QE Japan……Surges Stocks Around the World
The U.S. equity markets closed the trading session with sizable gains, as the Dow and S&P both logged record-high closes, in the wake of a surprising announcement from the Bank of Japan (BOJ) that it is expanding its vast stimulus spending program in an effort to boost core inflation to a level in line with the BOJ’s goal. Meanwhile, gold and crude oil prices were under solid pressure and the U.S. dollar rallied.
Treasuries were lower as domestic economic reports showed that consumer sentiment was unexpectedly revised higher and business activity in the Midwest region jumped to a twelve-month high, while personal income and spending missed expectations and 3Q employment costs rose more than forecasted.
In earnings news, Citigroup lowered its previously reported quarterly results due to an increase in legal expenses and Starbucks posted softer-than-expected same-store-sales, while Dow members Exxon Mobil and Chevron both topped the Street’s earnings forecasts.
The Dow Jones Industrial Average gained 195 points (1.1%) to 17,390
On the NYSE winning issues beat losers by a 5 to 1 margin in lopsided trading
The S&P 500 Index was 23 points (1.2%) higher at 2,018, sectors leading the way higher today included Energy (+2.03%) Materials (+1.87%) and Technology (+1.55%)
Small and MidCaps beat the S&P 500 today with the SmallCap 600 higher by 1.65% and MidCaps better by 1.22%
The Nasdaq Composite gained 65 points (1.4%) to 4,631
In moderately heavy volume, 1.0 billion shares were traded on the NYSE, and 2.4 billion shares changed hands on the Nasdaq
WTI crude oil decreased $0.58 to $80.54 per barrel, wholesale gasoline was $0.01 lower at $2.15 per gallon
The Bloomberg gold spot price decreased $26.96 to $1,171.89 per ounce
Markets were higher on the week, as the DJIA surged 3.5%, the S&P 500 Index increased 2.7% and the Nasdaq Composite Index advanced 3.3% For the week, leading sectors included Healthcare (+4.18%) Utlilities (+3.08%). Financials (+3.02%) and Industrials (+2.60%)
Consumer sentiment revised higher, while personal income and spending report misses
The final University of Michigan Consumer Sentiment Index was revised higher to 86.9 from the preliminary level of 86.4 for October, with economists surveyed by Bloomberg expecting an unadjusted reading, and compared to the 84.6 level posted in September. The upbeat report came as a downward adjustment to the component pertaining to current economic conditions was more than offset by an upward revision to the portion regarding the economic outlook. On inflation, the 1-year expectation was revised higher from 2.8% to 2.9%, compared to September’s 3.0% figure, while the 5-year inflation outlook was unadjusted at 2.8%, matching the rate posted last month.
Personal income rose 0.2% month-over-month in September, below the 0.3% gain that economists had projected, while August’s 0.3% rise was unrevised. However, personal spending declined by 0.2% m/m last month, versus expectations of a 0.1% gain, while August’s 0.5% rise was unrevised. The September savings rate as a percentage of disposable income rose to 5.6%, from August’s unrevised rate of 5.4%.
Meanwhile, the PCE Deflator was up 0.1% m/m in September, matching the increase that was expected, and compared to the downwardly revised 0.1% decline seen in August. Compared to last year, the deflator was 1.4% higher, versus expectations of a 1.5% increase. Excluding food and energy, the PCE Core Index was up 0.1%, inline with forecasts and was 1.5% higher y/y, matching expectations.
The Chicago Purchasing Managers Index (chart) showed growth in Midwest activity unexpectedly accelerated, rising to 66.2 for October—the highest level in a year—from 60.5 in September, and versus expectations of a decline to 60.0, with a reading above 50 depicting growth.
The 3Q Employment Cost Index increased by 0.7% quarter-over-quarter, above the 0.5% increase that economists had expected, after rising by an unrevised 0.7% in 2Q.
Treasuries were lower, with the yields on the 2-year and 10-year notes increasing 2 basis points (bps) to 0.49% and 2.33%, respectively, while the yield on the 30-year bond rose 1 bp to 3.06%.
Stocks post second-straight weekly rally
The equity markets registered their second-straight weekly advance as volatility continued to fade. 3Q earnings season rolled on, with 78% of the 362 companies that have reported out of the S&P 500 exceeding earnings estimates and 59% topping sales forecasts, per data compiled by FactSet.
News on the week included that The Federal Reserve decided to end its asset-purchase program and upgraded its assessment of the labor market. Also, the first look at 3Q U.S. GDP showing a 3.5% pace of expansion easily bested growth forecasts, while Europe’s banking sector stress test results eased some concerns about the health of the region’s financial system. The U.S. economy continues to grow, the Fed remains accommodative, and global growth isn’t falling off a cliff. However, volatility could continue but equity investors should keep the longer-term picture in mind, which we believe is positive. We feel investors who remain underexposed to equities relative to their plan should use pullbacks to gradually add exposure. The time to buy has proven throughout history to be when investors most want to sell.
Finally, the weekly winning streak was solidified by the Bank of Japan’s surprising move to boost its asset purchases, which was complemented by Japan’s $1.2 trillion GPIF—the world’s largest public pension fund—announcing that it will more than double its portfolio allocation of foreign and domestic stocks.
Markets in for another heavy week as U.S. jobs and European central banks take the stage
Next week, with earnings season past its apex, the domestic economic calendar is likely poised to carry the bulk of the data load, starting with Monday’s release of the ISM Manufacturing Index and concluding with Friday’s October non-farm payroll report. Every piece of economic data will be examined thoroughly as the Fed’s statement maintained its “considerable time” language with respect to its forward guidance on the fed funds rate, it was made clear that the pace of any potential rate hikes will be data-dependent. The Committee took a more upbeat tone to the employment situation, while also adjusting their wording of slack in the labor market, noting that indicators are suggesting that it is gradually diminishing.. But with inflation still relatively tame, we don’t think the Fed will necessarily be in a rush to hike rates, and the pace of hikes may remain slow.
Europe broadly higher, while Asia rallied
The European equity markets finished nicely higher across the board as yesterday’s better-than-expected 3Q GDP out of the U.S. was met with some upbeat earnings reports from the region’s banking sector. However, the bulk of the broad-based advance came amid an unexpected announcement from the Bank of Japan that it will increase its asset purchase program. In economic news in the region, the Eurozone consumer price inflation estimate rose inline with economists expectations for October, French consumer spending fell more than expected, and German retail sales dropped by a larger amount than anticipated for September. Finally, Russia’s central bank raised its benchmark interest rate more than expected to 9.50%, from 8.00%, and compared to the 8.50% rate that was expected.
Asian equity markets finished broadly higher on the heels of the 3Q U.S. GDP report yesterday and after the Bank of Japan (BOJ) unexpectedly boosted its asset purchase plan. Stocks in the region surged, while the yen fell sharply as the BOJ announced that it would expand its annual asset purchases to 80 trillion yen ($726 billion), from its previous target of 60-70 trillion yen, through purchases of government bonds, while also saying it expects to triple the amount of purchases of exchange-traded funds (ETFs) and Japanese real-estate investment trusts (REITs). The move was split between policymakers as five members voted in favor of it, while four members opposed it.
The BOJ justified its actions in its statement by saying, “If the current downward pressure on prices remains, albeit in the short term, there is a risk that conversion of deflationary mind-set, which has so far been progressing steadily, might be delayed.” Additionally, Japan’s massive Government Pension Investment Fund (GPIF) announced that it would boost its target allocations for domestic and foreign stocks to 25% from 12%, while lowering its overall bond allocation. The news comes after Japan reported mixed inflation data and a larger-than-expected drop in the country’s household spending.
Stocks in China finished higher with some strength in financials leading the way after some upbeat earnings reports out of the sector, ahead of tonight’s read on Chinese manufacturing activity, while Indian equities rallied as continued optimism regarding government reforms added to the upbeat mood.
The international calendar will be dominated by monetary policy decisions from the Reserve Bank of Australia, the European Central Bank and the Bank of England. Also, China’s manufacturing PMIs will be accompanied by Markit’s business activity reports on the Eurozone, the U.K. and Japan, while Germany’s trade balance and industrial production reports will be reported later in the week.