Market Commentary
by Scott J. Brown, Ph.D., Chief Economist

The July figures on new and existing home sales each fell well short of expectations, and durable goods orders came in much weaker than anticipated. Real gross domestic product (GDP) rose at a 1.6% annual rate in the second estimate for second quarter of 2010 (compared to +2.4% in the advance estimate and a median forecast of +1.4%).

Growth in the second quarter was stronger than it appears, however. Imports, which have a negative sign in the GDP calculation, surged at a 32.4% annual rate, subtracting 4.5 percentage points from overall growth. Domestic Final Sales (GDP less inventories and net exports) – a better measure of underlying domestic demand – rose at a 4.3% annual rate (vs. +4.1% in the advance estimate). That indicates relative strength. But so what? The GDP revisions tell us nothing about the current pace of growth or where we'll be in the next few quarters – and that is what matters for the overall financial market outlook.

In his highly-anticipated Jackson Hole, Wyoming, speech, Federal Reserve Chairman Ben Bernanke gave mixed messages. The Fed is prepared to undertake more quantitative easing - buying long-term securities – but does not yet see that the benefits of such a move would outweigh the potential costs. "If deflation risks were to increase," Bernanke said, "the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable." So, the Fed is armed and ready to fire (in terms of doing more), but the trigger point has not yet been reached. The economic data over the next few weeks will be important.

Next week, the economic data calendar remains packed. The focus will be on the August Employment Report. The Census Bureau reports that there were 116,000 fewer census workers in mid-August than there were in mid-July, which should push the overall payroll figure into negative territory again. Private-sector payrolls are likely to post a lackluster gain (probably from 20,000 to 50,000; we need about 135,000 or so to keep pace with the growth of the working-age population). The unemployment rate is likely to edge up, reflecting the extension of unemployment insurance benefits. Keep an eye on temp-help payrolls, a leading indicator of new hiring, which improved nicely from October through May, but petered out in June and July.

Indices

	Last	Last Week	YTD return %
DJIA	9985.81	10271.21	-4.24%
NASDAQ	2118.69	2178.95	-6.63%
S&P 500	1047.22	1075.63	-6.09%
MSCI EAFE	1420.64	1461.14	-10.13%
Russell 2000	599.76	610.96	-4.10%

Consumer Money Rates

	Last	1-year ago
Prime Rate	3.25	3.25
Fed Funds	0.25	0.25
30-year mortgage	4.50	5.29

Currencies

	Last	1-year ago
Dollars per British Pound	1.553	1.624
Dollars per Euro	1.270	1.424
Japanese Yen per Dollar	84.670	94.290
Canadian Dollars per Dollar	1.055	1.099
Mexican Peso per Dollar	12.988	13.168

Commodities

	Last	1-year ago
Crude Oil	73.36	71.43
Gold	1236.65	944.49

Bond Rates

	Last	1-month ago
2-year treasury	0.55	0.56
10-year treasury	2.62	2.92
10-year municipal (TEY)	3.82	4.29

Treasury Yield Curve – 8/27/2010

S&P Sector Performance (YTD) – 8/27/2010

Economic Calendar

August 30	—	Personal Income and Spending(July)
August 31	—	S&P/Case-Shiller Home Prices (June) Chicago Purchasing Managers Index (August) Consumer Confidence (August) FOMC Minutes (August 10)
September 1	—	ISM Manufacturing Index(August) Unit Auto Sales(August)
September 2	—	Jobless Claims (week ending August 28) Productivity (2Q10, revised) Pending Home Sales (July)
September 3	—	Employment Report (August) ISM Non-Manufacturing Index (August)
September 6	—	Labor Day Holiday (markets closed)
September 8	—	Fed Beige Book
September 21	—	FOMC Meeting