OREANDA-NEWS. August 23, 2017. For the first time since May, U.S. equities suffered a second consecutive week of losses. The decline last week was relatively modest, just 0.6 percent in the S&P 500, leaving the index down just 2.2 percent since peaking on August 7. But the combination of seasonal weakness, White House distractions, and the lack of a positive catalyst has left stocks to drift below their 50-day moving average, although still well above their 200 day.

The latest round of economic data was generally supportive, but not enough to offset the more pervasive negative tone. Retail sales in July were surprisingly strong, and the report included upward revisions to two previously negative readings in May and June. Consumer sentiment also surprised on the upside. Industrial production and leading indicators were generally in-line, although slightly less robust than expected. Housing starts and permits disappointed, but that report followed a blowout June, leaving the longer-term uptrend intact.

Bond Yields Overcome a Volatile Week; Overseas Markets Outperform U.S.

Bond yields ended the week mostly unchanged, but that belies the volatile ride they experienced on the way. The yield on the ten-year Treasury note ended the previous week at 2.19 percent. By Tuesday, following the retail sales report, the yield had jumped to 2.27, only to fall back to end the week unchanged. The two-year note followed a similar, although slightly less volatile path and ended the week higher by two basis points at 1.31 percent. And the spread between high yield and government bonds, which had been the subject of recent focus after widening sharply in the previous two weeks, stabilized. After contracting to a three year low of 355 basis points on July 27, the spread had widened to 400 basis points by August 11, before closing last week at 398.

Overseas markets fared generally better than in the U.S. The MSCI EAFE index was fractionally positive in dollar terms, while the Emerging Markets index rose 1.6 percent. Of note was second quarter economic activity in Japan, which easily exceeded expectations, although that was not enough to prevent the Nikkei index from falling for the fifth consecutive week in local currency terms. Stocks in the Eurozone, however, rose modestly as the euro weakened. And stocks in Latin America were noticeably strong.

This Week: Watch for more from the Fed, Housing and Manufacturing Data

The minutes from the Fed’s July meeting confirmed the split between the rising chorus of those arguing for caution in the face of stubbornly low inflation and those who want to push ahead with the projected path of policy normalization. That same split was evident in remarks during the week from various Fed officials. At the end of the second quarter, the odds of another rate hike in December were 52 percent, according to the Bloomberg world interest rate probability function. Those odds have since dropped to 32 percent after a series of soft inflation readings. Central bankers gather in Jackson Hole at the end of the week for their annual economic symposium, focused this year on sustaining global growth. Fed Chair Yellen is scheduled to speak on Friday on the topic of financial stability, but her remarks will be monitored closely for any reference to current policy. The same applies to European Central Bank President Draghi who is also scheduled to address the symposium on Friday.