Bank of the West US Outlook Report for July 14, 2016

US Outlook Report: A Few Breaks in the Clouds this Week

Financial volatility continues to calm in the aftermath of the U.K. vote. The S&P VIX index, a measure of expected stock market volatility, has hit new lows in recent days, as the S&P 500 has hit record highs.  We think a combination of positive factors are behind these moves. Globally there have been some encouraging political developments and monetary policy signaling.  The transition to a new British Prime Minister happened sooner than anyone could have hoped, taking some of the political uncertainty out of the equation near-term.  And while the Bank of England didn’t cut interest rates as the market expected his week, they did promise monetary stimulus in August.

Abenomics in Japan is getting a new lease on life as the Prime Minster and the BoJ mull perpetual bonds, helicopter money, and a new 10- to 20-trillion Yen fiscal stimulus package (equivalent to $100 to $200B in U.S. dollars).  Stock market losses since the U.K. vote in Europe have been cut substantially in recent days, and for some countries completely reversed.  The improvement in corporate bond credit spreads has been even more impressive. The spreads have actually narrowed for most sectors since the U.K. vote, except for financials and industrials.

Here in the United States a robust employment report for the month of June helped remind investors that the U.S. expansion still has a considerable amount of momentum behind it. Indeed U.S. consumers are relatively shielded from events abroad, especially if financial contagion is contained and U.S. employers don’t slow hiring or start cutting jobs.

The solid U.S. employment trends appear to be holding so far into July.  Initial jobless claims over the last two weeks have returned to expansion lows.  Some of the lowest levels since the early 1970s.  Moreover, a strong dollar will help keep inflation on imported consumer goods low allowing household dollars to go further. This should help keep consumers spending.

But, I’ll close with a note of caution: We have yet to see in the data the real economic shock from what occurred last month across the pond.  Most of the indicators we have gotten so far are from before the U.K. vote, and more political and financial turmoil could be in store. But at this point, we should feel relieved since financial conditions could have been much worse. For now the political and policy responses around the world have sounded just about the right tone for the markets.


To learn more, check out this week’s U.S. Outlook Report.


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