Covenant Weekly Synopsis as of September 18, 2015

September 21, 2015

Markets got what they wanted from the Fed, or at least what they had wanted from each previous Fed meeting over the last nine years….namely that the Fed refrain from raising interest rates. That happened again last Thursday, only this time the equity markets did not rally as they had in the past. Whether equities behaved differently as a result of additional uncertainty about when the Fed might actually raise rates, or because investors are concerned that the Fed knows something about looming weakness in the economy that we don’t, may never be known. Nevertheless, what began as a nice week for equities, reversed hard following the Fed announcement and afternoon press conference as shown in the following chart of intraday performance of the S&P 500:

  Bloomberg Chart

In spite of the decline over the last day and a half of trading, domestic large caps closed the week with only a modest loss, while small cap and tech stocks managed to make gains.  Emerging and Frontier market equities posted the strongest performance on the weak up 3% and 1%, respectively.  The yield on traditional fixed income instruments declined on the week with the 10-year UST falling 0.05% to 2.13% and the 30-year UST declining 0.02% to yield 2.94%.  Precious metals snapped , while the energy complex was mixed (the price of WTI crude oil rose and natural gas prices fell). Additional market detail can be found here.

Housing Sector Strength:  Under the radar earlier this year, strength in the housing sector is increasingly difficult to ignore.  The latest sign of recovery in this pillar of the American economy came Friday when data showed that during the second quarter home mortgage debt increased by 0.5% from the prior year.   According to data from Bloomberg, this was the first annual increase in mortgage debt since 2008.  

Budding Borrowing

The growing base of mortgage financing is being driven by increasing demand for mortgages (on the back of an improving labor market) and moderating lending standards making loans available to more would-be borrowers.   A headwind to growth since the Financial Crisis, a turnaround in this sector would provide a much needed boost to the U.S. economy growth as housing (and its related sub-sectors) is estimated to make-up 13% of GDP.

Economic Wrap-up: The headline for August’s Retail Sales number was fairly weak at +0.2% month-over-month (m/m), however looking beneath the hood the headline number was dragged down by a 1.8% decline in gasoline station sales. The control group (sales ex-autos, gasoline, building materials) increased by 0.4% and is on track for solid 2.5% – 3% growth in Q3. Industrial Production declined 0.4% m/m in a continuation of a sideways trend for manufacturing output. Inflation remains weak as Core CPI for August indicated a 1.8% annualized rate (below the Fed’s 2% target).

Be good,

Jp