By: Mark Schieffer, CFA
EVP Chief Investment Officer
The July employment figures rebounded after 3 disappointing months. Non-farm payrolls grew by 163 thousand, compared to economist estimates of 100 thousand. Unemployment claims have been trending lower over the last 6 weeks, an encouraging sign. However, the unemployment rate remains stubbornly high at 8.3%.
Oil and gas prices are reversing a bit after moving sharply lower in the 2nd quarter. Gas prices are up 33 cents per gallon (10%) in the last month. Severe drought conditions in most of the U.S. will cause higher food and ethanol prices down the road. These factors will set some limits in consumer spending growth in the near term.
The household debt service ratio has receded back to 1994 levels (11% from a high of 14.1% in Q3 ’07), mainly due to the decimation from mortgage defaults and foreclosures. Depression level interest rates have also helped here. Corporations are benefiting from a carryover effect, issuing debt at extremely attractive levels, thereby boosting financial leverage and earnings power.
As I mentioned last month, there are stark differences in the problem solving approaches laid out by the Obama and Romney camps. Romney further solidified this divide by choosing a Jack Kemp protégé running mate in Paul Ryan. This will make for inflammatory television and political ad copy.
Despite all the angst in European markets, nothing of any real policy substance has occurred this summer, with the exception of an extension/expansion of the Fed’s Operation Twist program. ECB President Draghi made forceful declarations of holding the line on the Euro and that has served as a short-term firewall on sovereign debt issues in Europe. U.S. policy makers have been able to stay quiet with a few mildly positive economic reports. The next opportunity for them to insert themselves will be the Fed’s annual Jackson Hole summit in September. With the election season in full display, I’m sure the Fed would like to fly under the radar there.
The 2-year T-note yield is up 2 basis points in the last month to a current yield of .28%. Over the last ten months, this bellwether short-term safe investment has traded within a range of less than 20 basis points. However, the 10-year T-note yield rose 28 basis points in the last month to 1.79% as the markets are fading the possibility of near term QE3 stimulus programs. The current yield is still 50 basis points below the highs for 2012. U.S. stock prices rose sharply in the last month up 4.5-5% across the board. Despite all the anxiety, the summer season has been much better than expected in the financial markets.