Market Perspective for July 31, 2015

Interest rates were the most significant story of the week. The Federal Reserve adjusted the language in its policy statement suggesting the likelihood of a September rate hike. Specific shifts in comments include removing some equivocal language about the job market and adding a word that makes it sound as if labor improvements are starting to meet expectations:

The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished.

Also, the Fed added the word “some” to this sentence:

The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The U.S. economy grew at 2.3 percent in the second quarter, in line with the prediction of the Atlanta Federal Reserve Bank, which forecasted 2.4 percent growth. Growth was solid in the quarter but the government also revised data from the previous year and quarter. The prior quarter was elevated, ticking up to 0.6 percent growth from a decline of 0.2 percent.  Last year’s data was revised lower to an average of 2.2 percent growth, making the post-2008 period the slowest economic expansion since World War II, followed by a next slowest expansion from 2001 to 2007, when the economy grew at an annualized rate of 2.7 percent.

Stable GDP growth and a positive outlook from the Federal Reserve sent U.S. stocks higher on the week. The S&P 500 Index closed Friday with a 1.19 percent gain, while the Dow was up 0.71 percent.  The Nasdaq rallied 0.78 percent and the Russell 2000 advanced 0.89 percent.

The U.S. Dollar Index traded higher on the week, while the Asian Dollar Index hit a new 5-year low. Talk of China devaluing the yuan increased, pushing the yuan lower. Thailand’s currency has been falling in July, while Malaysia and Indonesia’s currencies are at their lowest levels since the late 1990s. The weak wage growth reported on Friday reversed many of these weekly moves, but the longer-term trend remains in place.

Earnings were sound again this week. Amgen (AMGN) beat earnings and shares were up about 5 percent on Friday, lifting the biotech sector. Exxon (XOM) and Chevron (CVX) missed their earnings estimates and each fell about 4 percent on Friday.

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