Ameriprise Financial Inc.
08/02/2021 | Press release | Distributed by Public on 08/02/2021 15:14
Investors Optimistic About the Economy and Future Earnings Growth
As was the case last week, the deluge of economic data continues in the week ahead. But first, a look back at what was learned last week. The U.S. economy grew at an inflation-adjusted annualized rate of 6.5 percent in the second quarter. That came as a mild disappointment, but only in comparison to the 8.5 percent pace that had been expected. Growth was held back by a reduction in inventories, the trade imbalance, residential construction, and government spending, as evidence of supply-side constraints were evident in the data. A degree of moderation was also seen in the June durable goods report. Nevertheless, excluding last year's second quarter, it was the fastest growth since the third quarter of 2003. And it followed the strong 6.3 percent pace of the first quarter. Consumer spending was particularly strong, especially in the services category as the economy continued to reopen.
The housing market also showed some signs of moderation. New home sales fell in June, continuing the slowdown seen since the January peak, with the exception of a modest increase in March. And the total for May was revised lower. Mortgage rates remain attractive, but scarce inventory and high prices have slowed demand. The S&P Core Logic CS national home price index rose at a record pace in May, climbing 16.6 percent year-over-year.
Consumer Sentiment Rebounds Slightly; The Fed Signals Changes in Policy
There was some relatively good news on the inflation front, despite another month of increases well above the Fed's long-term objective. The June core PCE deflator rose 3.5 percent year-over-year, below the expected 3.7 percent increase. In addition, the July final reading of consumer sentiment from the University of Michigan showed a modest reduction in inflation expectations for both the year ahead and the five to ten-year time horizon. Consumer sentiment overall also rebounded slightly from the steep decline reported in preliminary report for July, although sentiment remains below its April peak, attributable in part to rising prices. The Conference Board's July consumer confidence report reflected a more upbeat scenario, as it rose for the sixth straight month.
Most importantly, the Federal Open Market Committee met last week. And although this meeting did not include an economic update, the Committee did reinforce its view of economic strength and transitory inflationary pressures, while leaving the overnight rate unchanged and keeping intact its pace of bond purchases. It did indicate, however, that discussions relative to its bond purchases were continuing, leading toward a possible reassessment in 'coming meetings.' Through year-end, the FOMC is scheduled to meet in September, November, and December. Assuming further progress is made in that interim toward its goals of price stability and full employment, we appear to be edging closer to a shift in policy. For now, however, the Fed remains short of its goal of full employment. On Friday, Fed Governor Brainard said, 'the determination of when to begin to slow asset purchases will depend importantly on the accumulation of evidence that substantial further progress on employment has been achieved. As of today, employment has some distance to go…I expect to be more confident in assessing the rate of progress once we have data in hand for September…' That would suggest that the August symposium in Jackson Hole, and the September FOMC meeting are unlikely to reveal further detail on any plan to taper, raising the profile of the November and December meetings.
The Economy is Growing at a Solid Pace, but Friction Remains in the Labor Market and Supply Chains
An important piece of the puzzle will arrive this Friday with the July jobs report. The economy is expected to have created 900,000 new non-farm jobs, which would be the strongest growth since last August. The unemployment rate is expected to fall to 5.7 percent following its modest increase to 5.9 percent in June. If 5.7 percent is the actual result, it will be the lowest rate of unemployment in this recovery. Also on this week's economic calendar are the ISM PMI reports for July. The manufacturing sector is expected to remain strong, as foreshadowed by the previously reported flash PMI report. However, the flash report evidenced some moderation in the far larger services category, perhaps slowed by the spread of the Delta variant of the coronavirus. It will be interesting to see if that same moderation is reflected in the ISM report, although the consensus expects a modest increase from the June level.
Overall, the economy is growing at a solid pace, well above its long-term potential, but not without clear evidence of friction in the labor market and in production supply chains. Although the second quarter growth rate would have been even higher without these headwinds, the economy is likely to remain strong as these frictions are slowly overcome, albeit with some overall moderation.
Not to be lost in the focus on the economic data is the incredible strength of corporate earnings growth in the second quarter. The number of companies reporting positive surprises for both earnings and revenue growth is historically high, as is the extent to which both are exceeding expectations. As we approach two-thirds of the S&P 500 index having reported results, Factset now anticipates earnings growth of 85 percent in the quarter. This compares to the 63 percent pace that had been expected at the end of the quarter, contributing to the steady climb in stock prices that has now pushed the S&P 500 to a year-to-date gain of almost 18 percent.
Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.
The Consumer Confidence Index (CCI) is a survey measures how optimistic or pessimistic consumers are regarding their expected financial situation. It is based on consumers perceptions of current business and employment condition, and their expectations for business, employment, and income for the next six months.
The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of consumer confidence levels in the United States. It is a statistical measurement of the overall health of the economy as determined by consumer opinion. It takes into account people's feelings toward their current financial health, the health of the economy in the short-term, and the prospects for longer-term economic growth, and is widely considered to be a useful economic indicator.
The personal consumption expenditure (PCE) measures of the prices that people living in the United States pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The flash reading of PMI is an estimate of the Manufacturing Purchasing Managers' Index (PMI) for a country, based on about 85% to 90% of the total PMI survey responses each month. Its purpose is to provide an accurate advance indication of the final PMI data.
The ISM manufacturing index, also known as the purchasing managers' index (PMI) is an estimate of manufacturing for a country, based on about 85% to 90% of total Purchasing Managers' Index (PMI) survey responses each month. It is considered to be a key indicator of the state of the U.S. economy.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.
The housing market also showed some signs of moderation. New home sales fell in June, continuing the slowdown seen since the January peak, with the exception of a modest increase in March. And the total for May was revised lower. Mortgage rates remain attractive, but scarce inventory and high prices have slowed demand. The S&P Core Logic CS national home price index rose at a record pace in May, climbing 16.6 percent year-over-year.
Consumer Sentiment Rebounds Slightly; The Fed Signals Changes in Policy
There was some relatively good news on the inflation front, despite another month of increases well above the Fed's long-term objective. The June core PCE deflator rose 3.5 percent year-over-year, below the expected 3.7 percent increase. In addition, the July final reading of consumer sentiment from the University of Michigan showed a modest reduction in inflation expectations for both the year ahead and the five to ten-year time horizon. Consumer sentiment overall also rebounded slightly from the steep decline reported in preliminary report for July, although sentiment remains below its April peak, attributable in part to rising prices. The Conference Board's July consumer confidence report reflected a more upbeat scenario, as it rose for the sixth straight month.
Most importantly, the Federal Open Market Committee met last week. And although this meeting did not include an economic update, the Committee did reinforce its view of economic strength and transitory inflationary pressures, while leaving the overnight rate unchanged and keeping intact its pace of bond purchases. It did indicate, however, that discussions relative to its bond purchases were continuing, leading toward a possible reassessment in 'coming meetings.' Through year-end, the FOMC is scheduled to meet in September, November, and December. Assuming further progress is made in that interim toward its goals of price stability and full employment, we appear to be edging closer to a shift in policy. For now, however, the Fed remains short of its goal of full employment. On Friday, Fed Governor Brainard said, 'the determination of when to begin to slow asset purchases will depend importantly on the accumulation of evidence that substantial further progress on employment has been achieved. As of today, employment has some distance to go…I expect to be more confident in assessing the rate of progress once we have data in hand for September…' That would suggest that the August symposium in Jackson Hole, and the September FOMC meeting are unlikely to reveal further detail on any plan to taper, raising the profile of the November and December meetings.
The Economy is Growing at a Solid Pace, but Friction Remains in the Labor Market and Supply Chains
An important piece of the puzzle will arrive this Friday with the July jobs report. The economy is expected to have created 900,000 new non-farm jobs, which would be the strongest growth since last August. The unemployment rate is expected to fall to 5.7 percent following its modest increase to 5.9 percent in June. If 5.7 percent is the actual result, it will be the lowest rate of unemployment in this recovery. Also on this week's economic calendar are the ISM PMI reports for July. The manufacturing sector is expected to remain strong, as foreshadowed by the previously reported flash PMI report. However, the flash report evidenced some moderation in the far larger services category, perhaps slowed by the spread of the Delta variant of the coronavirus. It will be interesting to see if that same moderation is reflected in the ISM report, although the consensus expects a modest increase from the June level.
Overall, the economy is growing at a solid pace, well above its long-term potential, but not without clear evidence of friction in the labor market and in production supply chains. Although the second quarter growth rate would have been even higher without these headwinds, the economy is likely to remain strong as these frictions are slowly overcome, albeit with some overall moderation.
Not to be lost in the focus on the economic data is the incredible strength of corporate earnings growth in the second quarter. The number of companies reporting positive surprises for both earnings and revenue growth is historically high, as is the extent to which both are exceeding expectations. As we approach two-thirds of the S&P 500 index having reported results, Factset now anticipates earnings growth of 85 percent in the quarter. This compares to the 63 percent pace that had been expected at the end of the quarter, contributing to the steady climb in stock prices that has now pushed the S&P 500 to a year-to-date gain of almost 18 percent.
Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.
The Consumer Confidence Index (CCI) is a survey measures how optimistic or pessimistic consumers are regarding their expected financial situation. It is based on consumers perceptions of current business and employment condition, and their expectations for business, employment, and income for the next six months.
The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of consumer confidence levels in the United States. It is a statistical measurement of the overall health of the economy as determined by consumer opinion. It takes into account people's feelings toward their current financial health, the health of the economy in the short-term, and the prospects for longer-term economic growth, and is widely considered to be a useful economic indicator.
The personal consumption expenditure (PCE) measures of the prices that people living in the United States pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The flash reading of PMI is an estimate of the Manufacturing Purchasing Managers' Index (PMI) for a country, based on about 85% to 90% of the total PMI survey responses each month. Its purpose is to provide an accurate advance indication of the final PMI data.
The ISM manufacturing index, also known as the purchasing managers' index (PMI) is an estimate of manufacturing for a country, based on about 85% to 90% of total Purchasing Managers' Index (PMI) survey responses each month. It is considered to be a key indicator of the state of the U.S. economy.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.