Monthly Archives: April 2014

Market Insights 4/30/2014

Fed Continues to Taper

The U.S. equity markets closed the trading session higher, as stocks advanced in the wake of the Federal Reserve’s afternoon statement that it will, as expected, continue tapering the pace of its monthly asset purchases. In other economic developments, the first read on 1Q GDP was much softer than expected, 1Q employment costs rose at a smaller rate than anticipated and weekly mortgage applications declined, while ADP job growth and regional manufacturing activity came in stronger than forecasted.

In equity news, Twitter topped analysts’ quarterly expectations, but its monthly user growth figures disappointed. Time Warner announced results that bested analysts’ estimates, while eBay exceeded the Street’s forecasts, but offered softer-than-expected guidance. Energizer Holdings announced plans to separate its household products and personal care divisions into two independent, publicly-traded companies.

The Dow Jones Industrial Average rose 45 points (0.3%) to 16,581

The S&P 500 Index gained 6 points (0.3%) to 1,884

The Nasdaq Composite added 11 points (0.3%) to 4,115

In moderate volume, 908 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil dropped $1.54 to $99.74 per barrel, wholesale gasoline fell $0.05 to $2.96 per gallon

The Bloomberg gold spot price declined $4.91 to $1,291.01 per ounce

Fed continues to taper, while 1Q GDP widely misses forecasts

The statement from the two-day Federal Open Market Committee meeting was released at 2:00 p.m, where the Fed announced that information received since the Committee met in March indicates that growth in economic activity picked up in recently, after having slowed in part because of adverse weather conditions. As expected, the Central Bank stated that it will continue to reduce the pace of its current stimulus program by $10 billion to $45 billion a month. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month.

The Committee reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate, and in determining how long to maintain the current exceptionally low target range for the federal funds rate, the Committee will assess progress toward its objectives of maximum employment and 2% inflation by taking into account a wide range of information. All of the voting members of the Committee supported the decision to continue tapering.

The first look — of three– at 1Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 0.1%, well below the 2.6% expansion in 4Q and the 1.2% growth forecasted by economists surveyed by Bloomberg. However, personal consumption came in well above forecasts, rising 3.0%, following the 3.3% increase recorded in 4Q, and versus the 2.0% gain that was projected. The Commerce Department said the strong gain in personal consumption was offset by negative contributions from exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending.

On inflation, the GDP Price Index came in cooler than expected at a 1.3% rise, from the 1.6% advance seen in 4Q, which was the increase that economists anticipated, while the core PCE Index, which excludes food and energy, rose 1.3%, above expectations of a 1.2% gain, and following the 1.3% growth in 4Q.

The ADP Employment Change Report showed private sector payrolls rose by 220,000 jobs in April, versus the forecast of economists, which called for a 210,000 increase, while March’s rise of 191,000 jobs was revised higher by 18,000 to a gain of 209,000. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader nonfarm payroll report, expected to increase by 215,000 jobs in April, after posting a rise of 192,000 in March.

The Chicago Purchasing Managers Index showed growth in Midwest activity accelerated more than expected, after rising to 63.0 in April—the highest since October 2013—from the unrevised 55.9 level in March, compared to the increase to 57.0 that economists had expected, with a reading above 50 depicting growth.

The MBA Mortgage Application Index fell 5.9% last week, after the index declined 3.3% in the previous week. The decline came as a 6.9% drop for the Refinance Index was accompanied by a 4.4% decrease for the Purchase Index. Moreover, the average 30-year mortgage rate remained at 4.49%.

Treasuries were higher, with the yield on the 2-year note falling 3 basis points (bps) to 0.41%, the yield on the 10-year note declining 4 bps to 2.65%, and the yield on the 30-year bond dropping 2 bps to 3.46%.

Europe and Asia finish mixed

The European equity markets finished mixed, as traders reacted to the plethora of U.S. economic data, which followed some lackluster data in the region, while treading cautiously ahead of the Federal Reserve’s monetary policy decision. Eurozone consumer price inflation data accelerated to a 0.7% y/y rise for April, from a 0.5% increase in March, but below the 0.8% gain that was expected and the European Central Bank’s target of close to 2.0%. German retail sales fell in March and French consumer spending dropped much more than expected for last month. However, Spain’s 1Q GDP grew 0.4% q/q, matching forecasts, while the German unemployment change fell more than expected this month.

Stocks in Asia finished mixed ahead of today’s flood of economic data out of the U.S., with Japanese stocks returning to action following yesterday’s holiday. In central bank action, the Bank of Japan announced its decision to keep its monetary policy unchanged, while gains were held in check as economic reports showed the nation’s industrial production rose by a smaller amount than expected in March and the country’s manufacturing output depicted contraction for the first time since February 2013. Elsewhere, South Korea reported that its industrial production growth for March missed expectations.

Market Insights 4/29/2014

Stocks Stack Gains Ahead of Monetary Policy Decision

The U.S. equity markets closed higher ahead of tomorrow’s Federal Reserve monetary policy decision and first look at 1Q GDP. The increase for stocks may have been aided by some upbeat global earnings reports, while domestic economic reads showed housing prices continued to rise and consumer confidence came in below expectations. Treasuries were mixed following the domestic data.

In earnings news, Dow member Merck & Co reported better-than-expected quarterly earnings results, while Coach announced a sharp drop in its North American same-store sales and Bristol-Myers Squibb issued full-year guidance that missed analysts’ expectations. Gold was nearly unchanged, while crude oil prices and the U.S. dollar were higher.

The Dow Jones Industrial Average (DJIA) rose 87 points (0.5%) to 16,535

The S&P 500 Index gained 9 points (0.5%) to 1,878

The Nasdaq Composite added 29 points (0.7%) to 4,104

In moderate volume, 739 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.44 higher to $101.28 per barrel, wholesale gasoline added $0.02 to $3.01 per gallon

The Bloomberg gold spot price declined $0.55 to $1,296.19 per ounce

Consumer Confidence misses expectations, while home prices rise

The Consumer Confidence Index declined to 82.3 in April, from an upwardly revised 83.9 in March, compared to the 83.2 reading that economists surveyed by Bloomberg had anticipated. The report came as a modest improvement in the component pertaining to expectations of business conditions was more than offset by a decline in the portion related to the current situation.

In housing news, the 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 12.9% y/y in February, compared to the 13.0% increase that economists had expected. Moreover, month-over-month, home prices were higher by 0.8% on a seasonally adjusted basis for February, matching forecasts.

Treasuries were mixed, with the yield on the 2-year note ticking 1 basis point higher to 0.44%, the yield on the 10-year note losing 1 bp to 2.69%, while the 30-year bond rate was nearly flat at 3.49%.

Tomorrow, the U.S. economic calendar will begin to regain some of the Street’s attention from 1Q earnings season, beginning with the first look (of three) at 1Q GDP, forecasted to show a 1.2% quarter-over-quarter annualized rate of expansion, from the 2.6% growth posted in 4Q. The Federal Reserve will conclude its two-day monetary policy meeting, with the midday release of the Federal Open Market Committee’s (FOMC) decision. The Central Bank is expected to announce that the pace of its monthly bond purchases will be “tapered” again, reduced by another $10 billion to $45 billion a month. There is no press conference or economic forecast release scheduled for this meeting.

1st Quarter GDP is forecasted to show a sharp deceleration from the previous two quarters, the most recent economic reports has been notably strong. In the equity markets, we have been experiencing what’s often called an “internal correction,” or a period of significant market rotation away from highly-valued, high-momentum names to more reasonably valued names. These internal shakeouts that help to squash speculative froth are normal in a bull market and often serve as a good setup for the next leg higher. With many macro indicators signaling a pickup in growth and no signs of a recession on the horizon, in our view the bull market is likely intact as the economy continues its long and slow expansion.

Also on tap tomorrow, the Chicago Purchasing Manager Index is forecasted to tick higher in April, to a level of 57.0 from the 55.9 posted in March, with a reading above 50 depicting growth. As well, the ADP Employment Change report will be released, which is expected to show private sector payrolls increased by 210,000 during April after gaining 191,000 in March. Lastly, we will receive the weekly MBA Mortgage Applications report.

European equities find support, while Asia finishes mixed

The European equity markets moved higher, supported by some upbeat earnings reports in the region, which more than offset festering geopolitical concerns and some disappointing economic data. The favorable corporate news overshadowed a preliminary report showing a slightly smaller-than-expected pace of 1Q U.K. GDP growth, an unexpected decline in Italian retail sales, and a larger-than-forecasted decrease in German consumer price inflation.

Stocks in Asia finished mixed in lighter-than-usual volume as the Japanese markets were closed for a holiday. Meanwhile, traders digested some earnings reports in the region, while Ukraine concerns continued to linger with the U.S. and Europe imposing further sanctions on Russia. In economic news, a report out of China showed the nation’s Leading Index improved for March, while a separate release from South Korea revealed a favorable read on the country’s current account surplus.

Market Insight 4/28/2014

Volatile Session

The U.S. equity markets closed a volatile trading session in mixed fashion, as stocks retreated from some solid morning gains in the wake of some major M&A news and continued geopolitical concerns. In economic news, investors welcomed better-than-expected reads for pending home sales and regional manufacturing activity. Treasuries were mostly lower following the domestic reports.

On the equity front, Comcast Corp and Charter Communications announced a series of agreements contingent on Comcast’s merger with Time Warner Cable. Dow component Pfizer announced that it made a second attempt at a near $100 billion bid for AstraZeneca, while Corning topped the Street’s quarterly expectations and Bank of America suspended its share buyback and dividend increase plans after making an error in its capital plan. Gold was lower, the U.S. dollar was flat and crude oil prices were higher.

The Dow Jones Industrial Average rose 87 points (0.5%) to 16,449

The S&P 500 Index gained 6 points (0.3%) to 1,869

The Nasdaq Composite declined 1 point to 4,074

In moderate volume, 815 million shares were traded on the NYSE, and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.24 higher to $100.84 per barrel, wholesale gasoline lost $0.04 to $2.99 per gallon

The Bloomberg gold spot price declined $6.59 to $1,296.66 per ounce

Pending home sales rise, while regional manufacturing activity accelerates

Pending home sales gained 3.4% month-over-month in March—the first monthly increase since June 2013—versus the projected 1.0% rise that economists surveyed by Bloomberg had forecasted, and following the favorably revised 0.5% decrease registered in February. Compared to last year, sales were down 7.4% last month, versus the forecasted 10.3% drop, and February’s upwardly revised 10.2% decrease. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which dipped to a level that was roughly inline with expectations for March.

Treasuries were mostly lower, with the yield on the 2-year note nearly flat at 0.43%, while the yields on the 10-year note and the 30-year bond rose 4 basis points to 2.70%, and 3.48%,respectively.

Tomorrow, the domestic docket will be light, offering a look at the S&P/CaseShiller Home Price Index, with the 20-city composite forecasted to rise 0.8% month-over-month in February on a seasonally-adjusted basis. Many feel that we pressed the pause button on the housing recovery last summer upon the initial move higher in mortgage rates and declining affordability. There are however signs of improvement to come, with many of housing’s leading indicators ticking up from their rate/weather-hit recent weakness.

Europe higher, while Asia mostly lower

The European equity markets finished mostly higher, amid some M&A optimism in the region, which helped overshadow festering Ukrainian concerns, as the U.S. and Europe imposed further sanctions on Russia. Shares of AstraZeneca Plc. rallied after Dow member Pfizer Inc. confirmed speculation that it approached the drugmaker—for a second time—with a near $100 billion takeover proposal, which AZN rejected saying it undervalues the company. In economic news, German import prices declined more than expected in March, while Italian consumer confidence unexpectedly improved for April.

Stocks in Asia finished mostly to the downside following Friday’s declines in the U.S. A report from Japan showed that the nation’s retail sales for March rose more than expected, while a separate read from China showed the country’s industrial profits were higher y/y in March and a looming raft of IPOs continued to foster liquidity concerns.

Market Insights 4/25/2014

Gains Melt

The U.S. equity markets posted steep losses as Ukraine tensions outweighed upbeat domestic data and corporate reports. In economic news, consumer sentiment for April was revised more favorably than expected, while business activity in both the services and manufacturing sectors declined but remained in expansion territory. Treasuries were higher following the decline in stocks and domestic reports.

In earnings news, Dow member Microsoft reported stronger-than-expected profits, while Ford announced earnings that were below analysts’ forecasts. Meanwhile, Amazon and Dow component Visa issued disappointing guidance and Starbucks matched the Street’s quarterly projections. Gold was higher, crude oil prices were lower and the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average dropped 140 points (0.8%) to 16,362

The S&P 500 Index fell 15 points (0.8%) to 1,863

The Nasdaq Composite tumbled 73 points (1.8%) to 4,076

In moderate volume, 676 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil was $1.34 lower to $100.60 per barrel, wholesale gasoline shed $0.02 to $3.03 per gallon

The Bloomberg gold spot price gained $9.81 to $1,303.17 per ounce.

Markets were lower on the week, as the DJIA lost 0.3%, the S&P 500 Index declined 0.1%, and the Nasdaq Composite Index decreased 0.5%.

Healthcare stocks were standout winners on the week, only bested by utilities, amid massive M&A news out of the pharmaceutical sector. However, the bid for back-to-back weekly market gains was thwarted by a flare-up in geopolitical concerns, with Russia restarting military exercises on the Ukrainian border and the West threatening to impose further sanctions. Global economic data painted a mixed picture, with U.S. reports showing stronger-than-expected durable goods orders but an unexpected drop in new home sales.

Consumer sentiment jumps

The final University of Michigan Consumer Sentiment Index was revised more favorably than expected to 84.1 for April from the preliminary report of 82.6, and compared to the 83.0 revision that economists surveyed by Bloomberg had estimated. March’s figure was 80.0 and this month’s level was the highest since July 2013. Both the economic outlook and conditions components of the report were adjusted higher to levels solidly above March’s levels. On inflation, the 1-year expectation ticked higher to 3.2%, matching March’s figure, while the 5-year inflation outlook was adjusted lower to 2.9%, inline with the expectation in the previous month.

It appears that economic data is bouncing back after the largely weather-induced slowdown we saw in the first quarter. Recent retail sales numbers were better than expected, and previous months were revised higher. Plus, consumer confidence has edged higher as it seems Americans are becoming more comfortable with the economic expansion as the labor market continues to heal and the housing market solidifies.

Finally, corporate confidence is improving, which should translate to more hiring, higher wages, which we are starting to see, and better capital spending. To us, these developments mean that interest rates are likely to creep higher, and economic expansion should accelerate allowing sectors to like Energy, Materials and the Industrial to outperform.

Meanwhile, the preliminary Markit U.S. Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—declined to 54.9 for April from the 55.7 level registered in March, though a reading above 50 denotes expansion. The release is independent and differs from the ISM’s business activity reports, as it has less historic value and Markit weights its index components differently.

Treasuries were higher, with the yields on the 2-year note and the 30-year bond dipping 1 basis point to 0.43%, and 3.45%, respectively, while the yield on the 10-year note decreased 2 bps to 2.67%

Another round of tapering expected

Next week, the U.S. economic calendar will likely be headlined by the two-day Federal Reserve’s Open Market Committee meeting, which will conclude with release of the statement following the meeting mid-day on Wednesday. The Bloomberg consensus of economists is expecting the Central Bank to announce that the pace of its monthly bond purchases will be “tapered” again, reduced by another $10 billion to $55 billion a month. There is no press conference or economic forecast released scheduled for this meeting. The Fed continues to emphasize a “dovish” stance and remains concerned about both the labor market and the threat of deflation. Monetary policy continues to inch toward normalization, but Fed Chairwoman Janet Yellen has made it a point to emphasize the Fed’s plan to stay accommodative for an extended period—data permitting.

Next week, other major U.S. releases will include pending home sales, Dallas Fed Manufacturing Activity, the S&P/CaseShiller Home Price Index, Consumer Confidence, the first reading (of three) on first quarter GDP, personal income and spending, the Chicago Purchasing Manager Index, domestic vehicle sales, the final Markit US Manufacturing PMI for April, the ISM Manufacturing Index, and nonfarm payrolls.

Europe and Asia mostly lower

The European equity markets finished lower, as resurfacing Ukraine concerns continued to stymie sentiment, with tensions escalating as Russia restarted military exercises on the country’s border. Meanwhile, Standard & Poor’s cut its rating on Russia citing large capital outflows amid the heightened tensions with the West that could further undermine already weakening growth. In economic news in the region, U.K. retail sales for March came in slightly better than expected.

Stocks in Asia finished mostly to the downside as the Ukraine/Russia tensions dampened sentiment, while some earnings reports in the region disappointed. In China, liquidity concerns fostered by a potential flood of IPOs and festering economic growth uneasiness continued to hamstring sentiment. Elsewhere, in Japan, traders digested a slightly cooler-than-expected core consumer price inflation report, which appeared to foster expectations that the nation may deploy further stimulus measures, while Australia’s markets were closed for a public holiday.

Market Insights 4/24/2014

Stocks Mostly Higher Following Up & Down Session

In the wake of a volatile trading session, the U.S. equity markets closed just above the opening level as some upbeat domestic data and earnings were countered with a flare-up in tension between Russia and Ukraine. In economic news, March durable goods orders easily bested economists’ expectations, while jobless claims increased more than expected and regional manufacturing growth slowed more than forecasted.

Treasuries were modestly higher following the data. In earnings news, 3M, Verizon and UPS reported results below the Street’s expectations, while Facebook, General Motors and Dow member Caterpillar, announced profits north of estimates. Apple topped analysts’ quarterly forecasts, declared an increase to its quarterly dividend and announced a 7-for-1 stock split. The U.S. dollar was flat, while gold and crude oil prices were higher.

The Dow Jones Industrial Average was nearly unchanged at 16,502

The S&P 500 Index added 3 points (0.2%) to 1,879

The Nasdaq Composite increased 21 points (0.5%) to 4,148

In moderate volume, 653 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.50 to $101.94 per barrel, wholesale gasoline was $0.01 higher at $3.05 per gallon

The Bloomberg gold spot price moved $8.77 higher to $1,292.68 per ounce

Durable goods orders top forecasts, while jobless claims rise more than expected

Durable goods orders grew 2.6% month-over-month in March, compared to the 2.0% increase expected by economists surveyed by Bloomberg, while February’s 2.2% gain was revised to a 2.1% rise. Orders ex-transportation rose 2.0% m/m in March, versus the forecast of a 0.6% increase, and February’s figure was revised lower to a 0.1% gain from an initial rise of 0.2%. Additionally, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, gained 2.2% m/m last month, compared to the 1.5% increase projected, after declining by 1.1% in February, revised favorably from the initial 1.3% drop.

Weekly initial jobless claims rose by 24,000 to 329,000 last week, above the expected 315,000 level, as the prior week’s figure was upwardly revised by 1,000 to 305,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, increased by 4,750 to 316,750, while continuing claims dropped by 61,000 to 2,680,000, south of the forecasted level of 2,745,000.

Finally, the Kansas City Fed Manufacturing Activity Index showed growth in the sector slowed more than expected in April, decreasing to 7 from 10 in March, and compared to the decrease to 8 that was expected, with a reading above zero depicting expansion.

Treasuries were modestly higher, with the yield on the 2-year note nearly unchanged at 0.44%, while the yields on the 10-year note and the 30-year bond ticked 2 basis points lower to 2.68% and 3.46%, respectively.

Tomorrow, the U.S. economic calendar will offer a look at the preliminary Markit US PMI Index, with economists expecting a level of 55.5, a slight increase from the 55.3 registered in March. A reading above 50 denotes expansion. As well, the final University of Michigan Consumer Sentiment Index for April will be released, with a reading of 83.0 expected, an increase from the preliminary report level of 82.6.

Europe mostly higher, Asia mixed

The European equity markets finished mostly to the upside as traders digested a plethora of earnings and economic reports in the U.S. and Europe, while European Central Bank (ECB) President Mario Draghi noted that the central bank could embark on broad-based asset purchases if the outlook for inflation worsens. Meanwhile, German business confidence reported by the Ifo Institute showed sentiment among 7,000 executives toward the business climate and expectations unexpectedly improved in April. However, gains were limited by resurfaced Ukraine concerns, with Russia restarting military drills along the Ukrainian border. In other economic news in the region, French business sentiment unexpectedly dipped and Switzerland’s trade surplus narrowed as exports declined in March, while U.K. retail sales improved solidly in April.

Stocks in Asia finished mixed following the modest pullback yesterday in the U.S. following a disappointing housing report, while sentiment may have been dampened as the U.S. and Japan failed to reach a Trans-Pacific Partnership agreement. Meanwhile, festering Chinese liquidity concerns stemming from a potential flood of IPOs hitting the market overshadowed further economic reforms from the government aimed at easing restrictions on private-sector infrastructure investment. Elsewhere, South Korea reported the nation’s 1Q GDP grew at a slightly stronger amount than expected, while India’s markets were closed for a public holiday.

Market Insights 4/23/2014

Economic Data Saps Sentiment

Despite mostly positive reports from the earnings front, some disappointing economic reports domestically and from China put a halt in the bulls’ plans to extend the recent rally. New home sales fell well short of expectations, manufacturing activity surprisingly slowed, and mortgage applications declined. Moreover, a preliminary read on manufacturing activity in China showed continued contraction, overshadowing a near three-year high in Eurozone business activity. Treasuries finished higher following the lackluster data and crude oil prices were mixed, while gold saw only a modest gain and the U.S. dollar ended lower.

The Dow Jones Industrial Average fell 13 points (0.1%) to 16,502

The S&P 500 Index lost 4 points (0.2%) to 1,875

The Nasdaq Composite declined 35 points (0.8%) to 4,127

In moderate volume, 653 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.31 to $101.44 per barrel, wholesale gasoline was unchanged at $3.04 per gallon

The Bloomberg gold spot price moved $0.50 higher to $1,284.31 per ounce

Housing data disappoints, while manufacturing activity growth unexpectedly slowed slightly

New home sales surprisingly fell, dropping 14.5% month-over-month (m/m) in March, to an annual rate of 384,000 units, from February’s an upwardly revised 449,000 unit pace. Economists surveyed by Bloomberg had expected an increase to a 450,000 rate for last month.

The preliminary Markit U.S. Manufacturing PMI Index surprisingly dipped to 55.4 in April from 55.5 in March, and compared to the 56.0 level that economists had expected, with a reading above 50 denoting expansion. The disappointing report showed the main negative influence was a rise in the suppliers’ delivery times component, while new orders and output expanded at faster rates and staffing levels rose for the tenth-consecutive month. The release is independent and differs from the Institute for Supply Management’s Manufacturing Index, as it has less historic value and Markit weights its index components differently.

In other housing news, the MBA Mortgage Application Index decreased 3.3% last week, after the index rose 4.3% in the previous week. The decline came as a 3.7% drop for the Refinance Index was accompanied by a 2.6% decrease for the Purchase Index. Moreover, the average 30-year mortgage rate rose 2 basis points to 4.49%.

Treasuries finished higher, as the yield on the 2-year note dipped 2 bps to 0.43%, while the yields on the 10-year note and the 30-year bond declined 3 bps to 2.68% and 3.47%, respectively.

Tomorrow’s US economic calendar will be headlined by the release of durable goods orders, forecasted to rise 2.0% month-over-month (m/m) in March, after posting a 2.2% increase in February. Excluding transportation, orders are expected to increase 0.6%, after gaining 0.2% in February, and orders for nondefense capital goods excluding aircraft, considered a good proxy for business spending, are anticipated to gain 1.4% on the heels of a 1.3% fall in February.

The preconditions for a pickup in capital expenditures are lining up. Experts note that one of the most arresting characteristics of the economic recovery is the surge in corporate profitability, particularly remarkable in light of the recovery’s relatively weak trajectory. Shareholders have benefitted recently from companies’ preference for returning cash via buybacks and dividends rather than making investments. But the tide may be turning, as the long period of under-investment appears to have taken a toll on corporate productivity, with the average age of the capital stock at a historical peak. The combination of an increase in corporate confidence, high levels of corporate cash and an increase in business loans are the preconditions we believe could result in increased capex this year. This has resulted in our outperform rating on the industrials and material sectors.

Europe gives back some of recent rally, Asia finished mixed on Chinese data

The European equity markets pulled back somewhat from their recent three-day rally, as traders digested the disappointing U.S. economic data and another lackluster read on Chinese manufacturing activity, which overshadowed some upbeat Eurozone business activity reports. The preliminary Eurozone Composite PMI Index—a gauge of activity in both the services and manufacturing sectors—rose to the highest level in almost three years, per Bloomberg, coming in at 54.0 for April, from 53.1 in March, and compared to the 53.0 level that economists had projected. A reading above 50 denotes expansion and the favorable report was led by accelerated growth out of Germany, while French business activity slowed but continued to show expansion.

In other economic news in the region, U.K. public sector net borrowing came in below forecasts for March, while the Bank of England released the minutes from its policy meeting earlier this month, in which it left its benchmark interest rate unchanged at a record low of 0.50%. The BoE voted unanimously to keep its policy unchanged, as Governor Carney noted that while the BoE sees the economy “building momentum,” there is scope to wait for more spare capacity to be absorbed before raising the benchmark rate.

Stocks in Asia finished mixed, with yesterday’s continued upward momentum for the U.S. markets lending support, while traders digested a preliminary read on Chinese manufacturing activity. The HSBC preliminary China Manufacturing PMI Index improved slightly to 48.3 in April, from 48.0 in March, matching expectations. Despite the modest improvement, the index remained in contraction territory as denoted by a reading below 50, with new orders, new export orders and employment all decreasing. Also, sentiment in China continued to be hamstrung by market liquidity concerns as it faces a potential raft of IPOs. Meanwhile, Australia’s 1Q consumer price inflation came in cooler than expected.

Market Insights 4/22/2014

Bulls Feed

U.S. equities notched another day of gains in the wake of mostly positive earnings reports and slew of M&A activity in the pharmaceutical sector, while a slightly better-than-expected existing home sales report and an expansionary read on mid-Atlantic manufacturing activity added to the upbeat mood.

Netflix, along with Dow members Travelers Companies and United Technologies all topped the Street’s expectations, as did Comcast, while Dow component McDonald’s posted mixed results. Aiding the cause, Novartis AG, GlaxoSmithKline Plc, and Eli Lilly and Co announced a series of deals for a total of $28.5 billion, while Valeant Pharmaceuticals International announced a proposed merger with Allergan valued at over $45.0 billion. Treasuries finished mixed, as were crude oil prices, while gold and the U.S. dollar were lower.

The Dow Jones Industrial Average rose 65 points (0.4%) to 16,514

The S&P 500 Index gained 8 points (0.4%) to 1,880

The Nasdaq Composite jumped 40 points (1.0%) to 4,161

In moderate volume, 679 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.90 to $101.75 per barrel, wholesale gasoline gained $0.01 to $3.10 per gallon

The Bloomberg gold spot price declined $5.24 to $1,284.53 per ounce

Existing home sales slightly above estimates, regional manufacturing activity returns to growth

Existing-home sales dipped 0.2% month-over-month in March to an annualized rate of 4.59 million units, above the Bloomberg estimate of an annual rate of 4.56 million, while February’s figure was unrevised at a 4.60 million unit pace. The median existing-home price rose 7.9% y/y to $198,500. The supply of homes available for sale equated to 5.2 months of supply at the current sales pace. Single-family home sales were flat m/m and multi-family sales declined 1.8% m/m. Sales of existing homes reflect closings from contracts entered one-to-two months earlier.

Lawrence Yun, chief economist at the National Association of Realtors (NAR) that releases the report, said current sales activity is underperforming by historical standards, while price growth is rising faster than historical norms because of inventory shortages. However, as we enter into the critical spring and summer season, we expect improvement. Aiding our belief in a renewed housing improvement, the labor market continues to strengthen, while the NAR’s Yun added that the improvement will likely come “especially if inventory continues to improve and mortgage interest rates rise only modestly.

As well, the Richmond Fed Manufacturing Index showed activity for the Mid-Atlantic region returned to growth for April, rising to 7.0 from March’s unrevised -7.0 level, and compared to economists’ expectations of an improvement to 2.0. A reading above zero denotes expansion and today’s reading snapped a two-month string of contraction, as shipments and new order volume both jumped into expansion territory, while employment also moved back above zero.

Treasuries finished mixed, as the yield on the 2-year note rose 1 basis point to 0.40%, the yield on the 10-year note was flat at 2.72%, while the 30-year bond rate dipped 3 bps to 3.50%.

More housing data will come tomorrow in the form of new home sales, forecasted to rise 2.3% m/m during March to an annual rate of 450,000 units, coming off February’s 3.3% decline to a level of 440,000 units, as well as MBA Mortgage Applications. Also, the preliminary Markit U.S. Manufacturing PMI will be released, with economists expecting a slight increase during April to a level of 56.0 from the 55.5 posted in March.

Drugmaker deals help buoy European stocks, Asia mixed

After remaining closed yesterday for the Easter holiday weekend, the European equity markets traded higher, aided by the large drugmaker M&A announcements, which boosted optimism in the pharmaceuticals sector. Meanwhile, economic news in the region was sparse, with a report showing Eurozone construction output rose modestly in February. Stocks in Asia finished mixed despite the continued upward momentum in the U.S., with some late-day strength in the yen pressuring Japanese stocks. Meanwhile, economic news in the region was non-existent, while traders awaited tonight’s preliminary April manufacturing activity report for China from HSBC, expected to improve slightly but remain at a level depicting contraction.

In addition to the HSBC report, tomorrow’s international economic calendar will hold consumer price data from Australia, the flash Markit manufacturing and services PMI readings from across Europe and public sector net borrowing from the U.K. In central bank action, the Bank of England will release the minutes from its April monetary policy meeting.

Market Insights 4/21/2014

Markets Notch Gains

U.S. equities finished modestly higher to start the week following the long Easter holiday weekend, but action was somewhat subdued with markets in Europe, Hong Kong, and Australia remaining closed. 1st Quarter earnings season continued in earnest with stronger-than-expected profits from Sun Trust Banks, Hasbro, and Advanced Micro Devices. Treasuries finished nearly flat, despite a report showing U.S. Leading Indicators rose more than expected, while crude oil prices and the U.S. dollar were higher, and gold was lower.

The Dow Jones Industrial Average rose 41 points (0.3%) to 16,449

The S&P 500 Index gained 7 points (0.4%) to 1,872

The Nasdaq Composite added 26 points (0.6%) to 4,122

In moderately-light volume, 603 million shares were traded on the NYSE, and 1.5 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.07 higher to $104.37 per barrel, wholesale gasoline gained $0.04 to $3.09 per gallon

The Bloomberg gold spot price declined $4.76 to $1,289.54 per ounce

Leading indicators top expectations

The Conference Board’s Index of Leading Economic Indicators rose 0.8% month-over-month in March, above the 0.7% gain that economists surveyed by Bloomberg had projected, while February’s 0.5% increase was unrevised. The report was led by positive contributions from components pertaining to the yield curve, average workweek, and jobless claims, while the largest drag was building permits.

Treasuries finished nearly unchanged, as the yield on the 2-year note and the 30-year bond were flat at 0.40% and 3.52%, respectively, while the yield on the 10-year note declined 1 basis point to 2.72%.

Although the Street’s focus is on 1Q earnings season, tomorrow’s existing home sales report will likely garner some attention, expected to decline 1.0% m/m to an annual rate of 4.56 million units for March, from the 4.60 million unit pace in February. Existing home sales reflect closings from contracts entered one-to-two months earlier and make up the lion’s share of total housing sales. February sales of existing homes hit the lowest level since July 2012, due to continuing frictions of constrained inventory, restrictive mortgage lending standards and housing affordability that is less favorable than a year ago, as noted by the National Association of Realtors.

International front relatively quiet as most markets remain closed

Action on the international front was subdued on Monday as markets in Europe remained closed for the Easter holiday weekend, along with Hong Kong and Australia. However, mainland Chinese markets traded today, which saw some pressure amid some caution ahead of this week’s preliminary April manufacturing activity report from HSBC. Also, concerns about a potential raft of IPO filings in the region weighed on existing publicly-traded equities as a local media outlet reported that regulators will start reviewing IPO plans this week following a halt in January, according to Bloomberg.

Stocks in Japan finished flat, as some weakness in the yen was offset by a disappointing March trade report, which showed Japanese exports rose at a smaller amount than expected, while the nation’s trade deficit widened more than projected.

Market Insights 4/17/2014

The U.S. equity markets closed out the day in mixed fashion as the Dow finished lower, unable to log its fourth-straight session of gains. Major indices finished the shortened week positive with all domestic markets closed tomorrow in observance of Good Friday. In economic news, weekly jobless claims were better than expected and manufacturing activity in the mid-Atlantic region expanded more than forecasted. Treasuries were solidly lower following the reports. Gold was lower and the U.S. dollar was nearly unchanged, while crude oil prices were higher.

The Dow Jones Industrial Average declined 16 points (0.1%) to 16,409.

The S&P 500 Index gained 3 points (0.13%) to 1,865.

The Nasdaq Composite added 9 points (0.2%) to 4,096.

In moderate volume, 827 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq.

WTI crude oil ticked $0.54 higher to $104.30 per barrel, wholesale gasoline gained $0.01 to $3.05 per gallon.

The Bloomberg gold spot price declined $7.51 to $1,295.02 per ounce.

Markets were higher on the week, as the DJIA gained 1.5%, the S&P 500 Index added 1.9%, and the Nasdaq Composite Index increased 1.8%.

Jobless claims tick higher, while growth in regional manufacturing activity jumped

Weekly initial jobless claims rose by 2,000 to 304,000 last week, below the 315,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 2,000 to 302,000. However, the four-week moving average, considered a smoother look at the trend in claims, fell by 4,750 to 312,000, while continuing claims declined by 11,000 to 2,739,000, south of the forecast of economists, which called for a level of 2,780,000.

In regional manufacturing news, the Philly Fed Manufacturing Index showed growth in activity for the mid-Atlantic region accelerated more than expected in April, rising to 16.6—the highest since September—from 9.0 in March, and compared to the increase to 10.0 that was forecasted. A reading above zero denotes growth and the favorable report was led by jumps in expansion of new orders and shipments, along with accelerated employment growth, while inventories remained in negative territory.

Treasuries were solidly lower following the data, with the yield on the 2-year note rising 3 basis points to 0.40%, the yield on the 10-year note gaining 9 bps to 2.72%, and the 30-year bond rate increasing 8 bps to 3.52%.

Please note: All U.S. markets will be closed tomorrow in observance of Good Friday.

Stocks rebound on economic data and as earnings season begins in earnest

The equity markets posted solid gains for the Easter holiday-shortened week, battling back from last week’s sell-off. Sentiment was buoyed by some upbeat U.S. economic reports as March retail sales and industrial production both topped expectations, while the Fed’s Beige Book suggested economic activity rebounded from weather-related slowdowns. Stocks found support from Federal Reserve Chairwoman Janet Yellen suggesting the Central Bank remains focused on supporting the economic recovery, soothing some concerns about a hawkish shift within the Fed.

Meanwhile, 1Q U.S. earnings season ramped up and so far, of the 82 companies that have reported out of the S&P 500, 70% have bested analysts’ bottom-line forecasts, per Bloomberg, led by results from financials, though fixed income trading and mortgage activity have stood out in the reports as persisting headwinds for the sector. Meanwhile, the revenue side of the season has been less than stellar with the number of companies that missed forecasts (51%) slightly outweighing those that surprised to the upside with their topline results.

Return from holiday to focus on company commentary and earnings

Earnings season will likely be the predominant factor next week, although traders will also keep an eye on the US economic calendar. Economic releases will include existing home sales, durable goods orders, and the preliminary manufacturing and services Markit US PMI Indexes for April, as well as the Index of Leading Economic Indicators, the Richmond Fed Manufacturing Index, new home sales, the Kansas City Fed Manufacturing Activity Index, and the final University of Michigan Consumer Sentiment Index reading for April.

Earnings season is a time to hear managements’ strategic plans and forecasts for profits. One of the most arresting characteristics of this economic recovery is the surge in corporate profitability, particularly remarkable in light of the recovery’s relatively weak trajectory. Clearly, shareholders have benefitted, but the focus of companies on profits has come at the expense of capital expenditures, or capex. The preconditions for a pickup in capex appear to be lining up, which could be self-reinforcing for the economic expansion.

Europe higher, Asia mixed

The European equity markets finished higher, as traders digested the plethora of earnings reports, as well as the upbeat economic data out of the U.S. However, volume was lighter than usual ahead of a long Easter holiday weekend, with many European markets closed tomorrow. Stocks shrugged off festering Ukraine tensions as German producer prices unexpectedly fell in March and European Union new car registrations rose sharply for last month.

Stocks in Asia finished mixed, despite yesterday’s rally in the U.S., as Fed Chairwoman Janet Yellen soothed hawkish concerns toward the Central Bank, though volume was lighter than usual ahead of tomorrow’s holiday that will have some markets in the region closed. In China the government announced that it will cut the reserve requirement ratio for certain rural banks, which appeared to underwhelm those who have ramped up expectations of more meaningful stimulus measures as the government tries to hit its 7.5% economic growth target. A separate report showed China’s foreign direct investment unexpectedly fell in March which likely kept sentiment hamstrung.

Market Insights 4/16/2014

Bulls Looking for a Sweep

The U.S. equity markets closed nicely higher, holding onto solid gains for the third-straight session. Stocks began their advance on the heels of some domestic economic reports that showed industrial production and capacity utilization topped forecasts and mortgage applications rebounded.

Federal Reserve Chairwoman Yellen continued to try to ease concerns about the Central Bank turning hawkish, while the afternoon release of the Fed’s Beige Book report suggested economic activity increased in most regions. Treasuries were mixed following the domestic releases, which included some disappointing housing construction data. Gold and the U.S. dollar were nearly unchanged, while crude oil prices were slightly higher.

The Dow Jones Industrial Average rose 162 points (1.0%) to 16,425

The S&P 500 Index gained 19 points (1.0%) to 1,862

The Nasdaq Composite added 52 points (1.3%) to 4,086

In moderate volume, 675 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.01 higher to $103.76 per barrel, wholesale gasoline was unchanged at $3.04 per gallon

The Bloomberg gold spot price declined $0.28 to $1,302.35 per ounce

Housing construction data misses, but mortgage apps rise, while Fed comes into focus

Housing starts for March rose 2.8% month-over-month to an annual pace of 946,000 units, compared to the 970,000 unit rate that economists surveyed by Bloomberg called for. However, February’s starts were upwardly revised to an annual pace of 920,000, from the 907,000 rate initially reported. Single-family starts were higher m/m and y/y, while multi-family construction was down m/m and y/y. Permits for March were below the projected annual pace of 1,010,000 units. Single-family permits rose m/m but were down y/y, while multi-family permits fell m/m, but were sharply higher compared to the same period a year ago.

In other housing news, the MBA Mortgage Application Index rose 4.3% last week, after the index decreased 1.6% in the previous week. The improvement came as a 6.9% rise for the Refinance Index was accompanied by a 1.3% increase for the Purchase Index. Moreover, the average 30-year mortgage rate fell 9 basis points to 4.47%.

Industrial production rose 0.7% m/m in March, compared to the expected 0.5% increase, while February’s 0.6% gain was revised sharply higher to a 1.2% rise. Utilities and mining output rose solidly, while manufacturing production also grew. Moreover, capacity utilization unexpectedly increased to 79.2%, from February’s unrevised 78.8%, and compared to the 78.7% forecasted. Utilization is 1.2 percentage points higher y/y, but is 0.9 percentage point below its long-run average.

Federal Reserve Chairwoman Janet Yellen continued to try to ease concerns about a hawkish shift at the Central Bank, reiterating that economic and financial conditions likely warrant maintaining the current range for the fed funds rate for a considerable time after the asset purchase program ends. Yellen added that in determining how long to maintain the current target range of 0-0.25% for the fed funds rate, “the larger the shortfall of employment or inflation from their respective objectives, and the slower the projected progress toward those objectives, the longer the current target range for the fed funds rate is likely to be maintained.” She noted that this approach underscores the continuing commitment of the FOMC to maintain the appropriate degree of accommodation to support the recovery.

The Beige Book was released, which is a Fed tool used in shaping monetary policy summarizing current economic conditions in each Fed district. The report suggested economic activity increased in most regions, rebounding from weather-related slowdowns earlier in the year.

We indicated in our 2014 outlook that we saw the potential for 10-year Treasury yields to rise as high as 3.5% this year, with an outside chance of going as high as 3.75% if the economy surprised us on the upside. However, to date, the economy has surprised us on the downside. Some of the weakness is probably due to harsh winter weather. If that’s the case, then logically there should be a healthy rebound in growth in the spring. We’ll keep one eye on the Fed’s forward guidance, but a closer eye on liquidity indicators to see if we should lower our expectations for where bond yields are headed this year.

Treasuries were mixed, with the yield on the 2-year note unchanged at 0.37%, the yield on the 10-year note ticking 1 bp higher to 2.63% and the 30-year bond rate losing 1 bp to 3.45%.

Tomorrow, the U.S. economic calendar will offer a look at weekly initial jobless claims, expected to increase by 15,000, to a level of 315,000. Additionally, the release of the Philly Fed Manufacturing Index will come after the opening bell, anticipated to increase slightly to a level of 10.0 for April, after the larger-than-expected increase to 9.0 in March, with a reading above zero denoting expansion in manufacturing activity for the mid-Atlantic region.

Europe and Asia move higher

The European equity markets finished higher, shrugging off festering Ukraine tensions, as a slightly better-than-expected read on Chinese economic growth accompanied some favorable profit reports in the region and out of the U.S. In economic news, the U.K. unemployment rate fell to 6.9% in February, from 7.2% in the previous month, and compared to the 7.1% that economists had projected. The jobless rate in the region is below the 7.0% level that the Bank of England initially set as a target to consider changing monetary policy, though the BoE has walked away from the unemployment target. In other economic news, Eurozone consumer prices rose at a rate slightly below forecasts for March, and remain well below the European Central Bank’s target inflation rate.

Stocks in Asia finished mostly to the upside, in the wake of the gains in the U.S. yesterday on some favorable earnings reports, while Japanese stocks rallied on a weaker yen and a boost for tech stocks from an upbeat earnings report out of China. Moreover, sentiment was buoyed by Japan’s Finance Minister Aso suggesting the nation’s large Government Pension Investment Fund (GPIF) could rebalance as early as June.

China reported a slightly stronger-than-expected rate of growth for 1Q to help soothe concerns about an economic slowdown, with its GDP growth coming in at 7.4% y/y, roughly inline with expectations of a 7.3% pace of expansion, however, 1Q growth decelerated from the 7.7% expansion seen in 4Q. Separate reports showed the nation’s industrial production and fixed asset investment came in slightly below estimates for March, though retail sales for the month modestly topped forecasts. China’s reforms announced last fall are a positive development, but policymakers have a fine line to walk – implementing reforms and reducing credit growth, while keeping growth from falling too much. Fiscal coffers may now be loosening, but one area we are closely monitoring is the recent property market slowdown, which could have repercussions for the overall economy if it deepens or is lasting. However, forthcoming stimulus amid pervasive pessimism could provide a base for Chinese stocks to recover.