Monthly Archives: September 2014

Market Insights 9/30/2014

Q3 Ends on a Down Note

U.S. equities finished a choppy final trading day of the 3Q lower amid some disappointing domestic economic reports and continued geopolitical uneasiness. Consumer Confidence declined more than expected in September, housing prices missed expectations, and manufacturing activity in the Midwest slowed more than estimated.

Chinese and Eurozone growth concerns lingered, while protests Hong Kong expanded and media reports surfaced that Russia may be looking to impose capital controls, of which the nation’s central bank denied.

Treasuries finished lower, as did crude oil and gold prices, while the U.S dollar continued its rally.

The Markets….

The Dow Jones Industrial Average declined 28 points (0.2%) to 17,043

The S&P 500 Index was 6 points (0.3%) lower at 1,972

The Nasdaq Composite fell 12 points (0.3%) to 4,493

In heavy volume, 923 million shares were traded on the NYSE, and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil fell $3.41 to $91.16 per barrel, wholesale gasoline lost $0.07 to $2.44 per gallon

The Bloomberg gold spot price declined $8.32 to $1,207.49 per ounce


Consumer Confidence drops, while home prices miss

The Consumer Confidence Index dropped to 86.0 in September, falling to the lowest level since May, from an upwardly revised 93.4 in August and compared to the 92.5 level that economists surveyed by Bloomberg had projected. The drop came as a solid month-over-month decline in the component pertaining to expectations of business conditions was accompanied by a decrease in sentiment regarding the present situation.

Treasuries finished lower, as the yield on the 2-year note ticked 1 basis point higher to 0.58%, the yield on the 10-year note rose 2 bps to 2.50% and the 30-year bond rate increased 4 bps to 3.21%.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 6.8% y/y in July, compared to the 7.4% increase that economists had expected. Moreover, m/m, home prices were lower by 0.5% on a seasonally adjusted basis for July, versus forecasts calling for a flat pace of growth.

The Chicago Purchasing Managers Index showed growth in Midwest activity decelerated more than expected, decreasing to 60.5 for September, from 64.3 in August, and versus expectations of a decline to 62.0, though a reading above 50 depicts growth.

September U.S. manufacturing activity is poised to take most of the spotlight from tomorrow’s economic calendar, with the release of the final Markit Manufacturing PMI Index being followed by the ISM Manufacturing Index. Markit’s report is expected to show growth remained at August’s 57.9 level, while the ISM report is forecasted to show a slight decline to 58.5 from the prior month’s 59.0 figure, with readings above 50 for both indexes denoting expansion. Manufacturing reports have showed continued expansion for the sector, helping fuel optimism regarding the U.S. economy, but fostering increased concerns about a potential sooner-than-expected Fed rate hike.

However, at its most recent policy meeting, the Fed maintained its “considerable time” statement language pertaining to its current target range for the fed funds rate, likely due to its ongoing concerns about the “significant underutilization” of labor resources and its apparent lack of concern about inflation risks. As such, the employment components of the reports are likely to garner the most attention, ahead of Friday’s September nonfarm payroll release. Markit’s preliminary report suggested payrolls rose at the fastest pace since March 2012, while August’s ISM report showed the 14th consecutive month of growth in employment.

Other data on tomorrow’s economic docket include: the ADP Employment Change report, MBA mortgage applications, construction spending, and vehicle sales.

Europe higher, Asia mixed following data

The European equity markets finished mostly to the upside, with reports from the economic calendar fostering optimism of further stimulus measures from the European Central Bank (ECB), and overshadowing heightened geopolitical concerns, courtesy of expanding pro-democracy protests in Hong Kong. Meanwhile, reports that Russia may introduce capital controls caused some volatility for the nation’s currency, prompting the Russian central bank to respond by saying it is not considering the introduction of any kind of restrictions on cross-border movement of capital, per Reuters.

The Eurozone consumer price inflation estimate for September came in at a 0.3% y/y forecast, matching projections, and compared to the 0.4% increase estimated in the previous month. The Eurozone unemployment rate remained at an elevated 11.5% for August, while the German unemployment change unexpectedly rose for this month. However, a separate report showed Germany’s retail sales grew at a much higher rate than anticipated for August. Against the backdrop of the decelerating inflation and elevated unemployment rate, the ECB is set to deliver its monetary policy decision on Thursday, and the ECB may need to include government bonds longer-term, but this may not be enough to lift the European economy out of stagnation.

U.K. stocks finished lower despite the nation’s 2Q GDP growth being surprisingly adjusted higher to a 0.9% quarter-over-quarter pace of growth, from the preliminary 0.8% rate of expansion. The growth in U.K. economic output was an acceleration from the 0.7% expansion in 1Q, and the figure may have exacerbated Bank of England rate hike concerns, which ramped up last week as Governor Carney suggested the time for rate increases may be nearing.

Stocks in Asia finished mixed as traders digested a plethora of data out of Japan and China, while continued protests in Hong Kong continued to weigh on markets in the region. Japan’s Nikkei 225 Index fell, with some strength in the yen during the session pressuring export-related issues, while data from the economic calendar diverged. Japan’s retail sales rose much more than projected for August, but separate reports showed the nation’s industrial production unexpectedly fell and household spending dropped more than anticipated for the month.

China’s Shanghai Composite Index gained ground despite the release of the final HSBC China Manufacturing PMI Index, which was revised lower to 50.2 for September, from 50.5 in the preliminary report, where economists had expected it to remain. The reading was unchanged from August’s level, but a figure above 50 denotes expansion. However, the Hong Kong Hang Seng Index fell again as pro-democracy protests continued to expand in the nation’s streets, ahead of public holidays, which begin tomorrow and will cause the country’s markets to be closed for the next two days, fostering concerns that the crowds could increase. The Reserve Bank of India left its monetary policy unchanged, as expected, while South Korea’s industrial production surprisingly dropped in August.

Market Insights 9/29/2014

Geo-political Events Finally Take Center Stage

With little in the way of compelling corporate news and economic reports to sway investors’ psyches, a multitude of geopolitical events appear to be in the driver’s seat when it comes to the mood of market, pushing stocks lower in today’s session.

Growth concerns in China and the Eurozone continue to linger, and global monetary policy uncertainty has ratcheted higher ahead of Thursday’s policy decision from the European Central Bank, while mounting pro-democracy protests in Hong Kong and political uncertainty in Brazil, Spain and France added to the mix.

Friday’s September U.S. nonfarm payroll report appears to have investors on edge, in regards to its implications to domestic monetary policy. Reports on the week’s busy economic calendar showed personal income and spending rose and regional manufacturing growth accelerated at a faster pace than expected, while pending home sales fell more than anticipated.

Treasuries finished modestly higher on the increased uncertainty, while gold and the U.S. dollar were slightly lower, and crude oil prices gained ground.

The Markets….

The Dow Jones Industrial Average declined 42 points (0.3%) to 17,071

The S&P 500 Index was 5 points (0.3%) lower at 1,978

The Nasdaq Composite shed 6 points (0.1%) to 4,506

In moderate volume, 648 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil increased $1.03 to $94.57 per barrel, wholesale gasoline gained $0.02 to $2.51 per gallon

The Bloomberg gold spot price declined $1.95 to $1,216.42 per ounce

Personal income and spending rise, while pending home sales decline

Personal income rose 0.3% month-over-month in August, matching the gain that economists surveyed by Bloomberg had projected, while July’s 0.2% rise was unrevised. Personal spending increased by 0.5% m/m last month, versus expectations of a 0.4% gain, while July’s 0.1% dip was revised to a flat reading. The August savings rate as a percentage of disposable income declined to 5.4%, from July’s downwardly revised rate of 5.6%. Meanwhile, the PCE Deflator was flat m/m in August, versus the 0.1% decline that was expected, and compared to the unrevised 0.1% increase seen in July. Compared to last year, the deflator was 1.5% higher, above expectations of a 1.4% increase. Excluding food and energy, the PCE Core Index was up 0.1%, topping forecasts of a flat reading, and was 1.5% higher y/y, compared to the 1.4% increase that was anticipated.

Pending home sales fell 1.0% m/m in August, versus the projected 0.5% decline that economists had forecasted, and following the downwardly revised 3.2% gain registered in July. Compared to last year, sales were down 4.1% last month, versus the 1.4% drop that was anticipated, and following July’s negatively revised 2.8% decrease. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly declined in August.

The Dallas Fed Manufacturing Index showed growth in activity for the region accelerated slightly more than expected, rising to 10.8 in September from 7.1 in August, and compared to the 10.5 figure that was forecasted, with readings above zero denoting expansion for the sector.

Treasuries finished modestly higher amid the dampened global sentiment, as the yield on the 2-year note ticked 1 basis point (bp) lower to 0.57%, the yield on the 10-year note fell 2 bps to 2.49%, and the 30-year bond rate dropped 4 basis points to 3.17%.

The week’s busy domestic economic calendar will offer investors another look at the housing market tomorrow, in the form of the S&P/CaseShiller Home Price Index, forecasted to show housing prices in the 20-city composite were flat m/m during July after falling 0.2% in June, while year-over-year prices are expected to have gained 7.4% following the 8.1% gain posted the month prior, and Consumer Confidence will be released, with economists anticipating a slight tick higher to a level of 92.5 in September from the 92.4 registered in August. Meanwhile, the Chicago Purchasing Manager Index will also be released and is anticipated to show manufacturing in the Midwest fell slightly to a reading of 62.0 in September from the level of 64.3 in August, but a level above 50 depicts expansion in activity.

Europe lower, Asia amid Hong Kong protests

The European equity markets finished lower, with banking stocks leading the way due to concerns about the impact on the sector of intensified pro-democracy protests in Hong Kong, while political uncertainty in Spain and France exacerbated sentiment. In economic news, Eurozone economic confidence declined for September, while a read on German consumer price inflation came in flat m/m for last month and Spanish retail sales fell in August.

The data precedes this week’s European Central Bank (ECB) meeting, which will likely be closely watched for the details of a QE program announced at the last meeting, and expectations are high that the ECB will eventually expand the QE program to include government bonds. The ECB may need to include government bonds longer-term, but this may not be enough to lift the European economy out of stagnation.

Stocks in Asia finished mixed on the heels of Friday’s solid gains in the U.S., while escalating protests in Hong Kong weighed on the nation’s stocks. Japan’s Nikkei 225 Index rose, with the yen falling back to six-year lows versus the U.S. dollar, helping export-related issues. Stocks in China advanced ahead of tonight’s September manufacturing report, and despite a separate release showing the nation’s industrial profits declined 0.6% year-over-year in August, after rising 13.5% in the previous month. Hong Kong’s Hang Seng Index tumbled, as pro-democracy protests intensified over the weekend, resulting in the disruption of business activity in the nation, including the closure of banks and schools.

Market Insights 9/25/2014

Stocks Suffer Steep Losses

The U.S. equity markets suffered sharp declines, giving back all of the previous session’s gains, as investors may have been contemplating potential consequences that could arise courtesy of an increase in global uneasiness.

Some upbeat domestic economic reads spurred speculation of when the Fed may move to increase its target rate, while reports that Russian lawmakers may pass legislation to allow the government to seize foreign assets and amplified tensions in the Middle East also weighed on sentiment.

Treasuries and gold were higher in the wake of the recent volatility for equities, while the U.S. dollar index hit a four-year high and crude oil prices were mixed.

The Markets…..

The Dow Jones Industrial Average dropped 264 points (1.5%) to 16,946

The S&P 500 Index fell 32 points (1.6%) to 1,966

The Nasdaq Composite declined 88 points (1.9%) to 4,467

In moderate volume, 736 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.27 to $92.53 per barrel, wholesale gasoline was $0.03 higher at $2.54 per gallon

The Bloomberg gold spot price added $3.84 to $1,220.94 per ounce

Core durable goods orders top estimates, while jobless claims rise by smaller rate than expected

Durable goods orders fell 18.2% month-over-month in August, compared to the 18.0% drop expected by economists surveyed by Bloomberg, while July’s 22.6% surge was revised slightly to a 22.5% increase. However, ex-transportation, orders grew 0.7% m/m in August, versus the forecast of a 0.6% gain, and July’s figure was revised to a 0.5% decline, from the originally-reported drop of 0.8%. Moreover, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, rose 0.6% m/m last month, above the 0.4% increase projected, while the 0.5% decrease in July was revised to a 0.2% decline.

Durable goods orders can be volatile on a month-to-month basis, and the headline figures were distorted by a 316% increase in orders of nondefense aircraft and parts in July, then a 74% falloff in August. Taking out these distortions, the 5.0% increase in orders ex-transportation and 4.6% in business spending relative to a year ago bode well for an improving growth trend for the U.S. economy.

Recent economic releases have indicated a strengthening U.S. economy, showing signs of a self-sustaining expansion. A resurgence in capital spending is one factor of this expansion – as the economy strengthens, business confidence improves, typically resulting in increases in capital investment and hiring. However, a stronger U.S. dollar could make U.S. exports more expensive for foreigners and therefore less competitive, but there are also economic benefits.

One major benefit is that lower import prices leave more discretionary spending power for consumers. As for market implications, typically a strong dollar has been stock market bullish, but relative dollar stability is preferred over spikes. While we have a bullish view on U.S. stocks, a correction is always possible, particularly as we are in a period that historically has seen weakness.

Weekly initial jobless claims increased by 12,000 to 293,000 last week, below the 296,000 level that economists had expected, as the prior week’s figure was revised higher by 1,000 to 281,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, declined by 1,250 to 298,500, while continuing claims increased by 7,000 to 2,439,000, just south of the forecast of economists, which called for a level of 2,440,000.

The preliminary Markit U.S. Services PMI Index declined to 58.5 in September from 59.5 in August, and compared to the dip to 59.2 that economists had expected, with a reading above 50 denoting expansion. The release is independent and differs from the Institute for Supply Management’s (ISM) non-Manufacturing Index, as it has less historic value and Markit weights its index components differently. Markit’s services sector gauge is the companion to its manufacturing index, which earlier this week remained at a 52-month high of 57.9 for this month.

Treasuries were higher amid the downside volatility in the equity markets, with the yield on the 2-year note declining 3 basis points to 0.56%, while the yields on the 10-year note and the 30-year bond were 6 bps lower to 2.51% and 3.22%, respectively.

Tomorrow, the U.S. economic calendar will yield the release of the third and final look at 2Q Gross Domestic Product –GDP– the broadest measure of economic output, which is expected to be revised to a 4.6% quarter-over-quarter pace of expansion, an increase from the 4.2% posted in the second revision. Personal consumption is forecasted to be higher at a rate of 2.9% from the 2.5% originally reported, while the GDP Price Index and the core PCE index are anticipated to remain at their respective growth levels of 2.1% and 2.0%. Also slated for release tomorrow is the final University of Michigan Consumer Sentiment Index for September, with a reading of 84.8 expected, a slight increase from the preliminary report level of 84.6.

Europe lower, Asia mixed

The European equity markets finished lower after reversing to the downside in late-day action, with rate hike concerns in the U.S. following another round of upbeat data being accompanied by comments from Bank of England Governor Carney suggesting the time for a rate hike is nearing. Carney noted that, “With many of the conditions for the economy to normalize now met, the point at which interest rates also begin to normalize is getting closer.” The pound pared early losses versus the U.S. dollar following the comments.

However, resurfacing Ukraine concerns on headlines out of Russia teamed up with escalated Middle Eastern tensions to exacerbate sentiment. Meanwhile, early gains in Europe came as European Central Bank (ECB) President Mario Draghi continued to pledge to use additional monetary policy measures to combat the threat of deflation and sluggish economic growth. The euro remained under pressure on the ECB’s accommodative policy commitment, hitting the lowest level since November 2012 compared to the U.S. dollar, boosting the outlook for earnings from companies that do business outside the region.

The ECB’s actions are likely to help the economy at the margin, partly due to a weaker euro, at least in the near term, while whether QE will help increase lending is uncertain. The QE program may not be enough to give the European economy the boost it needs as Draghi believes fiscal stimulus to generate near-term demand and structural reforms to generate growth longer term are needed to cement a recovery in the Eurozone. We believe there are more attractive stock markets outside of Europe.

Stocks in Asia finished mixed on the heels of some stronger-than-expected housing data out of the U.S., while traders grappled with another sign of sluggish economic activity in the Eurozone and increased optimism regarding further stimulus measures from the European Central Bank. Japanese stocks gained ground as export-related issues found support from continued weakness in the yen, which moved back to six-year lows versus the U.S. dollar. Action in China was mixed as lingering economic growth concerns were met with a report that suggested the country’s president may be considering replacing the head of the nation’s central bank, which fostered speculation that such a move could open the door for further stimulus measures. Indian equities fell on concerns of potentially higher power generation costs after a court’s decision to cancel coal mining permits and levy a $1.3 billion penalty, per Bloomberg.

Market Insights 9/24/2014

Stocks Snap Losing Streak

U.S. equities rebounded from their recent losses to close higher in today’s action, courtesy of a surprisingly strong new home sales report and better-than-expected earnings from housing goods retailer Bed Bath & Beyond.

Another disappointing report out of the eurozone on German business sentiment further heightened optimism of further stimulus measures from the European Central Bank, while conflict in the Middle East remained in focus amid the continued U.S. and Arab ally airstrikes in Syria.

Treasuries finished modestly lower following the housing figures, while a separate report showed domestic mortgage applications declined. Gold finished lower, while crude oil prices and the U.S. dollar were higher.

Market Results

The Dow Jones Industrial Average (DJIA) rallied 155 points (0.9%) to 17,211

The S&P 500 Index rose 16 points (0.8%) at 1,998

The Nasdaq Composite jumped 47 points (1.0%) to 4,555

In moderate volume, 745 million shares were traded on the NYSE, and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.24 to $92.80 per barrel, wholesale gasoline was $0.01 higher at $2.51 per gallon

The Bloomberg gold spot price declined $6.27 to $1,217.15 per ounce

New home sales jump, while mortgage applications decline

New home sales surged 18.0% month-over-month in August, to an annual rate of 504,000 units—matching the level last seen in May 2008 and up 33.0% y/y—from July’s upwardly revised 427,000 unit pace. August’s figure topped the 430,000 rate that economists surveyed by Bloomberg had expected. Within the report, the median home price was up 8.0% y/y but down 1.6% m/m at $275,600. The 203,000 units of new home inventory was 16.0% higher y/y and 1.0% above last month, representing a rate of 4.8 months of supply at the current sales pace from 5.6 months posted for the previous month and the 5.5 pace in the same period a year ago.

New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings. The much stronger-than-expected new home sales were led by a 50.0% m/m jump in the West, with sales in the region 84.3% higher y/y, along with a 29.2% m/m gain in the Northeast, though sales in that region are down 3.1% versus the same period a year ago.

The MBA Mortgage Application Index fell 4.1% last week, after rising 7.9% in the previous week. The decrease was led by a 7.0% fall for the Refinance Index, while the Purchase Index dipped 0.3%. Moreover, the average 30-year mortgage rate rose by 3 basis points to 4.39%.

Treasuries finished slightly lower, as the yield on the 2-year note inched 1 basis point higher to 0.59%, the yield on the 10-year note rose 4 bps to 2.56%, and the 30-year bond gained 3 bps to 3.28%.

Tomorrow’s US economic calendar will be headlined by the release of durable goods orders, forecasted to drop 18.0% month-over-month in August, after surging 22.6% in July. The headline figure is distorted by the effects of a 318% increase in plane orders in July – excluding transportation, orders are expected to increase 0.6%, after a fall of 0.8% in July. Orders for nondefense capital goods excluding aircraft, considered a proxy for business spending, are anticipated to gain 0.4% on the heels of falling 0.5% in June.

Durable goods orders can be volatile on a month-to-month basis, but because they typically represent larger value purchases intended to last a long time, the trend in orders can reveal the level of confidence in the economy. Recent economic releases have indicated a strengthening U.S. economy, showing signs of a self-sustaining expansion. A resurgence in capital spending is one factor of this expansion – as the economy strengthens, business confidence improves, typically resulting in increases in capital investment and hiring.

We believe the labor market continues to be strong, and that the disappointing August payroll report may be just an outlier. Other jobs data didn’t jibe with this release, and the August payrolls release tends to have the highest historical upward revision rate of all months. While we have a bullish view on U.S. stocks, a correction is always possible, particularly as we are in a period that historically has seen weakness. We believe that inevitable pullbacks should be used as buying opportunities but warn investors that if they can’t handle a quick selloff in their stock portfolio, they may need to rethink their risk tolerance.

In addition, the domestic docket will offer investors a look at weekly initial jobless claims, forecasted to show a level of 296,000 jobs, up from the prior week’s 280,000, the Kansas City Fed Manufacturing Index, expected to double August’s figure by posting a level of 6, with a reading above zero indicating expansion, as well as the Markit U.S. Composite PMI Index.

Europe higher, Asia mixed

The European equity markets finished higher, rebounding somewhat from yesterday’s drop that came in the wake of a disappointing Eurozone business activity report and new regulations out of the U.S. to crack down on tax inversions. Meanwhile, another disappointing economic report out of the Eurozone in the form of German business confidence appeared to foster hopes that the European Central Bank (ECB) will be further committed to combating sluggish economic growth and the threat of deflation.

The German Ifo Business Climate Index, a gauge of corporate sentient derived from a survey of 7,000 executives, fell to 104.7 this month, from 106.3 in August, and compared to the decline to 105.8 that economists had projected. The index deteriorated for the fifth-straight month and hit the lowest level since April 2013. However, ECB President Mario Draghi noted today that “Monetary policy will stay accommodative for a long time and I can say that the Governing Council is unanimous in its commitment to use the available instruments within its mandate to bring inflation back to close but below 2%.”

A dip in inflation expectations and the weakening economic outlook prompted the ECB to recently announce a quantitative easing (QE) plan intended to purchase roughly one trillion euros. We are skeptical that the announced QE program will be enough to strengthen the pace of European economic growth and boost corporate earnings. The ECB’s actions are likely to help the economy at the margin, partly due to a weaker euro, at least in the near term, while whether QE will help increase lending is uncertain.

The QE program may not be enough to give the European economy the boost it needs as Draghi believes fiscal stimulus to generate near-term demand and structural reforms to generate growth longer term are needed to cement a recovery in the Eurozone. We believe there are more attractive international stock markets outside of Europe and continue to underweight developed countries around the world while providing investors with small exposures to Emerging and Frontier Markets. We still believe the best growth prospects lie in the U.S. and continue to overweight Large US domiciled companies.

Stocks in Asia finished mixed, with Japan’s markets returning to action following yesterday’s holiday, with some strength in the yen applying pressure to stocks, while a report showed growth in the nation’s manufacturing activity decelerated in September. Moreover, sentiment remained hamstrung by growth concerns toward the Eurozone on the heels of yesterday’s softer-than-expected read on the region’s business activity in the manufacturing and services sectors. Elsewhere, stocks in Australia declined, with banking stocks seeing some pressure on lingering concerns about a housing bubble in the nation, exacerbated by the Reserve Bank of Australia noting that it may take action to “reinforce sound lending practices” and keep the property market from overheating.

Market Insights 9/23/2014

Flurry of Global Events Hamper Stocks

A slew of global events seized the Street’s attention in today’s action, as new U.S. regulations aimed at cracking down on tax inversions created by trans-Atlantic mergers took the wind out of the sails of pharmaceutical and consumer-related stocks, tempering enthusiasm toward merger & acquisition activity in the sectors.

A disappointing business activity report out of Europe kept concerns about growth across the pond at hand, but the nervousness was offset somewhat by favorable domestic and Chinese manufacturing reports.

Meanwhile, U.S. and Middle Eastern allies began airstrikes in Syria for the first time, adding another layer to the geopolitical front. Treasuries finished modestly higher, together with gold and crude oil prices, while the U.S. dollar was flat.

Market Results

The Dow Jones Industrial Average declined 116 points (0.7%) to 17,057

The S&P 500 Index was 11 points lower (0.6%) at 1,983

The Nasdaq Composite lost 19 points (0.4%) to 4,509

In moderate volume, 713 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.69 to $91.56 per barrel, wholesale gasoline was $0.01 higher at $2.50 per gallon

The Bloomberg gold spot price rose $7.86 to $1,222.74 per ounce

Manufacturing reports show continued growth

The preliminary Markit U.S. Manufacturing PMI Index for September was surprisingly unrevised at August’s 52-month high of 57.9, and compared to the improvement to 58.0 that economists surveyed by Bloomberg had expected, with a reading above 50 denoting expansion. Markit said the report showed the fastest rise in payroll numbers since March 2012, while input cost inflation accelerated to the highest level seen so far this year. The release is independent and differs from the Institute for Supply Management’s (ISM) Manufacturing Index, as it has less historic value and Markit weights its index components differently.

The Richmond Fed Manufacturing Index showed growth in activity for the Mid-Atlantic region unexpectedly accelerated in September, rising to 14.0—the highest since March 2011—from July’s 12.0 level, and compared to the decline to 10.0 that economists had expected, with readings above zero denoting expansion.

Treasuries finished higher, as the yield on the 2-year note was 2 basis points lower at 0.53%, the yield on the 10-year note declined 3 bps to 2.54% and the 30-year bond rate fell 5 bps to 3.25%.

Tomorrow’s domestic economic calendar will focus on housing, with new home sales slated for release, forecasted to have moved 4.4% higher month-over-month in August to an annual rate of 296,000 units from the 2.4% decline to 280,000 units posted in July, as well as MBA Mortgage Applications.

Europe lower, Asia mixed on manufacturing data

The European equity markets finished lower, with healthcare and consumer-related stocks seeing some pressure as new regulations aimed at cracking down on U.S. tax inversions—the acquisition of foreign companies and re-domiciling to a country with lower tax rates—dampened optimism toward M&A activity in the sectors. Sentiment was also hamstrung by the U.S. and some Middle Eastern allies launching airstrikes against Islamic State militants in Syria for the first time.

Meanwhile, traders digested some softer-than-expected Eurozone business activity reports in the region. The preliminary Markit Eurozone Composite PMI Index—a gauge of activity in both the services and manufacturing sectors—declined to 52.3 for September, from 52.5 in August, where economists had expected it to remain, though a reading above 50 denotes expansion. The index hit the lowest level since December 2013, as German manufacturing growth decelerated more than expected, while French output remained at a level depicting contraction. In other economic news in the region, France’s 2Q GDP was unrevised at a flat quarter-over-quarter pace of growth, the second-straight quarter of no growth, while U.K. public sector net borrowing came in above expectations.

Stocks in Asia finished mixed with a preliminary report showing an unexpected improvement in Chinese manufacturing activity, while volume was lighter than usual with markets in Japan closed for a holiday. The preliminary HSBC China Manufacturing PMI Index rose to 50.5 in September, from 50.2 in August, and compared to the 50.0 level that economists had projected, with a reading above 50 denoting expansion. The report helped ease growth concerns that had ramped up recently on some softer-than-expected economic data and comments from the government that dampened expectations of further stimulus measures.

Market Insights 9/22/2014

Global Growth Concerns Pull Stocks Downward

Heightened Chinese and European growth concerns dragged stocks lower in today’s trading session, added by an unexpected decline in U.S. existing home sales. Treasuries finished modestly higher following the surprisingly disappointing housing report, as did gold, while crude oil prices were lower and the U.S. dollar was flat.

The Markets

The Dow Jones Industrial Average declined 107 points (0.6%) to 17,173

The S&P 500 Index was 16 points lower (0.8%) at 1,994

The Nasdaq Composite tumbled 52 points (1.1%) to 4,528

In moderate volume, 695 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.78 to $90.87 per barrel, wholesale gasoline was $0.03 lower at $2.58 per gallon

The Bloomberg gold spot price moved $0.32 higher to $1,216.02 per ounce

Home Sales Unexpectedly Decline

Existing-home sales surprisingly declined in August, decreasing 1.8% month-over-month to a 5.05 million annual rate, while the median forecast by economists surveyed by Bloomberg was for a rise to 5.20 million. July’s figure was revised modestly lower to a 5.14 million unit pace from the initially reported 5.15 million pace. The median existing-home price rose 4.8% from a year ago to $219,800. Single-family home sales declined 1.8% m/m, while multi-family sales were down 1.7% m/m, and both were lower year-over-year. T

The supply of homes available for sale declined 1.7% compared to last month to 2.31 million units, equating to 5.5 months of supply at the current sales pace, but were higher y/y. The National Association of Realtors (NAR) said sales increases in the Northeast and Midwest were outweighed by declines in the South and West, as investors paying in cash retreated from the market. Sales of existing homes reflect closings from contracts entered one-to-two months earlier.

The labor market continues to show strength, likely boding well for the housing market. Initial jobless claims are hovering around the 300,000 mark and hiring surveys are showing increasing plans to add to staff, while the Job Opening and Labor Turnover (JOLTS) reports have been quite encouraging. Given that these indicators did not jibe with August’s disappointing labor report—and the fact that August payrolls have the highest historical upward revision rate of all months—we do not think the trend of stronger job growth has shifted.

Treasuries finished higher, as the yield on the 2-year note fell 3 basis points to 0.55%, the yield on the 10-year note declined 2 bps to 2.55%, while the 30-year bond rate dipped 1 bp to 3.28%.

Tomorrow’s domestic economic calendar will offer investors a look at September manufacturing data, in the form of the preliminary Markit U.S. PMI Index, expected to show a slight rise from last month’s 57.9 level to 58.0, with a reading above 50 denoting expansion in activity, as well as the Richmond Fed Manufacturing Index, forecasted to decline to 10 from the 12 posted in August, with zero the demarcation point between expansion and contraction.

Europe and Asia lower on China and Eurozone growth concerns

The European equity markets finished lower, with concerns about Chinese economic growth dampening sentiment on the heels of comments from the nation’s finance minister, which preceded tonight’s read on the nation’s manufacturing output. Eurozone growth uneasiness continued to fester, with the G-20 meeting over the weekend offering a warning of the potential global impact of an extended slowdown in Europe. In economic news in the region, Italian industrial sales and orders both fell in July, while Eurozone consumer confidence deteriorated more than expected for September.

Stocks in Asia also finished lower amid lingering concerns about Europe following the G-20 meeting. Moreover, concerns about China’s economy weighed on sentiment ahead of tonight’s report on the nation’s manufacturing output from HSBC, while optimism regarding further stimulus measures from China was dampened to apply some pressure on the markets in the region, as the country’s finance minister noted that the government will not make major policy changes in response to economic indicators, per Bloomberg.

Market Insights 9/19/2014

Scotland Stay in U.K.; Wall Street Debuts Biggest IPO Ever

In the face of heavy trading volume, courtesy of quadruple witching day—the simultaneous expiration of stock and index options and futures contracts—the U.S. equity markets closed the session mixed as the Street debuted its largest IPO to date in the form of Chinese e-commerce company Alibaba Group Holding.

Additionally, early morning sentiment may have found a boost from across the pond as Scotland voted to continue its union with the U.K. Treasuries were mostly higher as the lone release on the domestic docket revealed Leading Indicators rose less than expected. Gold and crude oil prices were lower, while the U.S. dollar was solidly higher.

The Markets

The Dow Jones Industrial Average increased 14 points (0.1%) to 17,280

The S&P 500 Index was 1 point lower at 2,010

The Nasdaq Composite declined 14 points (0.3%) to 4,580

In heavy volume, 1.8 billion shares were traded on the NYSE, and 2.8 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.33 to $91.65 per barrel, wholesale gasoline was $0.05 higher at $2.61 per gallon

The Bloomberg gold spot price decreased $8.30 to $1,216.85 per ounce

Markets were higher on the week, as the DJIA increased 1.7% and the S&P 500 Index was 1.3% higher and the Nasdaq Composite Index ticked 0.3% to the upside

August Leading Indicators miss expectations, but July revised higher

The Conference Board’s Index of Leading Economic Indicators (LEI) increased 0.2% month-over-month (m/m) in August, below the 0.4% growth that economists surveyed by Bloomberg had projected, while July’s 0.9% gain was revised to a 1.1% rise. The report showed positive contributions from components pertaining to ISM new orders, the yield curve and credit, while the index was negatively impacted by building permits and jobless claims.

Treasuries were mostly higher, with the yield on the 2-year note nearly unchanged at 0.57%, while the yield on the 10-year note declined 4 bps to 2.58% and the 30-year bond rate decreased 6 bps to 3.29%.

Stocks back to record highs following heavily-anticipated week

The Dow and S&P 500 moved back to record high territory, with bullish sentiment remaining intact through what was seen as a potential volatile week. The bulk of the upward move for stocks came in the wake of the Federal Reserve’s monetary policy decision. The Fed maintained its statement language of “considerable time” pertaining to keeping the current target range for the fed funds rate after its asset purchase program ends, from which it tapered another $10 billion and confirmed that the program should be concluded by the end of October.

The maintained language seemed to soothe concerns about a sooner-than-expected rate hike. However, the reaction outside the stock markets diverged as traders appeared to add some credence to the Fed’s increased rate expectations that accompanied its statement. The yield on the 10-year Treasury note rose above the 2.60% mark midweek following the Fed’s decision, while the U.S. dollar continued its rally, fostering a fresh six-year low for the yen, which boosted Japan’s Nikkei 225 Index to highs not seen since November 2007. Global sentiment was underpinned by reports of further stimulus measures being deployed in China, targeted on bolstering the nation’s banking sector.

Heading into this week’s meeting, the fed funds futures market showed that investors have a more benign set of expectations for the future path of interest rates. Yellen added that if economic growth remains relatively healthy and job growth persists at a reasonable pace, it’s expected that the gap between the Fed’s and the market’s expectations would likely narrow by the latter moving higher. The Fed Char also pointed out that a strong dollar is likely to be both economic and stock market positive, but relative dollar stability is preferred over spikes as double-digit market returns have been the norm during periods of limited dollar movements. However, the market could experience some volatility in the short term with some multi-national companies’ earnings possibly being dented in the third quarter.

Recent economic releases have indicated a strengthening in the U.S. economy that is showing signs of a self-sustaining expansion, helping to support our bullish view on U.S. stocks. However, a correction is always possible, particularly as we are in a period that historically has seen weakness. We believe that inevitable pullbacks should be used as buying opportunities but warn investors that if they can’t handle a quick selloff in their stock portfolio, they may need to rethink their overall asset allocation and risk profile.

Manufacturing data likely to be in focus

Next week’s economic calendar will include the preliminary Markit US PMI Index for September, the Richmond Fed Manufacturing Index, durable goods orders, and the Kansas City Fed Manufacturing Activity Index. Other releases will include existing home sales, new home sales, the third look (of three) at 2Q GDP, and the final University of Michigan Consumer Confidence Index for September.

Europe mixed after paring boost from Scottish independence vote, Asia mostly higher

The European equity markets finished mixed after paring some of the early rally that came as Scotland voted to not leave the U.K. The British pound initially advanced on the rejected independence vote but moved lower versus the U.S. dollar during the European trading session. The vote was a source of heightened volatility as of late and the eased concerns in the wake of the outcome may have gave way to the economic issues facing the region, particularly the sluggish economy and threat of deflation in the Eurozone.

A dip in inflation expectations and the weakening economic outlook prompted the European Central Bank (ECB) to recently announce a quantitative easing (QE) plan intended to purchase roughly one trillion euros. We are skeptical that the announced QE program will be enough to strengthen the pace of European economic growth and boost corporate earnings. We believe there are more attractive international stock markets outside of Europe. In economic news, German producer prices dipped 0.1% m/m in August, as expected, while the Eurozone current account surplus widened in July.

Stocks in Asia finished mostly to the upside, on the heels of the record highs in the U.S. and early indications of Scotland rejecting a break away from the U.K. Japanese stocks were also boosted by a fresh six-year low in the yen versus the U.S. dollar, as well as the nation’s Prime Minister Abe noting that the Government Pension Investment Fund (GPIF) must review its asset allocations as soon as possible, per Bloomberg. Elsewhere, Chinese stocks finished higher amid continued stimulus optimism as the People’s Bank of China (PBOC) cut short-term borrowing costs for banks yesterday, which added to reports earlier in the week that the PBOC injected liquidity into the country’s five largest banks.

Market Insights 9/17/2014

Fed Maintains Policy Stance, Tapers Further

After a brief knee-jerk reaction downward, and pulling back from a nearly 90-point rise, U.S. equities closed with modest gains, with the Dow notching an all-time high, after the Federal Reserve delivered its monetary policy decision, solidifying its intent to move gradually in its efforts to remove accommodation and hike interest rates, while also outlining a set of principles on how it intends to move toward more normalized policy.

Treasuries finished higher, as yields, particularly at the short end, spiked higher following the Fed statement. Housing was also in focus on the economic front, as homebuilder sentiment jumped to its highest level since November 2005 and mortgage applications rebounded from last week, while consumer price inflation came in slightly cooler than expected. Gold was lower, crude oil prices were mixed, while the U.S. dollar was higher.

The Markets

The Dow Jones Industrial Average rose 25 points (0.2%) to 17,157

The S&P 500 Index gained 3 points (0.1%) to 2,002

The Nasdaq Composite added 9 points (0.2%) to 4,562

In moderate volume, 663 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.46 to $94.42 per barrel, wholesale gasoline was $0.01 higher at $2.57 per gallon

The Bloomberg gold spot price fell $8.13 to $1,227.42 per ounce

Fed Stands Pat

The Federal Reserve Open Market Committee (FOMC) concluded its two-day meeting, releasing its statement that showed little change from its June meeting release, in regards to the “moderate” pace of economic expansion, as well as its continued resolve to be gradual in its efforts to normalize monetary policy. As expected, the FOMC tapered the monthly pace of bond purchases by another $10 billion to $15 billion a month, remaining on course to end the program at its October meeting.

The Fed made no change to its target to keep interest rates near zero, as expected. Within its statement the FOMC kept the “considerable time” language, the time that the Fed expects to maintain the target range for the federal funds rate after the asset purchase program ends. Fed watchers expect that the Fed would likely need to change this guidance on timing of rates before eventually raising rates.

The Committee outlined a set of principles it will use to determine the timing of the pace of interest rate increases, once that time arrives. Committee members Charles Plosser and Richard Fisher both dissented, noting their objection to the use of the “considerable time” guidance given in the statement. As well, the FOMC released its latest economic projections, showing a slight decrease in its estimates for GDP, the unemployment rate and inflation.

Consumer inflation unexpectedly dips and homebuilder sentiment jumps

The Consumer Price Index (CPI) showed prices at the consumer level were down 0.2% month-over-month in August, compared to the flat pace of growth that economists surveyed by Bloomberg had forecasted, while July’s 0.1% increase was unrevised. Moreover, the core rate, which strips out food and energy, came in flat m/m in August, compared to the 0.2% gain that was projected, and July’s 0.1% rise was unadjusted. On a y/y basis, consumer prices were 1.7% higher for both the headline and core rates, versus expectations of 1.9% increases for both figures. July’s y/y figures showed unrevised gains of 2.0% and 1.9% for the headline and core rates, respectively.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment jumped to the highest since November 2005, rising to 59 for September from August’s unrevised 55, and compared to the rise to 56 that was expected. The index posted the third-straight month above the 50 mark that separates good and poor conditions. The report said builders in many markets have been reporting that buyer interest and traffic have picked up. However, the NAHB added that, “While a firming job market is helping to unleash pent-up demand for new homes and contributing to a gradual, upward trend in builder confidence, we are still not seeing much activity from first-time home buyers.” Tomorrow, the economic calendar will bring the latest home construction figures with the release of the August housing starts and building permits report. Starts are projected to decline 5.2% m/m to an annualized rate of 1,037,000 units, after surging over 15.0% in July, while permits are anticipated to decrease 1.6% to an annual rate of 1,040,000 units, following July’s 8.0% rise.

Treasuries finished lower following the FOMC statement, as the yield on the 2-year note jumped 4 basis points to 0.58%, the yield on the 10-year note rose 3 bps to 2.62% and the 30-year bond rate increased 2 bps to 3.38%.

In addition to the aforementioned starts and permits report, the other items on tomorrow’s domestic docket will include weekly initial jobless claims, forecasted to fall to a level of 305,000 jobs from the prior week’s 315,000 level, and the Philly Fed Manufacturing Index, expected to decline to 23.0 for September from the 28.0 registered in August, with a reading above zero denoting expansion in activity.

Europe higher on China stimulus reports, Asia mixed

The European equity markets finished mostly to the upside, following the late-day rally in the U.S. yesterday, while reports of further stimulus measures from China’s central bank underpinned sentiment. The gains in the region came despite lingering uncertainty regarding the outcome of tomorrow’s Scottish independence vote, which should be known after Thursday’s market close, while traders awaited today’s monetary policy decision from the U.S. Federal Reserve. In economic news in the region, U.K. jobless claims fell more than expected in August and Italy’s trade surplus widened for July, while separate reports showed Eurozone consumer price inflation ticked higher last month and the region’s construction output came in flat for July.

Stocks in Asia finished mixed following the solid gains in the U.S. yesterday and reports of further stimulus measures out of China, while showing some caution ahead of the monetary policy decision from the U.S. Central Bank. Stocks in Japan retreated further from last week’s eight-month high, while markets in India advanced, gaining back some of yesterday’s solid drop. On the economic front, a Chinese news website reported that the People’s Bank of China (PBOC) injected over $80 billion into the country’s five largest banks. The action is reportedly aimed at boosting lending and bolstering growth in the wake of recent softer-than-expected economic reports. The PBOC has not commented on the report.

Fed: “Considerable Time Before Rates Are Lifted”

The Federal Reserve on Wednesday repeated that interest rates are likely to stay low for a “considerable time” after it ends its bond-buying program in October, but the central bank also took concrete steps to prepare for an increase some time in 2015. The central bank’s vote to stick to its current go-slow approach on raising interest rates drew two dissents, the first time that’s happened since Janet Yellen took over as chairwoman in February.

The more hawkish presidents of the Dallas and Philadelphia Federal Reserve banks argued that rates will likely have to rise sooner than the Fed thinks—most analysts expect the first increase in mid-2015—and that the majority is understating the improvement in the U.S. economy.

By leaving in the language about a “considerable time,” the Fed signaled it’s still not prepared to raise the fed funds rate earlier than markets expect. Keeping the language was seen as a victory for the doves on the committee. The rate has hovered near zero since 2008.

By opting to retain this phrase in the statement, the committee has not precluded a rate hike in the second or third quarter of 2015 nor have they guaranteed a tightening in policy. Many suggested the Fed was likely swayed in part to stand pat because of weaker-than-expected job creation in August and a receding rate of inflation.

In a news conference after the meeting, Yellen said the labor market still has room to improve and most Fed officials want to see more evidence of progress before acting. “Things will depend on how the economy evolves and that will change over time and there is a good deal of up certainty associated with it,” she said.

But the Fed also sent some hawkish signals.

A majority of 10 Fed officials expects interest rates to rise to a median rate of 3.75% by the end of 2017, according to the central bank’s updated “dot plot.” Only four expect rates to be below that threshold. The central bank adjusted the dot plot to show for the first time that the Fed expects to move the fed funds rate in a range, instead of giving a specific target. Each dot now shows the midpoint of the range of the federal funds rate will be at the end of each year. According to the new plot, Fed officials now expect the midpoint of the Fed funds rate to be 1.375% at the end of 2015 and 2.875% by the end of 2016. These are up from 1.125% and 2.5% in the prior forecast in June.

The Fed also released a new exit plan, agreed to by all Fed officials except one. Key points of the exit plan include that the Fed will keep reinvesting proceeds of maturing securities until it begins increasing the federal funds rate. The Fed left open the possibility of selling assets, but said it doesn’t expect to see agency mortgage backed securities except for in limited fashion. The Fed said that it expects its $4.4 trillion balance sheet in the longer run should return to a size necessary to implement monetary policy and to hold primarily Treasuries.

The central bank also said it would launch a test program on the sale of so-called reverse repos as part of a process of figuring out the best way to increase interest rates when the time comes. The Fed revised the terms of its overnight reverse repo test program to allow each counterparty to bid up to $30 billion a day from the previous maximum of $10 billion. Each operation will have a $300 billion size limit.

As expected, the Fed trimmed the size of its bond buying plan by $10 billion to $15 billion. That’s the seventh straight meeting with a $10 billion taper of QE3.

In the statement, the Fed said it expects to end the asset purchase program at its next meeting at the end of October if economic data doesn’t surprise over the next six weeks.

Market Insights 9/15/2014

Caution Persists into the New Week

Stocks finished mixed as investors appeared content to remain on the fence, carrying over last week’s cautious tone and “risk on” strategy into Wednesday’s Fed policy decision and Thursday’s Scottish independence vote looming on the horizon.

An unexpected decline in U.S. industrial production, as well as softer-than-expected Chinese economic data, negated a surge in manufacturing activity out of the New York region that notched its highest level in nearly five years.

Treasuries finished higher amid the palpable caution, as did gold and crude oil prices, while the U.S. dollar was little changed.

Market Results

The Dow Jones Industrial Average rose 44 points (0.3%) to 17,031

The S&P 500 Index lost 1 point (0.1%) to 1,984

The Nasdaq Composite tumbled 49 points (1.1%) to 4,519

In moderately-light volume, 591 million shares were traded on the NYSE, and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.65 to $92.92 per barrel, wholesale gasoline was $0.01 higher at $2.53 per gallon

The Bloomberg gold spot price rose $3.54 to $1,233.19 per ounce

Industrial production unexpectedly dips, while regional manufacturing activity jumps

Industrial production surprisingly slipped, dipping 0.1% month-over-month in August, compared to the 0.3% gain expected by economists surveyed by Bloomberg, and July’s 0.4% rise was revised to a 0.2% gain. Utilities output rebounded slightly from the previous two months’ drops and mining production gained ground, while manufacturing output declined. Capacity utilization declined to 78.8% from July’s downwardly revised 79.1% level, and compared to the 79.3% that economists had forecasted. Utilization is 1.0 percentage point above its level a year ago, while 1.3 percentage points below its long-run average.

The Empire Manufacturing Index, a measure of manufacturing in the New York region, showed growth in output accelerated much more than expected in September, jumping to 27.5 from the unrevised 14.7 in August. This was the highest level since October 2009, and the estimate of economists called for an increase to 16.0, with a reading above zero denoting expansion.

Treasuries finished higher, as the yields on the 2-year and 10-year notes declined 2 basis points to 0.54% and 2.59%, respectively, while the 30-year bond rate dipped 1 bp to 3.34%.

Tomorrow’s economic calendar will be fairly light, but offer the first of this week’s looks at inflation in the form of the Producer Price Index (PPI), with economists forecasting that prices at the wholesale level were flat during the month of August, following the 0.1% m/m gain seen the month prior, while excluding food and energy, the core rate is expected to have moved 0.1% m/m higher, after registering a 0.2% increase in July.

Europe and Asia fall as looming Scottish vote and Fed decision linger

The European equity markets finished mostly lower in late-day action, with caution continuing ahead of Thursday’s independence vote in Scotland, which will be accompanied by the initial results from the European Central Bank’s first Targeted Long-Term Refinancing Operations (TLTRO) operation. Most experts believe Scottish voters are unlikely to ultimately cast a yes vote to breaking away from the U.K. given the many uncertainties surrounding a separation, the vote could create volatility and disruptions in markets. Equally important are implications for the future membership of the U.K. in the European Union as well as for separatist campaigns across Europe. The results of the ECB’s first TLTRO operation will be closely watched for the amount of demand generated, and the implications of whether the ECB can be successful in expanding its balance sheet as much as it hopes.

Stocks in the region were hamstrung as traders grappled with whether the U.S. Federal Reserve will signal any changes to its stance following its Wednesday meeting, while digesting some disappointing Chinese economic data.

Stocks in Asia also finished mostly lower amid the caution ahead of this week’s monetary policy meeting by the U.S. Central Bank and Scottish independence vote, and while some Chinese economic reports over the weekend came in softer than expected. Meanwhile, volume was lighter than usual with markets in Japan closed for a holiday. China reported that its industrial production, retail sales and fixed asset investment for August all came in softer than expected. Elsewhere, India’s wholesale price inflation decelerated more than expected for August, while after the closing bell, the country reported a sharp deceleration in export growth for last month.