Despite significant volatility, stocks ended last week higher after a finalized Greek bailout deal and some upbeat domestic economic data. For the week, the S&P 500 gained 0.67%, the Dow grew 0.60%, and the NASDAQ added 0.09%.
Greece finally clinched a third bailout from creditors when its parliament approved the deal and Germany backed off its opposition to the terms. The deal isn’t perfect and the International Monetary Fund is refusing to participate until there is an agreement on debt relief from Greece’s Eurozone creditors. However, U.S. investors greeted the news that Greece will remain in the monetary union with a sigh of relief. Is the Greek drama finally over? Probably not for long.
China added significant uncertainty last week when the Chinese government unexpectedly devalued the yuan against the dollar by the largest amount in two decades. While China claims that the move isn’t designed to lower export prices and boost demand, the move came after a series of depressing export reports that suggest China’s economy is in trouble. At any rate, China has been under immense pressure to devalue its currency as part of market reforms. Investors are worried that a currency war could put pressure on the dollar and hurt U.S. manufacturers.
Despite panicky media headlines that claimed that the sky is falling, the devaluation really isn’t a big deal. Here’s why:
The Chinese yuan dropped about 3.5% against the dollar in the past year. However, the Euro is down 16.4%, the Canadian dollar is down 15.8%, and the Japanese yen is down 17.0%. All told, the U.S. dollar has gained significant ground against the currencies of most of our trading partners. A stronger U.S. dollar means that Americans can afford to buy more foreign products. As First Trust’s chief economist says, “The idea that the Chinese devaluation is going to send ripples of catastrophe across the world is nothing more than a Chicken Little story.”
A cheaper yuan is like a sale on Chinese goods. Right now, the Chinese economy is showing weakness, and a cheaper currency will hopefully help stoke growth in the world’s second-largest economy. If the move is successful in boosting growth, it will be a big help to the global economy. A more expensive dollar relative to the yuan means that Chinese consumers might end up importing fewer U.S. goods (potentially causing some U.S. firms to suffer in the short term). However, if it’s a sign that China may be allowing the market (instead of its central bank) to set the value of its currency, it’s a net win for global consumers in the long term.
Looking at the week ahead, all eyes will be on China to see whether last week’s currency devaluation will continue. Analysts will also be digging through the official minutes from the latest Federal Reserve Open Market Committee meeting for more hints about how the Fed plans to handle potential threats to economic growth.
P.S. You may have seen Chinese currency called the yuan or the renminbi in media reports and wondered if there was a difference. They are essentially interchangeable terms. Renminbi (meaning “people’s currency” in Mandarin) is the formal term used by Chinese officials, while the yuan is the actual unit of the currency.
Monday: Empire State Mfg. Survey, Housing Market Index, Treasury International Capital
Tuesday: Housing Starts
Wednesday: Consumer Price Index, EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales
Friday: PMI Manufacturing Index Flash
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
Consumer sentiment flags in August. Though American consumers don’t seem to be concerned about inflation or current economic conditions, the latest survey indicates some concerns about their future finances. Dips in consumer sentiment could translate into lower spending this quarter.
Nationwide home rental prices are sky high. The cost of renting a home has risen to record highs. A study found that renters can now expect to pay about 30% of their income in rent, as compared to the 15% buyers pay toward a mortgage. Hopefully, unaffordable rents will contribute to housing market activity.
Weekly jobless claims rise again. The number of Americans filing new claims for unemployment benefits rose unexpectedly last week. Though claims have risen for three straight weeks, they are still below the 300,000 mark and still support a strengthening job market.
Business inventories rise. U.S. businesses increased their stockpiles of goods by the most in two years, indicating that they expect demand to increase in the coming months. Analysts hope that a stronger job market will boost consumer spending.
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