Market Insights 5/20/2015

Stocks Drift Lower Following Fed Minutes

The U.S. equity markets staged mild gains before ultimately pulling back and closing mixed on the heels of the release of the Federal Reserve’s minutes from its April monetary policy meeting.

Equities were treated to a mixed bag of earnings results from the retail sector, while financials were in focus following announced findings of probes into manipulation of foreign exchange and Libor markets. Treasuries were higher, as were the U.S. dollar, gold and crude oil prices.

The Markets…

The Dow Jones Industrial Average declined 14 points (0.1%) to 18,291

The S&P 500 Index lost 2 points (0.09%) to 2,126, sectors were mixed on the day with 5 down and 4 up, Utilities +.16%, Energy +.19% and HealthCare+.13% leading the way higher and Industrials -.37% and Financials -.28% providing the drag.

Small and MidCaps outpaced LargeCaps with the the MidCap 400 up .03% and the SmallCap 600 higher by .07% when the S&P 500 returned -.09%.

The Nasdaq Composite gained 2 points to 5,072

In moderate volume, 692 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude gained $0.99 to $58.98 per barrel, wholesale gasoline added $0.04 to $2.04 per gallon

The Bloomberg gold spot price increased $2.39 to $1,210.25 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 95.54

Fed releases minutes, mortgage applications decline

The minutes from the Federal Open Market Committee’s (FOMC) two-day monetary policy meeting, which concluded on April 29, showed that Committee members remain divided over the timing of the first rate hike. Although officials may hold diverging views about the likely timing and pace of policy firming, they agreed that the Committee’s decision to begin firming would depend on the incoming data and their implications for the economic outlook. In discussing the language for its post-meeting statement, the Committee also agreed that the wording should reflect their assessment that the Committee’s decision to begin normalizing policy would be determined on a meeting-by-meeting basis, and that this assessment would take into account a wide range of information.

Our long-term view continues to be that the Fed’s approach to tightening monetary policy will be slow and that the potential upside in yields will be limited due to structurally slower economic growth and lower inflation than in the historical past. It’s goal is to “normalize” policy rather than slow down an overheating economy. In the near term, investors should expect more volatility as expectations about central bank policies evolve and get highlighted in the news.

The MBA Mortgage Application Index declined 1.5% last week, after decreasing 3.5% in the previous week. The decline came as a 0.3% rise in the Refinance Index was more than offset by a 3.7% drop for the Purchase Index, with the average 30-year mortgage rate rising 4 basis points to 4.04%.

Treasuries were higher with the yield on the 2-year note declining 2 basis bps to 0.59%, the yield on the 10-year note falling 3 bps to 2.26% and the 30-year bond rate decreasing 1 bp to 3.07%.

Tomorrow, the housing market will continue to be in focus as the U.S. economic calendar will bring the release of existing home sales, with the largest portion of the home sales market projected to rise 0.8% month-over-month in April to an annual rate of 5.23 million units. It appears, first time home buyers are being impeded by the lack of existing housing supply for sale, which has driven up prices and crowded out lower income buyers. New home construction is needed to ease the supply issue in many of these markets but the jump in the Housing Market Index—a key leading indicator for housing starts—supports the view that housing is likely to be a brighter light illuminating the economy this year.

Other items set for release on tomorrow’s domestic docket include weekly initial jobless claims, forecasted to increase to a level of 270,000 from the 264,000 posted the week prior, as well as the Philly Fed Manufacturing Index, expected to have risen to a level of 8.0 for May from the 7.5 registered in April, and the Kansas City Fed Manufacturing Index, with economists expecting an increase to -4 for May from -7 in April, with zero representing the demarcation point between expansion and contraction for each respective index. Finally, we will also receive the Index of Leading Economic Indicators, with economists looking for a 0.3% m/m advance in April after ticking 0.2% higher in the month prior.

Europe ticks higher, Asia mixed as Japanese stocks get a boost from an upbeat GDP report

The European equity markets tilted toward the upside, following yesterday’s broad-based gains, despite lingering Greek debt deal uncertainty, while traders digested some corporate and economic data ahead of the release of the April meeting minutes from the U.S. Federal Reserve. Bond yields gained ground, while the euro continued its recent retreat against the U.S. dollar. In economic news, the minutes from the Bank of England’s May policy meeting showed members voted unanimously to keep its benchmark interest rate at a record low of 0.50%, though the decision for two members was “finely balanced.” German wholesale inflation came in cooler than expected for April, while eurozone construction output rebounded for March.

Stocks in Asia finished mixed on the heels of the lackluster session in the U.S. yesterday as the dollar rallied and bond yields moved higher, while sentiment in the region was buoyed by a stronger-than-expected 1Q GDP report. Japan announced a 2.4% quarter-over-quarter annualized pace of growth in 1Q, compared to the 1.6% expansion that was expected, and an acceleration from the downwardly revised 1.1% rise seen in 4Q. Chinese equities were supported by gains in technology issues, while in Australia a favorable read on the nation’s consumer sentiment was overshadowed by some weakness in basic materials stocks.