Financial Review

Another Strong Jobs Report

Sinclair Noe — December 4, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW + 369 = 17,847
SPX + 42 = 2091
NAS + 104 = 5142
10 YR YLD – .05 = 2.28%
OIL – 1.01 = 40.07
GOLD + 25.30 = 1087.90

The economy added 211,000 jobs last month, beating estimates of about 200,000. The unemployment rate held steady at 5% as more workers entered the labor pool. The Labor Force Participation Rate increased in November to 62.5%, from 62.4% in October. The last two months’ jobs numbers were revised higher. The government said 298,000 new jobs were created in October instead of 271,000. September’s gain was raised to 145,000 from 137,000. Over the past 12 months, the economy has added 2.64 million jobs.

Let’s break down jobs by sector: Employment in construction rose by 46,000 in November, with much of the increase occurring in residential specialty trade contractors (+26,000). Over the past year, construction employment has grown by 259,000.

Professional and technical services added 28,000 jobs. Over the year, professional and technical services have added 298,000 jobs.

Health care employment increased by 24,000 over the month, following a large gain in October (+51,000). In November, hospitals added 13,000 jobs. Health care employment has grown by 470,000 over the year.

Employment in food services and drinking places continued to trend up in November (+32,000) and has risen by 374,000 over the year.

Retail trades added 31,000 and has increased by 284,000 over the year.

Mining lost 11,000 jobs; this area includes jobs in oil drilling and support services. Since a recent peak in December 2014, employment in mining has declined by 123,000.

Information lost 12,000 jobs over the month. Within the industry, employment in motion pictures and sound recording decreased by 13,000 in November but has shown little net change over the year.

State and local governments added 8,000 jobs in November, while the federal government added 6,000 jobs.

The past five years of job growth have been in the private sector. Government jobs are still 561,000 below the peak.

The number of persons working part time for economic reasons increased in November. These workers are included in an alternate measure of unemployment known as the U6, which increased to 9.9% from 9.8%.

In November, average hourly earnings for all employees on private non-farm payrolls rose by $.04 cents to $25.25, following a $.09 cent gain in October. Over the year, average hourly earnings have risen by 2.3 percent, falling from a 2.5% pace in October that raised hopes of rising wages in the months ahead. The average workweek for all employees on private non-farm payrolls edged down by 0.1 hour to 34.5 hours in November.

Prepare for liftoff. Unless there is some catastrophe in the next 12 days, the jobs report was strong enough to lock in a Federal Reserve rate increase at the upcoming December 16^th FOMC meeting. This was the last major economic report before the Fed policy meeting, and recent speeches from Fed Chair Janet Yellen and other policymakers leaves little doubt about their intentions.

In yesterday’s testimony to Congress’s Joint Economic Committee, Yellen stated her view that given existing demographics the United States needs to create about 100,000 jobs per month to absorb the natural growth of the labor force. Any job creation above that would be consistent with continued improvement in the labor market, either further cutting the unemployment rate or else drawing new people into the labor force out of the ranks of the discouraged; and that is exactly what we saw in this month’s jobs report – more people entered the work force.

Yellen has not quite come out and said explicitly that 100,000 new jobs is the green light for a December rate hike, but she’s dropped about as many hints as the Fed ever does about the future course of economic policy. When the Fed hikes rates on December 16^th, it will be one of the best communicated rate hikes ever.

There is no question that the labor market has shown improvement. The economy has added jobs for 69 consecutive months, gaining more than 13.7 million jobs. The unemployment rate dropped down to 5% in October and even as more people moved into the labor force in November, the unemployment rate held steady.

This is quite simply a historic time for job growth. And don’t give me the garbage about how you don’t’ believe the numbers. The statistics are imperfect, I grant, but they are the most accurate information available and there is no evidence they have been doctored – none. And this slow, steady, and strong job growth doesn’t fit into many political narratives but you should look at the numbers rather than narratives.

We are now at what the Fed would like to call full employment; that point where everybody who has some job skills and wants a job, can find a job; the point where there are just enough jobs to stimulate growth without pushing inflation above target. The problem is – we’re not there yet. Millions of working age people left the workforce in the downturn and they have not returned. The percentage of the population working was unchanged at 59.3, which is only a tenth of a percentage point higher than it was a year earlier.

The uptick in the participation rate, though small and based on historically low levels, is an encouraging indication of progress for those who had dropped out of the labor force. It suggests that labor-market slack still is greater than the 5% unemployment rate would strictly indicate.

And wages just have not been growing, which means no wage push inflation. For many people, a pay increase only comes with a second, or third job. So, we’re not yet at the point where demand pushes economic growth. The economy can probably add millions more jobs and the unemployment rate could drop to about 4% before we really see full employment.

Yesterday, Yellen said, “I think we’ve seen some welcome hints” of wage increases, but she cautioned, “it’s tentative evidence; we don’t know if it will last.”

Meanwhile the European Central Bank cut interest rates yesterday and extended their quantitative easing program. The Bank of Japan recently added more stimulus to prop up their economy. The divergence has resulted in a stronger dollar which hurts US exports, as seen in a separate report today showing the U.S. trade deficit widened in October as exports fell to a three-year low, suggesting that trade could again weigh on economic growth in the fourth quarter. The Commerce Department said the trade gap rose 3.4 percent to $43.9 billion, a sign that the worst of the drag from a stronger dollar was far from over. September’s trade deficit was revised up to $42.5 billion from the previously reported $40.8 billion.

The blowout year for mergers and acquisitions just keeps getting bigger. According to Dealogic, global M&A volume just soared to $4.3 trillion, pushing 2015 to date ahead of 2007’s total, when the previous record of $4.29 trillion of mergers was struck. U.S. targeted M&A volume hit a record high in September and currently stands above $2 trillion for the first time ever. What’s driving the deal making? Cheap debt, which might change if the Fed hikes rates.

Uber is raising more money, and the new valuation will make it larger than 80% of the S&P 500 stocks, including old, established names like Dow Chemical, BlackRock, and Netflix. Bloomberg reports the car-booking startup is looking to raise as much as $2.1 billion in a financing round that would give it a valuation of $62.5 billion. Uber has increased actual U.S. gross revenue about 200 percent this year and is profitable in more than 80 cities around the world, and the number of U.S. trips completed this year has increased 250 percent compared with the same period last year.

So, why is the Fed on a near-certain track to raise interest rates? Normally Wall Street reacts badly to the prospect of rate hikes, but today’s triple digit rally in the Dow Industrials and the NASDAQ Comp, are just an indication that a Fed rate hike has been baked into the cake and the strong jobs numbers really are an indication of a stronger economy, which should be reflected with higher valuations.

The Fed’s easy money policies have driven Wall Street for the past 7 years, and there has to be some concern that if the Fed takes the punchbowl away, the party might be over. But that might be part of the reason why the Fed is no longer willing to keep monetary policy at the emergency levels of 2008. The Fed has to be concerned that an overabundance of free money is spoiling corporate America, resulting in unicorn valuations. We know how that story ends and it is ugly. The thinking is that it is better to tap on the brakes now, even though the economy is growing slowly, rather than waiting for the economy to go much faster and slam on the brakes, only to swerve into the ditch, again.

Also, remember the exhortations of Former Fed chair Bernanke, repeated by current Fed chair Yellen, that there is only so much we should expect from monetary policy. Economic growth must be supported by fiscal policy. The House and Senate have taken a concrete step toward reviving the Export-Import Bank, by voting to renew the bank’s funding as part of a five-year highway and transportation construction measure. Obama signed the bill into law today, hours before current funding was scheduled to run out. The highway bill is a good example of fiscal policy adding to economic growth; spending on infrastructure is an investment that pays dividends in jobs and increased productivity, and taking on infrastructure projects while rates are still low just makes sense.

But today’s jobs report signals that rates won’t stay low for long. And that means higher mortgage rates, higher credit for auto loans and credit cards, and all manner of debt. And it is coming sooner rather than later.

Financial Review

Two Paths Diverge

Sinclair Noe — December 2, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

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DOW – 158 = 17,729
SPX – 23 = 2079
NAS – 33 = 5123
10 YR YLD + .03 = 2.18
OIL – 1.67 = 40.1
GOLD – 15.60 = 1054.20

American businesses stepped up hiring last month, led by strong gains in retail, finance and other service industries. Payroll processor ADP says that private companies added 217,000 jobs last month, the most in five months. Service sector firms added 204,000, while manufacturers hired just 6,000. The figures come just two days before the government issues its official jobs report for November. If the Friday jobs report is anywhere close to today’s ADP report, it might lock in a rate hike at the Fed FOMC meeting in two weeks.

The productivity of American businesses was higher in the third quarter than initially reported — but so were labor costs. Newly revised government figures show that productivity rose at a 2.2% annual rate instead of 1.6%. Unit-labor costs were revised higher to show a 1.8% annual increase in the third quarter, and second quarter costs were revised higher. As a result, the year-over-year increase in labor costs climbed to a 3% rate, the highest level in six quarters. Unit-labor costs reflect how much it costs a business to produce one unit of output, such as a refrigerator or a ton of steel.

The Fed published their Beige Book, anecdotes on the economy collected from the 12 Fed districts; the information is published two weeks before FOMC policy meetings. There were no surprises in the report; 9 of the 12 districts report growth, the same as the October report. The economy seems to be growing at a moderate or modest pace. Housing markets improved at a moderate pace. Labor markets are starting to show hints of tightening but we’re not there yet. The conditions in the manufacturing sector were mixed; the strong dollar hurts some areas; low commodity prices hurt some areas, especially the energy sector; but low gas prices were helping consumers. Auto sales were strong. You know this stuff.

Federal Reserve Chair Janet Yellen spoke before the Economic Club in Washington DC; tomorrow she testifies before the Congressional Joint Economic Committee. Today Yellen said the economic data of the past couple of months has been consistent with expectations for an improving labor market and she is confident inflation is headed for the Fed’s target in the medium term. Here’s the key quote from Yellen: “Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”

If it sounds like Yellen has made up her mind about raising interest rates in 2 weeks, you are correct. The only suspense is her ability to herd the cats in the FOMC to something approaching unanimity. And the markets have priced in a rate hike. The next concern is the pace, duration, and amount of hikes. And the answer is slow and steady, and not over 1% by the end of 2016; again, this is priced into markets. The next concern is how the Fed will go about trimming its massive $4.5 trillion balance sheet and how the Fed can nudge banks to trim their excess reserves without triggering inflation. I posed that question today to Charles Plosser, the former President of the Philly Fed, and the answer was very slowly and cautiously because we are in uncharted territory.

Eurozone inflation held steady at a lower-than-expected 0.1% in November, giving further encouragement to ECB president Mario Draghi to pump up the central bank’s bond buying program tomorrow during a policy-setting meeting. In March, the ECB launched a more than €1trillion-euro stimulus plan running through September 2016 in order to snap a long period of low or negative inflation in the region, but given recent economic figures, that program will likely get a boost.

Greek Prime Minister Alexis Tsipras is hopeful that capital controls imposed at the height of the country’s debt crisis in July can be lifted in the first half of 2016. Addressing a conference of the Hellenic-American Chamber of Commerce, Tsipras said his government had taken the first steps to address non-performing loans and recapitalize banks so they could start lending again to the economy.

In the US we are starting to see hints of inflation, the labor market has shown steady, solid improvement, and economic growth is up. So, while you might argue against a rate hike from the Fed, really the idea is not particularly controversial. Now, juxtapose that against the Eurozone; ECB President Mario Draghi talks about the need for more and more stimulus policy. Tomorrow we’ll see if he can get the idea past the Germans or if the weakness of the southern tier defines the day; if not tomorrow, then he’ll push the idea of rate cuts and more bond buying to a future policy meeting. No matter the timetable, the paths for the Fed and the ECB are laid out, and they diverge. What happens in this scenario?

Well we can look to 1994, when the Fed tightened and Germany was cutting rates; remember, this was before the Euro Union. Back then, the dollar slipped; not really a surprise. History is not on the dollar’s side. In the last couple of decades, the dollar index has fallen every time the Federal Reserve has begun a cycle of interest rate hikes. The dollar just hit a 12 year high, so you might wonder if it is a bit overbought.

Certainly the thinking is that a rate hike would strengthen the dollar against its weaker global counterparts, and it might, for a while but the dollar would be susceptible to pullbacks on any sign of weakness or any sign the Fed is tightening too much or too fast. Even with modest and controlled tightening we might expect to see economic recovery in the Eurozone weighing on the dollar, not in the next month or two but over the course of the next year.

The bet on a strong dollar is one of the most crowded trades in the market today, despite the precedent of 1994. Meanwhile, bets on the euro are the most bearish ever. The US won’t stand by for long if the dollar appreciates significantly and its international competitiveness deteriorates substantially. Companies are already reporting earnings pressures due to the rising dollar, and some are even calling it a currency war, and demanding a more forceful response.

Next, watch the debt markets and especially the yield curve, that’s the spread between the 2-year yield and the 10-year yield. Rising interest rates and short-term debt yields could choke growth, while stable or falling long-term yields suggests investors see lower growth and looser monetary policy further ahead. Some think the yield curve could invert, with the yield on the 2-year dropping below the yield on the 10-year note. An inversion is a pretty sure sign of recession, but we’re still a long way from an inverted curve.

Also keep an eye on the spread between US Treasuries and German Bunds; this interest rate differential between risk free bonds has widened, but it can only be stretched so far. And watch the spread between the dollar and the currencies of emerging market countries. Sharp movements in interest rates and exchange rates can cause volatility in other markets. If it gets severe, it can create shocks.

And keep in mind that even if the ECB and the Fed diverge on interest rate policy, this shouldn’t shock anybody, because it would just be an extension of the existing divergence on quantitative policy. The Fed has already ended its bond buying binge known as Quantitative Easing Part 3, or 4, or whatever; just as the ECB started up its own QE. We already have quantitative divergence. Monetary policy divergence is not that different.

The instinctive reaction of many is that this widening gap between central bank policies must lead to a stronger dollar, but clearly it is not that simple. Different economies, different paths. We have some history to guide us, but it still feels like uncharted territory.

U.S. House and Senate negotiators have reached an agreement on a five-year highway bill that would also reauthorize the Export-Import Bank. The $305 billion bill would be partly financed by use of Fed surplus funds and a cut in the dividends received by commercial banks that own the Fed. House Speaker Paul Ryan predicts the bill will enjoy “good majority support” when it comes up for a full vote.

Crude oil supplies rose by 1.6 million barrels in the week ended November 27, according to the American Petroleum Institute, way above expectations for a decline of 1.2 million barrels. The more closely watched Energy Information Administration report came out later in the afternoon and it showed a buildup of crude supplies and a deepening global glut. Oil prices dipped below $40 a barrel for the first time since August.  The nation’s commercial stockpiles of crude oil, gasoline, diesel and other fuels last week soared above 1.3 billion barrels, a fresh record, according to the Energy Information Administration. Crude-oil stockpiles alone rose for the 10th week in a row, bucking expectations for a decline. OPEC is meeting in Vienna on Friday and there is talk of production cuts to support prices, but for now it looks like the world’s producers are pumping like crazy.

And finally, late news coming in of another mass shooting, this time in San Bernardino. The latest, unofficial tally is 14 dead and 14 injured. A manhunt is underway for three shooters; the suspects were heavily armed and possibly wearing body armor, and a bomb squad was on the scene, trying to defuse what was believed to be an explosive device. It seems like we hear these stories all the time these days. Whatever we are doing, it isn’t working.

Financial Review

See Opportunities

Sinclair Noe — December 1, 2015

Podcast: Play in new window | Download (Duration: 13:17 — 6.1MB)

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DOW + 168 = 17,888
SPX + 22 = 2102
NAS + 47 = 5156
10 YR YLD – .07 = 2.15%
OIL un 41.65
GOLD + 4.30 = 1069.80
SILV + .10 = 14.27

More than 180 nations are gathered in Paris to discuss a far-reaching agreement to reduce global carbon emissions. The emerging deal would require wealthy countries, including the U.S., to cut their own pollution while helping poorer countries shift from dependency on fossil fuels and mitigate the effects of climate change.

President Obama held a news conference today in Paris at the U.N. global climate summit; Obama said the world needs an enduring framework for addressing climate change and that he would seek an agreement that would boost economies as well as help the planet’s environment.

President Obama said the U.S. will meet commitments to help finance developing nations’ efforts to reduce carbon pollution, challenging congressional Republicans who have fought most of his environmental policies.

Some people look at the call for reducing carbon emissions and only see expenses, while others see opportunities. The number of annual patents for green energy has increased fivefold since 2002 and this year is on track to break another record after eight consecutive increases. Most patents in 2015 have been for solar technologies, 586 granted in the first half of the year; followed by fuel cells, electric vehicles, and wind power.

In Paris, countries and companies are pledging billions to fund even more research and development of new clean energy technologies. For the first time, more than half the world’s annual investment in clean energy is coming from emerging markets instead of from wealthier nations. The world recently passed a turning point and is adding more capacity for clean energy each year than for coal, natural gas, and oil combined.

For that trend to continue, rapidly developing economies are critical. Wind and solar are already competitive in price with grid electricity in some countries, and battery prices for large-scale electricity storage continue to fall.

As talks on climate change entered their second day in Paris, the Indian capital of New Delhi was buried under a thick smog, with visibility reduced to about 200 yards.

The Cyber Monday sales estimates are trickling in, and they’re looking good. Adobe Digital Index estimated that sales were up 12% year-on-year to $2.98 billion. It was enough to blow up the inter-webs. The websites of Target, PayPal, Walmart, and Victoria’s Secret, among a few others, experienced periodic outages or slow checkout times. Target had its biggest online-shopping day ever on Cyber Monday. Amazon said the holiday weekend was the best ever for its own devices.  Adobe says each of the first 18 days of December will tally $1 billion in sales.

If you were shopping over the holiday weekend, there is a good chance that you did not buy something with Apple Pay. According to Infoscout, nearly half as many eligible purchases were made using Apple Pay this Black Friday than last year, when the service was barely a month old. After the novelty wore off, well…

Vehicle sales maintained a strong sales pace in November: On a seasonally adjusted annualized basis, sales reached 18.2 million units for the third consecutive month. Ford pickups remain the top selling trucks and the Toyota Camry is the top selling passenger car. Fiat Chrysler said its U.S. auto sales rose 3 percent year-over-year in November. While Ford (+0.3%) and GM (+1.5%) missed estimates.

Hyundai, Toyota and Nissan all came in with better than expected sales. Volkswagen’s US sales in November fell almost 25%. Also today, Standard and Poor’s cut Volkswagen’s credit rating a notch, from A- to BBB+, on “a tarnished reputation and brand image, reduced business prospects, a more challenging competitive position, substantial costs, and weaker leverage metrics.”

The ISM manufacturing index fell to 48.6% last month from 50.1% in October; a reading below 50 indicates contraction. In a separate report, the private research firm Markit said its final PMI manufacturing index finished at a 25-month low of 52.8% in November.

Construction spending jumped a seasonally adjusted 1.0% in October, and was 13.0% higher for the year. During the first 10 months of this year construction spending amounted to $888 billion. For October, residential construction was 1.0% higher, while nonresidential construction rose 0.6%.

FOMC voting member Charles Evans said today that he is nervous about the December rate hike decision. His feeling is that the Fed needs to target 2% inflation, adding that the Fed Funds rate may be under 1% by the end of 2016. Fed funds futures now show that traders are assuming a 70% probability of a December rate hike, down from 76% yesterday. Keep in mind, FOMC Chair Janet Yellen will be speaking twice tomorrow.

Negotiators from both chambers of Congress reached agreement today on a 5 year highway plan. The highway measure also would revive the US Export-Import Bank, whose charter expired June 30. Lawmakers have until Friday to enact a highway plan or pass another temporary extension of transportation funding, and House Speaker Paul Ryan said his chamber will vote on the bill this week.

The legislation would provide $281 billion over six years for roads, bridges and mass transit. The measure would be financed in part by a one-time use of Federal Reserve surplus funds and by a reduction in the 6 percent dividend that national banks receive from the Fed.

Puerto Rico paid $354 million today on their Government Development Bank debt, avoiding default for now. A missed payment would have been the first default on the commonwealth’s direct debt. Over the past decade, Puerto Rico’s government has laid off 30,000 employees, closed nearly 200 schools, raised taxes and reformed pension funds. They still face $72 billion in debt, with the next payment of $1 billion due on January 1^st, and there is no indication they can pay. Governor Padilla is hoping to negotiate with creditors.

Morgan Stanley is planning to cut up to a quarter of its fixed income jobs over the next two weeks, resulting in the loss of hundreds of jobs. The cuts reflect a slowdown in client activity, pressure from investors to lift returns and new capital rules that penalize big banks for holding vast inventories of debt securities. In October, Morgan Stanley reported a 42% Y/Y drop in bond trading revenue in what CEO James Gorman called the bank’s worst quarter for fixed income since he took over in 2010.

Drug-benefit manager Express Scripts Holding said it is making arrangements with a drug compounder for patients to receive a lower-priced alternative to the expensive anti-parasitic pill Daraprim, whose price jumped more than 50-fold earlier this year. Turing Pharmaceuticals bought the rights to Daraprim and then jacked up the price from $13.50 a pill to $750 a pill. Express Scripts said it has arranged for patients to get the drug for $1 a capsule from San Diego-based drug compounder Imprimis Pharmaceuticals.

Meanwhile, Martin Shkreli, the CEO of Turing, is also the new CEO of a company called KaloBios Pharmaceuticals. KaloBios, which was at one point of time trading below a penny and was planning to wind down its operations after unsuccessfully finding a strategic alternative of staying afloat in the business, hit a 52-week high on Nov 23. The upsurge was due to the purchase of 70% of KaloBios’ shares by an investor group led by Shkreli.

After gaining control of the company, Shkreli assumed the position of the CEO and Chairman of the company’s board of directors. And then he stopped lending the company’s shares to people looking to short it. The shorts were squeezed and squeezed hard. The price jumped from about 90 cents to just over $45 in a matter of days.

Markit Economics said that its Purchasing Managers Index for the euro area rose to 52.8 in November from 52.3 the previous month. All euro area countries, with the exception of Greece, are seeing expansion in their manufacturing sectors. There was also good news on the employment front with Germany’s unemployment rate falling to a record low of 6.3 percent while in Italy unemployment dropped more than expected to reach 11.5 percent. However, it is unlikely that this improving data will do anything to hold back the European Central Bank’s easing plans on Thursday.

The Bank of England singled out two of Britain’s largest lenders for failing to meet certain capital thresholds in the latest round of stress tests examining the banking sector’s ability to withstand future global financial shocks. Despite the shortfalls, the central bank said that the two lenders, Standard Chartered and the Royal Bank of Scotland, passed the exercise, and that neither would be required to raise additional capital for now, but the tests will get tougher. So they say.

Brazil just dropped its latest batch of GDP numbers, and they point to a deepening recession. The country’s economy shrank 1.7% in the third quarter versus the second, on top of a 2.1% contraction the previous quarter and a 0.8% dip the quarter before that. That’s the first three-quarter streak of negative GDP growth since 1999, and it’s a far worse one at that.

Financial Review

The Value of Everything

Sinclair Noe — July 30, 2015

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | Android | RSS

DOW – 5 = 17,745
SPX + .06 = 2108
NAS + 17 = 5128
10 YR YLD – .01 = 2.27%
OIL – .27 = 48.35
GOLD – 8.40 = 1089.30
SILV – .08 = 14.83

Gross domestic product rose at a 2.3% annual rate from April to June, missing expectations for 2.6% growth. First quarter GDP was revised to show 0.6 percent growth after previous reports showed a 0.2 percent downturn. The latest reading on GDP was propelled by higher consumer spending on big-ticket items such as new cars and trucks and the strongest housing market in years. Personal spending accounted for two percent of the 2.3% headline increase.

Builders increased spending on new home construction at a 6.6% clip in the spring, especially for townhouses, condos and apartment units. That follows 10% gains in the prior two quarters. US exports, meanwhile, snapped back with a 5.3% increase after a 6% drop in the first quarter. Imports rose at a slower 3.5% pace. The improved trade figures also gave the economy a small boost.

Business investment was weak again. Outlays on equipment declined 4.1% and the value of inventories fell slightly to $110 billion from $112.8 billion. Spending on structures such as oil platforms fell 1.6%, largely because of the drop in oil prices. The story on the economy remains consistent: strong consumption, weak investment.

Inflation as measured by the PCE price index increased at a 2.2% annual rate after falling by 1.9% in the first quarter, a decline tied mostly to plunging gasoline costs. Excluding food and energy, core PCE rose to a 1.8% annual pace from 1% in the first three months of the year. The PCE is the Fed’s preferred measure of inflation and it is really close to their inflation target. The personal saving rate was 4.8 percent for the quarter, the same as the average of 2014; this would indicate that people are indeed spending the money they save on lower prices at the gas pump.

Gross domestic product is supposed to be a measure of everything a nation produces. As you might imagine, that is a difficult task. How do you go about placing a value on everything? GDP includes the value of electricity produced but it does not subtract for the air pollution from the coal fired plant; it includes the price of divorce lawyers but places no value on a healthy marriage. In other words, it is imprecise. And so it is constantly subject to revision. The mixing and matching of what drives GDP growth has changed to reflect the economy, with greater emphasis on services, consumption, and housing. Spending on intellectual property products grew at an annual rate of 5.5% in the second quarter, continuing a nice string of advances which offers some hope for improved productivity growth in future quarters. A couple of years ago, intellectual property wasn’t even counted.

The second-quarter report is the first to include new methodology meant to make GDP more accurate. Over the past several years GDP has slightly underestimated growth in the first quarter and sharply overestimated growth in the third quarter. The problems stemmed mostly from difficulties in measuring spending on the military as well as consumer services such as health care. The new report also incorporates changes in how certain taxes and social benefits are categorized. Based on the new calculations, the economy expanded at average 2% rate each year from 2012 to 2014 instead of 2.3% as reported under the old method of calculating GDP. So, if you thought the recovery wasn’t quite as robust as the numbers, you were unfortunately correct.

The GDP report was decent, not great, but good enough. It is totally consistent with the Fed’s assessment of the economy. Yesterday, the Federal Reserve FOMC left interest rates unchanged, but they left the door open for a possible interest rate hike when central bank policymakers next meet in September – if the economy and job growth continue to improve. Fed officials said they felt the economy had overcome a first-quarter slowdown and was “expanding moderately” and job gains have been “solid”. Today’s GDP report is in-line with that view.

The Fed will also watch the next couple of jobs reports to see if they are in-line with their assessment of the economy. Today, a report showed new applications for unemployment benefits rose by 12,000 to 267,000 in the week ended July 25. Jobless claims have been below 300,000 since May. That’s the longest run in 15 years. Next week, we’ll see the jobs report for July; based upon first time claims, the jobs report should be “solid”. And that in turn would point to a September rate hike by the Fed.

The average rate for a 30-year fixed-rate mortgage dropped to 3.98% in the week that ended July 30, falling to the lowest level in almost two months. This would seem to be a good time for many homeowners to refinance, but not everybody can, because many homeowners are still underwater.

There are programs to help, such as the Home Affordable Modification Program, or HAMP, which aims to make mortgages more affordable by changing terms, such as interest rates and loan duration. But there is a problem. Mortgage servicers reject 72% of struggling borrowers from HAMP. The Treasury Department requires mortgage servicers to explain why they reject borrowers, but a new report says the servicers aren’t giving a clear picture for the rejection, and that officials have found that servicers have “wrongfully denied” borrowers from entering HAMP.

Chinese stocks tumbled in the last hour of trading – with the Shanghai composite falling more than 2 percent-on reports that banks were investigating their exposure to the stock market. This year’s slump in China’s property market could hit the country’s banks, according to ratings agency Standard & Poor’s, in the latest warning to the world’s second largest economy.

Saudi Arabia, is planning to pull back from record-high levels of production at the end of the summer. The reduction could begin as soon as September and would amount to about 200,000 to 300,000 barrels a day.

Earnings season continues: Royal Dutch Shell warned that lower crude prices could continue for several years. Shell announced lower earnings, and plans to cut 6,500 jobs and pull back on capital spending.

Linn Energy reported a $379 million net loss and a 46% decline in revenue. Share price dropped 26% today.

Procter & Gamble posted a better-than-expected profit of $521 million, or 18 cents a share, but the consumer-products giant missed on revenue and provided a downbeat outlook for its fiscal 2016 earnings.

T-Mobile posted better-than-expected second-quarter revenue of $8.2 billion, and said it added 2.1 million subscribers, and raised its full-year subscriber outlook.

Time Warner Cable missed Street estimates with a second-quarter profit of $463 million, or $1.62 a share. The cable company did report a growth in subscribers.

LinkedIn revealed second-quarter results that easily topped Wall Street’s estimates on both lines, along with an upbeat full-year outlook.

Higher sales of Amgen’s blockbuster rheumatoid arthritis drug Enbrel and some newer drugs boosted second-quarter profit 7 percent. Amgen beat Wall Street estimates and raised full year profit forecasts.

Samsung Electronics is warning of “mounting challenges” ahead as the company’s once-highflying mobile unit again dragged on its quarterly results. With poor Galaxy S6 sales and a dramatic loss of Chinese market share, operating profit dropped 4% to $5.9 billion.

Looking to gain a better foothold in the mobile messaging market, Yahoo is launching Livetext, an app that makes video calling almost as private as texting. Users will be able to hold video chats in which text messages/emojis appear on the screen, but no audio is present. The app will be released today for Apple and Android devices.

After recently passing hedge funds in terms of total assets, ETFs are setting fresh sales record. In the past 12 months investors traded $18.2 trillion worth of ETF shares, a 17% increase from the 12 months prior and more than triple what it was 10 years ago. For perspective: The amount of dollars exchanging hands through ETFs is now more than the U.S. GDP, which stands at $17.4 trillion.

Meanwhile, the Export-Import Bank will stay shuttered for the rest of the summer after the House passed a highway funding bill that excluded a measure to save the lender. As a result, several corporations – the latest Boeing – are considering moving work overseas given the federal credit agency’s uncertain future. Ex-Im provided $27.4 billion in financing for U.S. exports in fiscal year 2014.

The Senate today passed legislation funding the nation’s highways, bridges, and roads for another three months – one day before construction across the U.S. would have come screeching to a halt. It is the 34th short-term patch passed by Congress since 2009. Remember the government shutdown of 2013; it didn’t last long, but it was a mess; it actually cost more to shut the government down than to keep it running. After that fiasco, lawmakers agreed to lift spending curbs for 2 years. That agreement expires October 1, when Congress will again be subject to the caps known as sequester. That may sound like plenty of time to fix the problem but remember, we’re talking about Congress; summer recess just started; they won’t even be back in Washington for a few weeks, and then they’ll take another break for Labor Day. So, they will try to pass a stop-gap spending resolution to buy more time in September. Still, you can’t rule out a partial government shutdown, again.