Market Insights 5/26/2015

New Data Weighs on Equities

The U.S. equity markets closed the trading session with sharp losses as investors were treated to a slew of domestic economic reports that aided in a rally for the U.S. dollar with some market participants deciphering the deluge of data as supportive of the Federal Reserve commencing the tightening of its monetary policy.

Treasuries were mostly higher following the data, while gold and crude oil prices were lower.

The Markets…

The Dow Jones Industrial Average dropped 190 points (1.0%) to 18,042

The S&P 500 Index fell 22 points (1.0%) to 2,104

The Nasdaq Composite tumbled 57 points (1.1%) to 5,033

In moderate volume, 796 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude slid $1.69 to $58.03 per barrel, wholesale gasoline lost $0.06 to $1.98 per gallon

The Bloomberg gold spot price decreased $18.91 to $1,187.70 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—rallied 1.3% to 97.28

Core durable goods orders top forecasts, kicking off a heavy day of data

Durable goods orders declined 0.5% month-over-month (m/m) in April, matching the Bloomberg estimate, while March’s 4.0% rise was revised to a 5.1% increase. Ex-transportation, orders rose 0.5% m/m, versus the forecast of a 0.3% gain, and March’s 0.2% decrease was favorably revised to a 0.6% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, grew 1.0%, compared to the projected 0.3% increase, and following the upwardly revised 1.5% rise in the month prior, from an initially reported decline of 0.5%.

The Consumer Confidence Index rose to 95.4 in May from a downwardly revised 94.3 in April and compared to the estimated 95.0. Components pertaining to expectations of business conditions dipped m/m, while sentiment toward the present situation improved solidly. Also, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—improved to -6.6 from -6.9 last month.

New home sales increased 6.8% m/m in April, to an annual rate of 517,000 units from March’s upwardly revised 484,000 unit pace, and compared to the forecast of a 508,000 rate. The median home price rose 8.3% y/y to $297,300. The supply of new home inventory declined to 4.8 months at the current sales pace. Sales in the Midwest and South rose m/m, while declining in the West and Northeast. 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 preliminary Markit U.S. Services PMI Index declined to 56.4 in May from 57.4 in April, and compared to the forecasted decrease to 56.5, with a reading above 50 denoting expansion.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.0% y/y in March, above the estimate of a 4.6% increase. M/M, home prices were higher by 1.0% on a seasonally adjusted basis for March, north of forecasts calling for a 0.9% gain.

The Dallas Fed Manufacturing Index fell to -20.8 for May from April’s -16.0 level and compared to the forecasted -12.4 figure. A reading below zero denotes contraction.

The Richmond Fed Manufacturing Activity Index improved to 1 in May from -3 in April, versus expectations of an improvement to 0, the demarcation point between expansion and contraction.

As the World Turns, we still believe economic growth will rebound in the coming months, with data suggesting the labor market is relatively healthy, small business optimism improving, and capital expenditure plans expanding, while housing has been a brighter spot. The consensus, and our, expectation is that the Fed will remain on hold through the summer and not begin raising rates until at least September. But it’s the subsequent path of rates that matters more than the start point.

Treasuries were mostly higher with the yield on the 2-year note flat at 0.61%, while the yield on the 10-year note dropped 8 basis points to 2.13% and the 30-year bond rate fell 10 bps to 2.89%.

Tomorrow, the U.S. economic calendar will quiet down, with weekly MBA Mortgage Applications expected to be the lone release.

Europe mostly lower, Asia mixed

The European equity markets finished mostly lower, with some markets that were closed yesterday for a holiday returning to action, while traders digested the plethora of U.S. data. Greek concerns continued to linger, though the equity markets in Greece rebounded somewhat from yesterday’s decline that came as the nation has yet to seal a deal to continue to tap bailout aid, with a key debt payment due next week to the International Monetary Fund (IMF). The euro traded solidly lower versus the U.S. dollar, while bond yields in the region were mixed, with rates in peripheral eurozone bond markets gaining some ground led by Greece.

Stocks in Asia finished mixed ahead of the return to action for the U.S. and some European markets. Chinese stocks were outperformers, finding strength in optimism that access to stocks in the region is expanding with the expected exchange link between Shenzhen and Hong Kong later this year coming on the heels of the recently opened Shanghai/Hong Kong link, while the nation announced on Friday cross border sales of mutual funds will begin July 1. Japanese stocks ticked higher, allowing the Nikkei 225 Index to extend its 15-year high and Australia experienced broad-based gains, while Indian equities declined amid some posturing ahead of some derivatives expiration later this week, per Bloomberg, and lingering concerns about corporate profits.