U.S. Markets: The major U.S. indexes ended the week mixed.  The week’s big story was the benchmark S&P 500 setting a new all-time record high during the week.  The Dow Jones Industrial Average finished the week essentially flat at 27,930.  The technology-heavy NASDAQ Composite rose for a fourth consecutive week, adding 2.7%.  By market cap, the large cap S&P 500 added 0.7%, while the mid cap S&P 400 and small cap Russell 2000 ended the week down -2.0% and -1.6%, respectively.

International Markets: Canada’s TSX rose just 3 points to 16,519, while the United Kingdom’s FTSE gave up -1.4%.  On Europe’s mainland France’s CAC 40 declined -1.3% and Germany’s DAX fell -1.1%.  In Asia, China’s Shanghai Composite rose 0.6%, while Japan’s Nikkei retreated -1.6%.  As grouped by Morgan Stanley Capital International, emerging markets finished the week up 0.1%, while developed markets ended down -0.6%.

Commodities: Precious metals finished the week mixed.  Gold finished the week down -0.14% to $1947 an ounce, while Silver rose 2.5% to $26.73 an ounce.  Oil had its third consecutive week of gains.  West Texas Intermediate crude rose 0.8% to $42.34 per barrel.  The industrial metal copper, viewed by analysts as a proxy for global economic health due to its wide variety of uses, ended the week up 2.1%.

U.S. Economic News: The number of Americans seeking first-time unemployment benefits climbed back above 1 million last week as the recovery in the labor market appears to have slowed.  The Labor Department reported new applications for unemployment benefits rose by 135,000 to 1.06 million.  Economists had expected 910,000 new claims.  While the level of initial claims remains a fraction of what it was in March, it remains very high by historical standards and is indicative of weak labor market conditions.  Continuing claims, which counts the number of Americans already receiving unemployment benefits, decreased by 636,000 to 14.844 million.  That number is reported with a one-week delay.

The National Association of Home Builders (NAHB) reported its Housing Market Index (HMI) rose in August hitting its highest level since December 1998.  The NAHB HMI for August rose six points to 78—its fourth consecutive increase.  All four regions posted gains, with the most notable improvement in the Northeast where optimism hit a fresh record high.  All three components of the HMI had solid gains, led by another jump in prospective buyer traffic to a record high level.  The improvement in housing demand has been boosted by record low mortgage rates.  Analysts note the surge in builder optimism implies a strong pickup in housing starts in the next few months.

Sales of existing homes soared by a record 24.7% in July to a 5.86 million annual rate.  The July reading was its highest level since December 2006 and well above the consensus of a 5.39 million unit rate.  All four regions posted double-digit gains as homebuyers across the country took advantage of record low mortgage rates.  Existing home inventory fell 2.6% to 1.5 million units, down 21.1% from the same time last year.  Months’ available supply fell to just 3.1, the second lowest on record and indicative of very tight housing inventory.  Economists generally consider 6 months of supply a “balanced” housing market.  

The number of new homes under construction jumped in July as Americans re-entered the housing market en masse.  The U.S. Census Bureau reported home builders began construction on homes at a seasonally-adjusted annual rate of 1.496 million last month.   The reading was up 22.6% from the previous month and up 23.4% from the same time last year.  The pace of home building is now down just 7% from its pre-coronavirus high.  Permitting activity occurred at a seasonally-adjusted annual rate of 1.495 million, up 18.8% from June and up 9.4% from July 2019.  All regions experienced an overall uptick in housing starts despite rising coronavirus cases in many parts of the country.  The biggest jump was in the Northeast, with a 35.3% increase.

Business activity in the New York area slowed last month, signaling a slower pace of growth going forward.  The New York Federal Reserve reported its Empire State business conditions index fell 13.5 points to 3.7.  The reading was far below expectations for a reading of 17.  In the details, the new orders index fell 15.6 points to -1.7, while shipments fell 11.8 points to 6.7.  Optimism about the six-month outlook also moved lower in July.  The future capital expenditures index slipped 3.1 points to 6.  Many economists believe the quick rebound is now over, and the economy will now settle into a slower path of growth.  Oren Klachkin, economist at Oxford Economics wrote in a note, “Our baseline forecast foresees manufacturing taking until 2022 to return to pre-virus levels of activity.”

As in New York, the Philadelphia region also saw a slowdown in activity.  The Philadelphia Federal Reserve reported its manufacturing index slowed for a second straight month in August.  After hitting 27.5 in June, the index fell to 17.2 this month.  Economists had expected a reading of 20.  New orders, shipments, and employment growth all moderated.  Notably, optimism about the next six months remained solid, with the index for future activity actually rising 3 points to 38.8.  Neil Dutta, head of economics, at Renaissance Macro Research is expecting factory activity to rebound in the coming months stating, “We think the broader story of the factory sector is that inventories are way too low relative to demand — thus we’d expect strong gains in production in coming months as inventories are rebuilt.”

According to minutes of the Federal Reserve’s Open Market Committee meeting in July, the Fed’s estimate for economic growth over the second half of the year has been revised lower.  At the latest meeting on July 28-29, the Fed said it expected the rate of recovery in gross domestic product and the pace of declines in the unemployment rate to be “somewhat less robust than in the previous forecast.”  The blame for the reduction in expectations was placed on the increasing spread of the coronavirus since mid-June, and the consequent slowing of state re-openings of businesses.  At the July meeting, Fed officials decided to keep interest rates at zero and to maintain monthly purchases of $120 billion of U.S. Treasuries and mortgage-backed securities.  Fed Chairman Jerome Powell has said the central bank “isn’t even thinking about thinking about raising rates.”

International Economic News: Canada’s virus containment strategy appears to be paying off.  Canada’s economy is set to grow at an annualized rate of 36% in the third quarter, compared to 20% for the United States, the average forecasts of Canada’s six largest banks showed.  That reflects some catch-up for Canada after an estimated deeper slump in the second quarter, but also greater success at controlling the spread of the coronavirus pandemic.  The number of daily new cases in Canada has slowed to less than 400, using a 7-day moving average, from about 1,800 at its peak in May, according to Canada’s Public Health Agency.  Matthieu Arseneau, deputy chief economist at National Bank Financial stated, “The phased reopening of the Canadian economy, combined with its lower starting point due to stricter public health measures, will mean a more vigorous bounce-back in Canada.”

In contrast to Canada, the United Kingdom’s biggest bank, HSBC, has sharply downgraded its forecast for the UK economy, now predicting it to shrink 10.3% this year and only grow 6% in 2021.  The latest figures are markedly more pessimistic than its previous prediction of a 7.8% contraction in 2020 followed by growth of 6.2% next year.  Furthermore, the forecast is much gloomier than that of the Bank of England (BoE).  The BoE has stated it expects the UK economy to shrink 9.5% this year and grow 9% in 2021.  HSBC senior economist Elizabeth Martins said recent economic data was underwhelming.  The UK economy crashed by an historic 20.4% in the second quarter, which “was worse than we had expected,” Martins said.

On Europe’s mainland the French government said it would unveil details of its 100 billion euro (US$118 billion) plan to reinvigorate the economy in the first week of September.  “The recovery plan is ready, the timetable for its implementation still stands,” government spokesman Gabriel Attal said in a statement.  Schools are set to reopen on Sept. 1, after most were closed during a two-month lockdown earlier this year to fight the coronavirus, and the government is working to ensure protective measures will be adequate, Attal said.  France has already outlined some of the parameters of its crisis measures, including cuts to domestic business taxes, investment in promoting jobs for the young and funding for environmental initiatives.

A recent survey revealed that the recovery in Germany’s private sector slowed in August as activity in the service sector unexpectedly came to a near standstill.  IHS Markit reported its flash composite Purchasing Managers’ Index (PMI) fell to 53.7 from 55.3 in July.  The reading, which remained above the 50-level that separates growth from contraction, came in weaker than a Reuters poll of 55.0.  The main drag came from the service sector, where the sub-index declined to 50.8 from 55.6.  Manufacturing proved more resilient with the sub-index rising to 53.0 from 51.0, reaching its highest level in nearly two years.  IHS Markit economist Phil Smith said activity in the service sector was close to stalling amid renewed travel restrictions and a sustained decline in overall employment that was weakening domestic demand.

China unveiled a new strategy for economic growth: opening the full potential of its domestic demand to the global economy.  Even before the COVID-19 crisis, the government had argued for some time that domestic demand and consumer spending should drive future economic expansion, taking over the role from export-led growth.  Now with demand facing slow recovery, the message is that the economy needs both domestic demand and foreign trade to succeed.  "Only when both the domestic and global markets function smoothly can the Chinese economy overcome the multiple challenges facing it," President Xi Jinping said.

Japan suffered its biggest economic slump on record as it continues to battle the coronavirus pandemic.  The world’s third largest economy saw gross domestic product fall 7.8% in April-June from the previous quarter, or 27.8% on an annualized basis.  Japan was already struggling with low economic growth before the crisis.  The latest data for the April to June quarter showed the biggest decline since comparable figures became available in 1980 and was slightly larger than analysts had expected.  One of the main factors behind the slump was a severe decrease in domestic consumption, which accounts for more than half of Japan's economy.  Exports have also fallen sharply as global trade is hit by the pandemic.  The latest data marks the third successive quarter of declines for the Japanese economy, representing its worst performance since 1955.

(Sources:  All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet.)