OREANDA-NEWS. August 23, 2016. U.S. equities turned fractionally lower last week in mostly directionless trading. The much anticipated release of the Federal Reserve’s July meeting minutes resolved little regarding its intentions, and the UK consumer seemed to shrug off the Brexit vote.

Last week it was the energy sector that led the way with a 2.5 percent gain1 against a backdrop of short covering in response to talk of a production freeze by OPEC members and other major foreign producers. Brent crude climbed almost \\$4.00 to end the week at \\$50.88 a barrel. Since bottoming at \\$41.80 on August 2 and entering a bear market from its peak of \\$53.26 on June 8, crude has just as quickly once again entered a bull rally.

Other sectors enjoying some support last week included materials and industrials, helped in part by the weaker dollar which has slid 3.0 percent since late July. Also turning slightly higher last week were financials and telecom. Leading the way lower were utilities, which lost 1.2 percent2, and healthcare and consumer discretionary, both down 0.6 percent.3-4

Overall, stocks have trended sideways since establishing their present narrow trading range following release of the July jobs report on August 5 as investors search for the next catalyst.

Fed Members Hint at Rate Hike

Nor did investors want to get in the way of the Fed, some members of which have been warning recently that the market may be underpricing the likelihood of another rate hike sooner than later. However, the July minutes, released on Wednesday, did not seem to betray any particular tilt toward a more hawkish stance. The Fed viewed the economy as having improved since its previous meeting and noted the muted reaction to the Brexit vote. But it also acknowledged that inflationary pressures remained below its target and that overseas uncertainties remain. In response, investors lowered fractionally their expectations for another rate hike for the remainder of the year.

Despite this relatively benign reading, Fed officials continue to caution that markets may be too complacent. The latest to weigh in was Fed Vice Chair Stanley Fischer who noted on Sunday that the Fed was close to meeting its economic objectives. This week the annual Jackson Hole Symposium takes place, and often produces clues regarding the Fed’s intentions.
Bond Yields Flat; Surprise U.K. Retail Sales Report

Bond yields drifted slightly higher over the course of the week, but they, too, showed little direction. The yield on the two-year note rose 3 basis points to close at 0.74 percent, and the ten-year rose 7 basis points to end the week at 1.58 percent.

The other major data point we were watching from overseas turned out to be a big surprise. The July retail sales report from the UK presented an opportunity to get a good look at full month data for the first time following the Brexit vote in late June. After sharp declines in sentiment surveys in the interim the retail sales report was expected to be barely positive. Instead, we got an extremely robust report that completely defied expectations. Variously attributed to good weather, recently strong wage gains, overseas buyers taking advantage of the weaker pound, and the month to month volatility in this series, the report at the very least postponed the hand wringing surrounding the economic consequences of the vote to leave the EU. They may yet appear, but apparently not in July.

As for the U.S., the economic data last week was also generally solid, led by industrial production, housing starts, and leading indicators. This week the calendar is a little more robust, with scheduled reports including new and existing home sales, flash manufacturing and service PMI, durable goods, and July personal income and spending.  

Important Disclosures:    
1As measured by the XLE Energy Select Sector SPDR ETF. Energy companies in this index primarily develop and produce crude oil and natural gas, and provide drilling and other energy-related services. Leaders in the group include ExxonMobil Corp., Chevron Corp, and ConocoPhillips.
2As measured by the XLU Utilities Index Select Sector SPDR. This index primarily provides companies that produce, generate, transmit or distribute electricity or natural gas. The component companies include Exelon Corp., Southern Co., and Dominion Resources Inc.
3 As measured by the XLV healthcare Select Sector SPDR. Companies in this sector primarily include health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. Pfizer Inc., Johnson & Johnson, and Abbott Labs are included in this sector’s mix.
4 As measured by the XLY Consumer Discretionary Select Sector SPDR ETF. Industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing are primarily represented in this group. The Index includes McDonald's, Walt Disney Co., and Comcast.
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