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Change is Coming Fortigent By Chris Maxey, Ryan Davis August 20, 2013

Nowhere To Hide As Stocks, Bonds Fall Equity markets moved lower for the third time in four weeks, shedding approximately 2%. Bonds also lost money, with the Barclays Aggregate Bond index declining 1.1%. Rates moved higher last week on additional taper talk; the yield on the 10 year US Treasury rose from 2.57% to 2.84% during the week. Economic data was generally positive last week, outside of a few underwhelming manufacturing reports. The relative health of retail and housing data offset this source of disappointment. On Tuesday, the Census Bureau reported that retail sales rose 0.2% in July. While this was a tenth below expectations, the prior month was revised higher by 0.2% to 0.6%. Additionally, after stripping out the impact of automobiles, retail sales surpassed estimates with a 0.5% increase.

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and general merchandise. At least one outlet attributed this decline to abnormally wet weather conditions on the East Coast. which is generally the level at which economists believe job growth occurs.Improvement in the retail report was spread across categories. Continued forward momentum appears promising.000. The only categories to decline by a substantial amount outside of motor vehicles were furniture and build materials stores. the PPI was flat at a headline level and increased just 0. expectations have coalesced around a consensus that the Fed will begin reducing its current pace of $85 billion per month in asset purchases.000. The measure declined 15.000. These measures continue to indicate a complete lack of pricing pressure for US goods. This was in line with expectations. Inflation data also arrived via the producer and consumer price indices. clothing & accessories. This was a hair under expectations. which strips out more volatile food and energy components. Housing starts also showed a bit of life last week.000. as building permits increased to a pace of 943.000 mark for almost two years now. as the series fell to the lowest level of the economic recovery. Meanwhile. The series has been under the 400. including food & beverage stores.2% at both the headline and core levels. All rights reserved. Page 2 ©Advisor Perspectives. In July. The recent inflation data would appear to suggest that the Fed still has continued room to execute its program of accommodation.1% at the core. However. but as we noted there were some weather-related issues in July. the CPI rose 0.000 to a seasonally adjusted annual rate of 896. Inc. increasing by 50.000 to 320. which also pushed the four-week moving average to 332. Thursday’s initial jobless claims report did nothing to deter those expectations. .

. The measure’s mining and utilities components were mixed. the reports indicated growth. the recent back up in mortgage rates could cause that trend to slow. coming in flat and 0. More concerning is the marked weakness in new orders. Two regional manufacturing surveys – the Empire State and Philadelphia Fed reports – weakened in August. albeit slower than the previous month and below market expectations. Industrial production was also disappointing. Inc.3% below consensus. which often portends future strength for the sector. All rights reserved. which contracted in July. The series was held back by the all-important manufacturing component. Still. Investors will learn more with the Flash PMI Page 3 ©Advisor Perspectives. Although the housing sector took over the reins from manufacturing as the economic leader over the past year.On the manufacturing front. This could leave the US economy more vulnerable to the vicissitudes of the manufacturing sector. there were three important reports last week that revealed a sector that is still trying to find its footing.

Economic growth across the Eurozone is improving. raising the specter of ongoing intervention. Economists are looking for further clarity on the pace of asset purchase reductions and any issues that may prohibit the Fed from slowing purchases. Inc. Investors could be due for a renewed bout of volatility based on any number of events set to happen before year-end. All rights reserved. It is unlikely either party will want to take the blame for that. the debate between Larry Summers or Janet Yellen as the next Federal Reserve Chairman will heat up given the pending end of Ben Bernanke’s term in January. Countries like Portugal continue to face austerity measures and fiscal reforms. is likely to be one of the biggest volatility contributors this fall. Any number of issues will be on the table during negotiations. Page 4 ©Advisor Perspectives. including higher taxes.S. The Wall Street Journal’s Jon Hilsenrath wrote over the weekend that an informal poll of economists showed Janet Yellen would be the best consensus builder at the Fed. repeal of the sequester. The U. All the while. Angela Merkel and the Christian Democratic Union are the likely favorites to win. Reaching a budget agreement will be difficult as Republicans and Democrats are estimated to be $100 billion apart. Congress returns from recess on September 9 and top of mind will be the end of the fiscal year and the debt ceiling. At the same time. Nearing the move to autumn.this week and the ISM manufacturing index due for release on September 3. In the event a deal is not reached by October 1. gave one of the strongest indications yet that consumers are spending and no longer in need of as much accommodation as the Fed has been willing to provide. so at the very least a short-term deal should be in place prior. Recent data suggests the Fed should in fact follow through with its reduced asset purchase program. This week will provide additional insight on current Fed thinking as minutes from the most recent meeting are released. Once the election is over. for instance. suggesting a more volatile path forward if he becomes the next Chairman. Internationally. the possibility of a government shutdown exists. politicians will look for common ground on the budget. understanding the need to keep Merkel in power. Retail sales for July. it is time to look ahead and see what resides on the horizon. but that is mostly the result of Germany and France. Germany holds federal elections on September 22. the news flow is likely to be just as important. there is the potential for Europeans to go back to the drawing board for new ways to fix their problems. . Only one economist felt the same way about Larry Summers. but the FOMC is also widely expected to announce a slowdown of its asset purchase program at its next meeting on September 18. Change is Coming The summer months brought a period of calm to global markets and economies. Not only does the debt ceiling look likely to run out by the end of October. One theory suggests other European nations stayed quiet in the run-up to the election. and cuts to discretionary spending.

In the last few weeks. traders and markets are ready to climb back to life in the next few weeks.Source: Thomson Reuters Several economists from Stanford and University of Chicago created an Economic Policy Uncertainty index to measure the number of instances of reported uncertainty in the media. the index is turning higher. The street Page 5 ©Advisor Perspectives. At the very least. During June and July. Data this week is mostly housing related. Markets could move in either direction depending on the decisions reached in any of the aforementioned events. though. minutes from the July 31 FOMC meeting are released on Wednesday. a possible harbinger of things to come. as the transcript is expected to reveal committee members planning an imminent reduction of asset purchases. investors should make sure they are properly diversified heading into the fall and prepared for a return of macro driven markets. the index reached its lowest level since prior to the financial crisis. All rights reserved. with new and existing home sales topping the list. Inc. . The Week Ahead Although economic data is fairly limited this week. There will likely be volatility in financial markets surrounding this publication. Source: Economic Policy Uncertainty Investors should understand that despite a seemingly quiet summer.

is not guaranteed as to accuracy or completeness. legal or tax advice. Central bank activity is limited this week. or reliance on. The information provided is general in nature and is not intended to be. investment. All rights reserved. Inc. Neither is expected to modify current policy. and should not be construed Page 6 ©Advisor Perspectives. although based upon information that Fortigent considers reliable.expects existing home sales to rebound from a slight slip last month. Not FDIC Insured No Bank Guarantee May Lose Value (c) Fortigent http://www. with only Turkey and Thailand meeting. while the opposite is true for new home sales. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of. . the information.Fortigent. The information is subject to change and.