US Economic Update – 15 August 2014

US retail sales miss the mark, producer prices also ease

US markets closed moderately higher last week despite a raft of mixed economic numbers and accelerating uncertainty over Ukraine. The out-performance was supported largely by positive performances in the corporate earnings arena as a wave of companies beat estimates.

To date, 78% of companies reporting have beaten analyst estimates according to data released by Factset, which has helped to underpin US indices. The blow graph highlights the sector winners and sector losers for the period.

US Corporate earnings surprises by sector

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In relation to economic data, US retail sales figures disappointed investors last week as the official data appeared to highlight a deceleration in growth during July. Overall retail sales emerged flat with the month before with zero growth, while core retail sales(ex automobiles) grew by just 0.1%.

In addition to weaker consumer demand for goods, producer prices also failed to inspire during July. Here, price expansion slowed to 0.1% MoM, while core producer prices (ex food and energy) held up slightly better with growth at 0.2% month on month.

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All in all, the US economy is recovering at a pace that is unlikely to alarm policy makers. While some month on month measures continue to exhibit tentative growth, the overall pace of economic expansion during Q2 is still believed to have been above trend. However, downside risks still exist.

At present; better than expected earnings growth at US companies, combined with a belief that a hike in the Federal Funds rate remains some way off, has kept markets well supported. Looking ahead, elevated levels of geopolitical risk and an escalating economic conflict between Russia and the west could still undermine portfolio performance.

In addition to this, an environment of growing expectations for tighter monetary policy over the months ahead also presents its own risks to the economic recovery as well as portfolio returns. Consequently, we continue to favour a more cautious approach to assessing opportunities from here forward.

Looking to the week ahead; Tuesday sees inflation figures emerge from the US, while Fed Chair Janet Yellen and ECB President Mario Draghi are both scheduled to address an audience at the Jackson’s Hole Symposium in Wyoming, North America, during the latter half of the week.

While little deviation is expected from the usual mantras during speeches from North American and European central bankers, Tuesday’s inflation numbers imply potential positives and negatives for equity markets.

This is as weaker inflation in the US could see investors betting on lower rates for longer – which would be positive for markets; while the reverse of this outcome applies if North American CPI emerges stronger than expected. Should this happen then investors could revise forward their expectations for the first hike to the Federal Funds rate, which would more than likely encourage a negative performance from equity markets.

Dow Jones

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