October Economic Update

Monthly Economic Update

October 2013

THE MONTH IN BRIEF September began with the possibility of U.S. military intervention in Syria; it ended with the probability of a federal government shutdown. In between those anxieties, the S&P 500 managed to rise 2.97%. Credit the Federal Reserve, which surprised financial markets worldwide with its decision to keep quantitative easing going at current levels for another month. Credit also some surprisingly strong data in the real estate and manufacturing sectors. Stock gains were worldwide last month; key commodities retreated. All in all, the events of September strained financial markets far less than many analysts expected.¹

DOMESTIC ECONOMIC HEALTH

When the Federal Open Market Committee voted 9-1 not to taper QE3 on September 18, the S&P 500 and Dow hit new closing highs, the NASDAQ settled at a 13-year high, and gold futures climbed 4% in a day. The Fed’s acknowledgement that the economy still needed a little more help was sweet music to global markets fearing a poor fourth quarter. However, just two days later, Kansas City Fed president James Bullard suggested that the Fed could be open to a small taper this month.^2,3

Elsewhere in Washington, partisan sparring over the federal budget escalated to the point of impasse. September drew to a close with no new measure to fund the government in place, leading to the furlough of 800,000 federal workers and the partial shutdown of non-essential government services. While the budget deadline was missed by Congress, the new online health insurance exchanges created by the Affordable Care Act were open for business on October 1.⁴

All of this aside, the economy showed more signs of its gradual U-shaped recovery. Consumer spending had risen 0.3% in August, with consumer incomes up 0.4%. Unemployment was at 7.3% in August (the lowest level since December 2008) with the creation of 169,000 new jobs. Manufacturing expanded for a fourth consecutive month, according to the Institute for Supply Management; its September PMI rose 0.5% to 56.2. (ISM’s August non-manufacturing PMI was even better at 58.6.) Durable goods orders were up just 0.1% in August; the Bureau of Economic Analysis made its final estimate of Q2 GDP, which was 2.5%.^.5,6,7,8.

Consumer inflation was tame: both the overall and core Consumer Price Indexes were up just 0.1% in August. (The Producer Price Index rose 0.3% in August, but the core PPI was flat.) Even with muted inflation, retail sales rose an underwhelming 0.2% in August. September’s consumer confidence indices offered conflicting results: the Conference Board’s survey fell to 79.7 from the August mark of 81.8, yet the final index from the University of Michigan showed a gain of 0.7 points to 77.5.^5,9,10,11.

GLOBAL ECONOMIC HEALTH

While the possibility of a U.S.-Russia brokered deal and a chemical weapons disarmament plan from the Hague helped to reduce fear in global markets about Syria, global markets still had estimable political concerns to contend with. On September 30, Italy faced a government crisis: five ministers belonging to former prime minister Silvio Berlusconi’s center-right party quit their posts after the nation’s parliament let the country’s value-added tax increase to 22%. So would a new election be necessary, perhaps imperiling Italy’s already fragile coalition government? Would Italy be hit with credit downgrades? October opened with these and other questions plaguing the eurozone economy, which actually grew 0.3% in Q2. Euro area unemployment was still at 12.0% in August, but the Markit eurozone manufacturing PMI rose 1.1% to 51.4 during that month.^1,12,13,14

The HSBC private-sector manufacturing PMI for China came in at a tepid 50.2 for September (compared to 50.1 in August); the nation’s official PMI stood at 51.1 last month. India’s factory sector contracted for a second month in September, though the Markit PMI reading improved to 49.6; the nation’s GDP slowed to 4.4% in Q2, and its central bank surprised analysts by raising interest rates. (The Indian rupee lost 22% of its value between May and August.) Elsewhere, Taiwan’s factory PMI was at 52.0 in September, South Korea’s at only 49.7.^1,15,16

WORLD MARKETS

September was amazingly positive for world benchmarks. Of all the world’s newsworthy stock indices, only Pakistan’s KSE 100 lost ground (-1.48%). Gains were prevalent in the Asia Pacific markets – Shanghai Composite, 3.64%; Hang Seng, 5.19%; TAIEX, 1.89%; Kospi, 3.66%; Sensex, 4.08%; Nikkei 225, 7.97%; Asia Dow, 5.09%. The European gains? FTSE 100, 0.77%; DAX, 6.06%; STOXX 600, 4.42%; CAC 40, 5.33%; RTSI, 10.19%. North of us, the TSX Composite rose 1.05%. South of us, the Bovespa advanced 4.66% and the IPC All-Share rose 1.75%. The Global Dow gained 5.96% on the month, while the MSCI Emerging Markets Index and MSCI World Index respectively climbed 6.23% and 4.82%.^17,18

COMMODITIES MARKETS

The month saw a retreat for three of the four major metals – gold dipped 4.69%, silver 7.64% and platinum 8.25%. Copper, however, rose 2.63%. Unleaded gasoline dropped 13.54% last month on the NYMEX, while oil slipped 5.10% and natural gas declined 0.03%. Crops were up and down, as usual. Corn dived 10.46% and soybeans slid 9.58%. On the upside, sugar posted a 6.78% gain for the month, wheat rose 6.37%, and cocoa climbed 10.08%; cotton gained 3.50% and coffee futures moved 1.38% higher. As for the U.S. Dollar Index, it fell 2.28% in September to end the month at 80.22.^19,20.

REAL ESTATE

Freddie Mac recorded a dip in interest rates on the 30-year FRM between August 29 (4.51%) and September 26 (4.32%). That development appealed to home buyers, and some of the latest housing market indicators were very appealing to economists – the 12.4% annualized gain shown in the overall S&P/Case-Shiller Home Price Index in July, the 7.9% rise in new home sales for August, and the 1.7% increase in existing home sales in August (to the best sales pace since February 2007). The National Association of Realtors did note a 1.6% fall in pending home sales in August after a 1.4% decline in July. The federal government reported a 0.9% gain in housing starts for that month.^5,21,22.

While conventional home loans averaged just 4.32% interest in late September, it was a long way from the low of 3.81% noted by Freddie Mac in May. In Freddie’s September 26 survey, average rates on 15-year FRMs, 5/1-year ARMs and 1-year ARMs were respectively at 3.37%, 3.07% and 2.63%; in the August 29 survey, they had been respectively measured at 3.54%, 3.24% and 2.64%.^21,22

LOOKING BACK…LOOKING FORWARD

On September 30, the Dow settled at 15,129.67, the S&P 500 at 1,681.55 and the NASDAQ at 3,771.48. The monthly gains below were part of the following quarterly gains: DJIA, 1.48%; S&P, 4.69%; NASDAQ, 10.82%.^1,17

Sources: online.wsj.com, bigcharts.com, treasury.gov – 9/30/13^,17,23,24  Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.  These returns do not include dividends.

When investors think of October, they commonly think of earnings season … but this October, the debt ceiling fight in Washington and the partial shutdown of the federal government have become top of mind. If the present budget deadlock and the escalating debt ceiling battle threaten to roil the markets – and make no mistake, they are serious threats – we can at least consider how well Wall Street fared in the volatility stemming from the Syria crisis. If there is a pullback (or a correction) in October, it might offer investors some good buying opportunities amid the frustration. If the market continues to be as resilient as it has been and if Congress gets tired of conflict, October might be another unexpectedly good month for stocks – just as September was.

UPCOMING ECONOMIC RELEASES:

Across the balance of the month, we have the September ISM service sector PMI and Challenger job-cut report and August factory orders (10/3), the Labor Department’s September jobs report (10/4), the release of the September Fed policy meeting minutes and August wholesale inventories (10/9), the University of Michigan’s initial October consumer sentiment index, September retail sales, the September PPI and August business inventories (10/11), a new Fed Beige Book, the September CPI and October’s NAHB housing market index (10/16), September industrial output, housing starts and building permits (10/17), the Conference Board’s August index of leading indicators (10/18), September existing home sales (10/21), a fresh FHFA housing price index (10/23), September new home sales (10/24), September hard goods orders and the final October University of Michigan consumer sentiment index (10/25), September pending home sales (10/28), the August Case-Shiller home price index and the Conference Board’s October consumer confidence index (10/29), a Federal Reserve policy announcement (and possible taper) along with the first federal government estimate of Q3 GDP and the ADP employment report for October (10/30), and finally the Commerce Department report on September consumer spending and the October Challenger job-cut report (10/31).