 230,000. There were also net revisions of -28,000 applied to the prior two months.
    • The unemployment rate fell by 0.1%, down to 6.1%. This was aided by a 0.1% drop in the labor force participation rate, which now stands at 62.8%.
    • Average hourly earnings rose 0.2%, in line with expectations but still somewhat subdued by historical standards. Hourly earnings have increased by 2.1% over the past 12 months.

Fact of the Week

  • According to the Census Bureau, there are 76 million homeowners in the United States. Of the 76 million, 24 million have no housing debt (ie. own it free and clear). Of the remaining 52 million that do have housing debt, 9 million (12.5%) homeowners have mortgage debt that exceeds the value of their homes (ie. mortgage is underwater).

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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