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Economic Update

July 28, 2014

Economic themes: Geopolitical Risk, FOMC, Earnings Season, Housing, Durable Goods.

  • Geopolitical Risk: Despite international pressure for a truce, Israel is continuing its 3-week long offensive against Hamas, as it remains very popular at home. Although they have stated they will no longer initiate strikes, they will continue to destroy militant tunnels and respond to rocket and mortar fire.  The death toll in Gaza has exceeded 1,000 people.  The Gaza militants desire a Palestinian State, free of Israeli occupation and the seven-year blockade.  Meanwhile, fighting continues in eastern Ukraine, preventing accident investigators from accessing the sight of the downed Boeing 777.  The current standoff is viewed as the worst between Russia and the West since the Cold War.  The West is considering further sanctions to try to put political pressure on Moscow.  Putin is not scared.
  • FOMC: The Federal Reserve is scheduled to announce the policy decisions from their meeting on Wednesday, where the market is anticipating a reduction in quantitative easing from $35 billion per month to $25 billion per month.  They will continue to focus on employment and inflation and expect interest rates to remain low for a “considerable time,” after quantitative easing ends, prospectively in October.  Federal Funds Futures continue to indicate the short term interest rate could rise in mid-2015.  Many market participants are awaiting Wednesday’s GDP report, and Friday’s employment report.
  • Earnings season: Of the S&P 500 companies to have reported second quarter earnings thus far, 78% have beat profit forecasts, and 66% have beat sales forecast.  Earnings are up 11%, the fastest pace in 3 years.  An additional 150 companies are reporting this week.
  • Housing: Pending home sales fell 1.1% in June, supported by gains in the Midwest, though held back by declines in the south.  Existing home sales increased 2.6% in June to a 5.04 million unit pace, above forecasts of a 4.99 million unit pace.  Prices increased 5.3%, and are up 4.3% over the past year, with inventory at 5.5 months.  New home sales have been volatile, falling 11.5% to a 406k unit pace in June, below forecasts of 475k units, with declines seen across all regions.  Prices declined 3.2% on the month, though are up 5.3% over the past year.
  • Durable Goods: New factory orders increased by 0.7% in June, above forecasts of a 0.5% increase, led by increases in aircraft, metals, machinery, and electronics, with declines in automobiles.  The figures represent an uptrend in manufacturing.
  • Economic highlights for the week ahead:

o    Tuesday, 7/29/2014: Case-Shiller.

o    Wednesday, 7/30/2014: GDP, FOMC Meeting Announcement.

o    Friday, 8/01/2014: Employment, Personal Income and Outlays, ISM Mfg.

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