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July: All the (Good) News That's Fit to Print

8/22/2014
By Jennifer Coombs

With geopolitical activity light in the week, a whole smorgasbord of positive economic data is left to give some much needed optimism to the stock market...

Firstly, strong growth in employment led to a strong preliminary PMI manufacturing report for the month of August. The composite index, at 58.0, is up a sharp 2.2 points from final July's 55.8 and up 1.7 points from the July flash of 56.3. Markit noted that all five components of the composite contributed to the month's growth, led by employment which is now showing its strongest reading since March 2013, though it had been soft in July's report.

Next, the Philadelphia Federal reserve provided details on the economic situation in the Philly-region. Though there was exceptional acceleration this month in the manufacturing sector, as the headline level came in at 28.0 vs July’s 23.9, the details in the report do not identify what precisely caused the boost. New orders have declined very sharply, so far this month, to 14.7 from 34.2 in July, while shipments are at 16.5; likewise well below the 34.2 reading in July. Unfilled orders are contracting and delivery times are improving – both of which point to a slowdown in activity. Oddly enough, this report does not support this morning's PMI manufacturing index, which at a national level, points to strong growth underway this month.

Continuing to show improvement in the housing sector was the National Relator’s report on existing home sales, which grew 2.4% in July  to an annualized pace of 5.15 million units. This topped economist expectations for an annualized pace of 5.0 million. June rose a revised 2.4% to a marginally revised 5.03 million units (down from 5.04 million units). Despite the monthly improvements, July sales were down 4.3% compared to the same month last year. The most encouraging aspect of the report was strength shown in the single-family component, which gained 2.7% to 4.55 million units annualized. Market supply rose faster than sales - up 3.5% in July to 2.37 million units. The inventory supply, however, was steady at 5.5 months.

Lastly, there was a huge jump in the index of leading economic indicators, up 0.9% in July compared to a sharply upward revised 0.6% in June (from 0.3%) and May’s gain was revised to 0.6% (from 0.7%). The drop in unemployment claims is a leading, and very convincing, factor for the strength in July. The yield spread, as usual, is the month's strongest factor reflecting the Federal Reserve's stimulus monetary policy. The manufacturing sector is another strong factor, specifically the ISM's new orders index. In addition, the report's credit component is also strong, which points to an increase in demand and access to loans. All in all, the report points to strong growth ahead in the next six months, but unfortunately will serve as further ammunition for the hawks at the Fed to increase rates.

Jennifer Coombs
Wall Street Strategies

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