Monthly Archives: September 2015

Market Insights 9/30/2015

Stocks Higher

U.S. equities closed the final session of 3Q with solid gains on the heels of a broad-based global advance with some recent soft data out of Japan and the eurozone boosting expectations of additional stimulus in those regions.

Treasuries were mixed as an upbeat ADP employment report was met with an unexpected decline in Midwest manufacturing activity. Gold was lower, crude oil prices were mixed and the U.S. dollar was higher.

The Markets…

The Dow Jones Industrial Average gained 236 points (1.5%) to 16,285

The S&P 500 Index increased 36 points (1.9%) to 1,920

The Nasdaq Composite advanced 103 points (2.3%) to 4,620

In heavy volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.14 to $45.09 per barrel, wholesale gasoline added $0.02 to $1.37 per gallon

The Bloomberg gold spot price declined by $11.42 to $1,116.01 per ounce

ADP employment report tops forecasts

The ADP Employment Change Report showed private sector payrolls rose by 200,000 jobs in September, versus the Bloomberg forecast of a 190,000 increase, while August’s rise of 190,000 jobs was revised to a 186,000 gain. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader non-farm payroll report, expected to show an increase of 200,000 jobs in September, after posting a rise of 173,000 in August. Excluding government hiring, private sector payrolls are expected to increase by 198,000, after expanding by 140,000 in August. The unemployment rate is forecasted to remain at 5.1% and average hourly earnings are projected to rise 0.2% month-over-month.

The Chicago Purchasing Managers Index showed Midwest activity unexpectedly fell into contraction territory (below 50), falling to 48.7 in September from 54.4 in August, and versus the expectation of a decline to 53.0. New orders, production and inventories all fell m/m, while employment grew compared to the prior month.

The MBA Mortgage Application Index fell 6.7% last week, after jumping 13.9% in the previous week. The drop came as a 7.5% decline in the Refinance Index was accompanied by a 5.6% decrease for the Purchase Index, while the average 30-year mortgage rate dipped 1 basis point to 4.08%.

In afternoon action, Federal Reserve Chairwoman Janet Yellen delivered the opening remarks to the Fed’s annual community banking conference in St. Louis, which provides an opportunity for bankers, regulators, and academic researchers to come together to share ideas and insights about community banking. Last week, Yellen noted in a speech that an interest rate hike sometime later this year would likely be appropriate, keeping expectations of a rate liftoff this year intact.

Treasuries were mixed, with the yield on the 2-year note declining 1 bp to 0.64%, while the yield on the 10-year note was flat at 2.05% and the 30-year bond rate ticked 2 bps higher to 2.87%. Bond yields have dropped as of late with the global markets remaining hampered by global growth concerns and Fed monetary policy uncertainty, as well as this week’s potential government shutdown, which appears to be set for a delay until December after the Senate passed a short-term spending bill, while the House is expected to approve the bill later today.

Tomorrow, global September business activity will be in focus, with reports on manufacturing and services sector output out of China and manufacturing activity out of the eurozone being followed by the ISM Manufacturing Index and Markit’s Manufacturing PMI Index in the U.S. ISM’s read is projected to decline to 50.6 from 51.1 in August, while Markit’s report is projected to remain at the prior month’s 53.0 level. Readings above 50 for both indexes denote expansion.

Underlying the view that the bull market is not over is the continued growth in the U.S. economy. The manufacturing sector, as well as multi-nationals, has been hit double-barreled by China’s growth slowdown and the dollar’s strength. The manufacturing sector is only about 12% of the U.S. economy though; with the services side representing the other 88%. And here the picture is much brighter. Associated with that strength is the improvement in housing—which is increasing its weight in the economy—and job growth, which continues to hum.

Europe and Asia broadly higher

European equities rallied, with Asian stocks finishing broadly higher and U.S. stocks extending yesterday’s gains. The advance in the region was broad-based, though automakers got a boost from an announcement that China will cut taxes on vehicle purchases. Stocks shrugged off some disappointing German economic reports and the festering migrant crisis, as Germany’s retail sales unexpectedly declined in August and its unemployment change surprisingly rose in September.

The Eurozone unemployment rate remained at 11.0%. In economic news, the Eurozone consumer price inflation estimate dipped 0.1% y/y for September, versus forecasts of a flat reading, and following the 0.1% rise posted in the month prior. Also, U.K. 2Q GDP was unrevised at a 0.7% quarter-over-quarter pace of expansion, matching forecasts, and an acceleration from the 0.4% growth posted in 1Q. The euro was lower versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished broadly higher, closing out a dismal 3Q for the equity markets, with the modest gains yesterday in the U.S. that snapped a string of recent losses slightly easing dampened global sentiment. Stocks in China advanced, as automakers received some support from the announcement out of China that it will cut taxes on vehicle purchases, ahead of tomorrow’s beginning of a week-long holiday, while some reports on the nation’s manufacturing and services sector activity are slated to be released tonight. Japanese equities gained back some of yesterday’s tumble on the exacerbated global growth concerns, while the yen retreated somewhat from its recent rally. Also, expectations of further stimulus measures from the Bank of Japan buoyed the markets on the heels of reports showing that nation’s industrial production unexpectedly declined and retail sales grew by a smaller amount than anticipated for August. Tomorrow, Japan will report its 3Q Tankan survey, which will give us a largely-followed look at sentiment in the country’s large manufacturing sector. An advance in Australia was aided by some strength in financials and mining stocks, while South Korean securities were higher, returning to action after being closed for the past two sessions due to a holiday. Finally, Indian equities extended yesterday’s gains that came from the larger-than-expected rate cuts by the Reserve Bank of India.

Market Insights 9/29/2015

Stocks Mixed After Morning Pop

After an upbeat start, U.S. equities closed the regular session mixed in choppy action, as stocks attempted to stabilize trading levels following yesterday’s steep declines with global growth concerns, Fed uncertainty and a potential government shutdown continuing to curb conviction.

Treasuries were higher despite an unexpected improvement in domestic Consumer Confidence. Gold and the U.S. dollar were lower and crude oil prices were higher.

The Markets…

The Dow Jones Industrial Average gained 47 points (0.3%) to 16,049

The S&P 500 Index added 2 points (0.1%) to 1,884

The Nasdaq Composite fell 27 points (0.6%) to 4,517

In heavy volume, 1.0 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.80 to $45.23 per barrel and wholesale gasoline added $0.02 to $1.35 per gallon

The Bloomberg gold spot price declined by $4.29 to $1,127.66 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 95.91

Consumer Confidence surprisingly improves, while home prices miss forecasts

The Consumer Confidence Index improved to 103.0 in September—the highest level since January—from the downwardly revised 101.3 level in August and compared to the Bloomberg estimate of a decline to 96.8. The component pertaining to sentiment toward the present situation improved solidly, more than offsetting a dip in expectations of business conditions. Also, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 0.8 from the upwardly revised 0.4 posted last month.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.0% year-over-year in July, below the estimate of a 5.2% increase. Month-over-month (m/m), home prices were lower by 0.2% on a seasonally adjusted basis for July, versus forecasts calling for a 0.1% gain.

Treasuries were higher, with the yields on the 2-year note and the 30-year bond declining 2 basis points to 0.65% and 2.85%, respectively, while the yield on the 10-year note dropped 4 bps to 2.05%. Bond yields fell yesterday as the global markets remained hampered by global growth concerns and Fed monetary policy uncertainty, as well as this week’s potential government shutdown.

Tomorrow, the U.S. economic calendar will offer the latest read on weekly MBA Mortgage Applications, to be followed by ADP’s employment change report, which is expected to show private sector payrolls rose by 190,00 jobs in September. Also, we will receive the Chicago Purchasing Managers Index for September, expected to show activity in the Midwest slowed to 53.0 from the 54.4 posted in August, though a reading above 50.0 indicates expansion.

Europe and Asia finish lower

European equities finished lower, with pressure on healthcare stocks remaining, amid persisting global growth concerns, particularly centered on the economic slowdown in China. However, oil & gas and basic materials stocks rebounded from recent pressure despite the continued growth uneasiness.

The economic front on both sides of the pond may have helped limit losses with the surprising improvement in U.S. Consumer Confidence following an unexpected rise in Eurozone economic confidence in September. German consumer price inflation declined more than expected m/m in September, while Spanish retail sales rose solidly in August. The euro traded slightly lower versus the U.S. dollar, while bond yields in the region finished mostly to the downside.

Stocks in Asia finished decisively lower following the drop in the U.S. and Europe yesterday as global growth concerns, fueled by uneasiness regarding China’s economic slowdown, festered to dampen global sentiment and continue to pummel commodity-related issues. Japan’s Nikkei 225 Index fell 4.1%, exacerbated by the extended rally in the yen, while resource-related stocks fell to weigh on Australia’s S&P/ASX 200 Index, which dropped 3.8%.

Stocks in mainland China and Hong Kong traded sharply lower, while yesterday China reported an accelerated drop in industrial profits. Volume was lighter than usual ahead of Thursday’s beginning of a week-long holiday celebration in China and as South Korean markets remained closed today. Indian equities erased early losses and finished higher, after the Reserve Bank of India cut two of its benchmark interest rates by a larger-than-expected 50 bps, with economists expecting a reduction of 25 bps.

Market Insights 9/28/2015

Stocks Slump to Start the Week

U.S. equities finished the first trading session of the week with solid losses, with China growth concerns sapping sentiment and thrashing the commodity markets, including gold and crude oil, while continued Fed uncertainty and a potential government shutdown added further uncertainty to the mix. Treasuries finished higher amid the dour mood, while the U.S. dollar was lower.

The Markets…

The Dow Jones Industrial Average tumbled 313 points (1.9%) to 16,002

The S&P 500 Index lost 50 points (2.6%) to 1,882

The Nasdaq Composite plunged 143 points (3.0%) to 4,544

In heavy volume, 1.1 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.27 to $44.43 per barrel and wholesale gasoline lost $0.05 to $1.33 per gallon

The Bloomberg gold spot price decreased by $14.21 to $1,131.99 per ounce

Personal Income Rise, Pending Home Sales Decline

Personal income was 0.3% higher month-over-month in August, below the Bloomberg forecast of a 0.4% rise, while July’s 0.4% increase was revised to a 0.5% advance. Personal spending rose 0.4% m/m, above expectations of a 0.3% increase, while July’s 0.3% gain was adjusted to a 0.4% advance. The savings rate as a percentage of disposable income declined to 4.6% from the downwardly revised 4.7% posted in July.

Pending home sales declined 1.4% m/m in August, versus the projected 0.4% rise, and following the unrevised 0.5% increase registered in July. Compared to last year, sales were 6.7% higher, versus forecasts of an 8.1% rise. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which declined more than expected in August.

Treasuries were higher, as the yield on the 2-year note declined 2 basis points to 0.67%, the yield on the 10-year note fell 7 bps to 2.09%, and the 30-year bond rate dropped 9 bps to 2.87%.

Today’s data kicks off a busy week for the U.S. economic front and barring a potential government shutdown that could impact the dissemination of data, it will culminate with Friday’s release of the September nonfarm payroll report. Ahead of Friday’s labor report, we will get other key domestic reports that are likely to keep Fed rate hike uncertainty and accompanying volatility elevated such as tomorrow’s S&P/Case-Shiller Home Price Index, forecasted to show home prices in the 20-city composite rose 5.2% year-over-year during July, and inch 0.1% higher m/m on a seasonally adjusted basis, while Consumer Confidence, also released tomorrow, is expected to fall to a level of 97.0 for September from the 101.5 posted in August. Later in the week investors will get a look at separate manufacturing reads from Markit and the ISM, September U.S. auto sales, and factory orders.

European stocks see pressure, Asia mixed

European equities finished broadly lower on the heels of a disappointing read on Chinese industrial profits. Spain’s political front was also in focus with pro-independence parties winning a majority in Catalonia’s parliamentary regional election, but the Catalan leader’s party did not gain enough votes to win an overall majority. The euro reversed to the upside versus the U.S. dollar in afternoon action and bond yields in the region moved mostly to the downside.

Further east, stocks in Asia finished mixed with traders grappling with another disappointing economic report out of China as well as uncertainty regarding the timing of the first rate hike in the U.S. Volume was lighter than usual with a few markets in the region closed for holidays, including South Korea and Hong Kong. Early pressure for Chinese stocks came as a report showed the nation’s industrial profits fell 8.8% year-over-year in August, an acceleration from the 2.9% drop seen in July. The action comes ahead of a plethora of reports on China’s September manufacturing and services sector business activity. Mainland Chinese stocks will be off later in the week as the nation’s week-long National Day holiday begins. Japanese equities fell, with the yen showing some strength and following the drop in China’s industrial profits, while a plethora of Japanese stocks were discounted to reflect their upcoming dividends, per Bloomberg. Finally, Indian stocks dropped 1.0% ahead of tonight’s monetary policy decision by the Reserve Bank of India, with expectations the central bank will cut some of its benchmark interest rates by 25 bps.

The Cash Is King Playbook

We’re seeing something really unusual in the financial markets this year. There’s almost nothing that’s working this year. No matter where you’ve diversified your portfolio you’ve likely lost some money with the exception of cash. If we look at the two primary asset classes, stocks and bonds, cash has only outperformed both in the same year 10 times in the last 90 years. So this is a pretty unusual event. But there’s some potential good news on the horizon. When this occurs both stocks and bonds tend to bounce back very strong.

In the 10 times this has occurred in the last 90 years stocks have followed up with average 1, 2, and 3 year returns of 14.34%, 18.76% and 16.72%. Bonds have done a bit worse with a 1, 2 and 3 year average return of 10.24%, 7.7% and 6.17%.

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Even a balanced portfolio, of stocks and bonds, has generated high returns with a 1, 2 and 3 year average return of 12.29%, 13.23% and 11.44%.

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As is often the case with diversification, it’s not timing the market that counts. It’s time in the market. So, while cash looks particularly smart today the historical figures say that cash won’t be king for long. Remember, it’s only a loss if you sell.

Market Insights 9/25/2015

Biotech Plunge Drags on Equity Rally

After starting the day sharply higher following last night’s address from Fed Chair Janet Yellen, which appeared to ease monetary policy uncertainty, the major U.S. indexes closed mixed as steep declines in biotech stocks weighed heavily on sentiment.

Treasuries were lower, while the domestic economic calendar revealed a favorable revision to 2Q GDP. Gold was lower, the U.S. dollar advanced and crude oil prices were mixed.

The Markets…

The Dow Jones Industrial Average gained 113 points (0.7%) to 16,315

The S&P 500 Index lost 1 point to 1,931

The Nasdaq Composite tumbled 48 points (1.0%) to 4,687

In moderately heavy volume, 975 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.79 to $45.70 per barrel and wholesale gasoline was $0.03 higher at $1.38 per gallon

The Bloomberg gold spot price decreased by $7.46 to $1,146.49 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 96.18

Markets were lower for the week, as the DJIA lost 0.4%, the S&P 500 Index decreased 1.4% and the Nasdaq Composite Index fell 2.9%

Final revision to 2Q GDP stronger than expected

The final look (of three) at 2Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 3.9%, favorably revised from the 3.7% growth registered in the second report, where the Bloomberg forecast expected it to remain. 1Q GDP expanded by an unrevised 0.6%. Personal consumption was revised to a 3.6% increase, above forecasts calling for a 3.2% gain for 2Q from the 3.1% increase that was previously reported. Personal consumption grew by an unrevised 1.8% in 1Q. The upward revision was also led by favorable adjustments to nonresidential fixed investment and to residential fixed investment that were partly offset by a downward revision to private inventory investment.

On inflation, the GDP Price Index was unrevised at a 2.1% increase, matching forecasts, while the core PCE Index, which excludes food and energy, was revised to a 1.9% rise, versus forecasts of an unrevised 1.8% gain.

The preliminary Markit U.S. Services PMI Index declined to 55.6 in September from 56.1 in August, in line with forecasts, with a reading above 50 denoting expansion. Markit said business activity in the sector grew but at the slowest pace in three months and confidence remained close to its three-year low, while average prices charged declined for a second month running.

The final September University of Michigan Consumer Sentiment Index was revised higher to 87.2 from the preliminary level of 85.7, and compared to the forecast of an upward revision to 86.5. However, the index was down from the 91.9 level in August. The upward revision came as both components pertaining to current economic conditions and the economic outlook were adjusted to the upside, but both were down versus August. The 1-year inflation projection was revised to 2.8% from 2.9%, in line with the projection in August, while the 5-10 year inflation outlook was adjusted to 2.7% from 2.8%, also matching the rate in the month prior.

Treasuries finished lower, with the yield on the 2-year note increasing 1 basis point to 0.69%, the yield on the 10-year note gaining 4 bps to 2.17%, and the 30-year bond rate advancing 5 bps to 2.96%.

Europe higher following Fed speech, Asia mixed to close out the week

European equity markets finished broadly higher, with U.S. Fed Chairwoman Janet Yellen noting in a speech last night that an interest rate hike sometime later this year would likely be appropriate. The comments appeared to ease concerns about the global economic picture as last week’s decision by the Fed to hold off on a rate hike seemed to foster concerns that the Fed knew something about the economy that the markets did not, which spooked global sentiment. The euro was lower versus the U.S. dollar, which found support from Yellen’s speech, while bond yields in the region were mostly higher.

Some automakers rebounded to help the broad-based advance, after coming under pressure this week amid the fallout from Volkswagen AG’s emissions cheating scandal. Markets in the region are shrugging off some political uncertainty in Spain ahead of this weekend’s Catalonia regional elections.

Stocks in Asia finished mixed on the heels of the declines in the U.S. and Europe yesterday, while traders digested last night’s speech by Fed Chair Yellen. Japanese equities rebounded from the previous session, aided by some weakness in the yen as the U.S. dollar gained ground following Yellen’s speech, while speculation of further stimulus measures by Japan’s government, which was bolstered by an updated policy outlook from Prime Minister Abe, aided the equity markets.

Japan’s core consumer price inflation dipped in August, matching expectations, but the headline rate and inflation after stripping out food and energy both came in slightly hotter than expected. Stocks in mainland China fell amid lingering economic growth concerns and as expectations regarding the government’s efforts to stabilize the markets continued to wane. South Korean securities declined, while weakness in oil & gas and financial issues more than offset strength in basic materials to lead Australian equities lower. Finally, markets in India were closed for a holiday.

WEEKLY RECAP: Fed uncertainty and global growth concerns foster disappointing week

The domestic equity markets finished mostly to the downside, courtesy of the fallout from last week’s decision by the Federal Reserve to hold off on hiking interest rates and accompanying it with a still-dovish statement.

Global growth concerns continued to fester, with China offering another disappointing read on manufacturing activity, while Dow member Caterpillar lowered its revenue outlook as it faces “a convergence of challenging marketplace conditions in key regions and industry sectors—namely in mining and energy.”

The global auto sector was in focus this week, with the industry feeling the ripple effects from Volkswagen’s admission that it cheated on U.S. emissions tests for its diesel vehicles.

Healthcare stocks were hampered by Presidential candidate Hilary Clinton’s pledge to take on the industry regarding drug pricing.

Toward the end of the week, Fed Chair Yellen’s speech kept alive expectations of a rate hike this year. Her speech appeared to ease some concerns about the domestic economy, possibly along with the week’s new and existing homes sales reports that suggested the housing sector will likely carry more weight in the economy going forward.

THE WEEK AHEAD: September labor report headlines heavy domestic economic calendar

Barring a potential government shutdown next week that could impact the dissemination of data, the U.S. economic calendar will culminate with Friday’s release of the September nonfarm payroll report. Ahead of the release, we will get other key domestic reports such as personal income and spending, the S&P/Case-Shiller Home Price Index, separate manufacturing reads from Markit and the ISM, and September U.S. auto sales.

Stocks have moved off of their correction lows despite continued global growth concerns and Fed uncertainty. We think most of the damage has been done in price; but more time (and volatility) may be needed before the bottoming process ends. The Fed punted on raising rates and took pains to indicate their continued dovishness and preference to raise rates slowly in the future. The continued uncertainty will likely contribute to elevated volatility in the coming months. The plunge in commodity prices should prove to be a net benefit to the global economy, despite some pockets of weakness for commodity-exposed sectors and industries.

In a quarter century, cash had never beaten stocks, bonds—until now

Cash is on track this year to outperform both stocks and bonds, something that hasn’t happened since 1990, according to Bank of America. And it might all be down to the notion that central bank-fueled liquidity has peaked. Year-to-date annualized returns are negative 6% for global stocks and negative 2.9% for global government bonds, according to analysts led by Michael Hartnett in a Friday note. The dollar is up 6% and commodities are down 17%, while cash is flat.

Here’s what this has to do with the liquidity story:

[Quantitative easing] & zero rates reflated financial assets significantly. The only assets that QE did not reflate were cash, volatility, the US dollar and banks. Cash, volatility, the US dollar are all outperforming big-time in 2015, which tells you markets have been forced to discount peak of global liquidity/higher Fed funds. Frequent flash crashes (oil, dollar, S&P 500) tell the same story. Peak in liquidity = peak of excess returns = trough in volatility.

While the Bank of Japan and the European Central Bank continue to provide quantitative easing, the Fed has stopped its asset purchases and is moving toward lifting rates from near zero, as is the Bank of England. The notion that liquidity has peaked and that financial markets must now adjust to that new dynamic.

Experts have argued that as China and other emerging-market central banks shed foreign reserves, liquidity is no longer flowing one direction, making for more volatile conditions.

It isn’t all doom and gloom, however. While it is “suddenly impossible to find a bull”, there are some positive notes, they said, including the observation that “bond and credit markets are not doing anything freaky right now,” they said. In the event of “true quantitative failure,” falling stock prices would be accompanied by falling credit prices and rising bond yields.

Also, housing markets, the job market and bank lending haven’t reversed their recent recovery and global earnings-per-share figures have already seen a sharp fall, dropping 9.6% from peak to trough.

Many of the most followed equity strategists on the street, who recently lowered their year-end target for the S&P 500 to 2,100 from 2,200, said a successful defense of 1,850 on the S&P would be a positive in a market without much conviction.

Many experts feel oil needs to avoid setting new lows and higher oil prices would generally boost global moral. Other positives would include emerging-market rate increases and reforms that allow emerging market currencies to rally; improvement in China’s export growth, which would remove the risk of further yuan devaluation; and the ability of individual investors to continue viewing the recent price action as an overdue correction rather than the start of a bear market.

Finally, there is the need for resilient U.S. domestic demand because the best narrative for risk assets in the next three to four quarter is still higher growth/higher rates. So maybe it is no surprise stocks are catching a lift Friday from Fed Chairwoman Janet Yellen’s signal that a rate increase by year-end remains likely.

Market Insights 9/24/2015

U.S Stocks Slump Ahead of Yellen Comments

Though well off the worst levels of the day, U.S. equities finished lower following some lackluster, but mostly better-than-expected domestic data amid continued global growth uncertainty and ahead of a speech on inflation from Fed Chair Yellen to be delivered about an hour after the closing bell. Treasuries, gold and crude oil prices were all higher, while the U.S. dollar was lower.

The Markets…

The Dow Jones Industrial Average fell 79 points (0.5%) to 16,201

The S&P 500 Index ticked 7 points (0.3%) lower to 1,932

The Nasdaq Composite lost 18 points (0.4%) to 4,734

In heavy volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.43 to $44.91 per barrel, wholesale gasoline was $0.01 lower at $1.35 per gallon

The Bloomberg gold spot price rose $22.70 to $1,153.00 per ounce

Durable goods orders mixed and jobless claims below forecasts, ahead of Fed Chief’s speech

Durable goods orders fell 2.0% month-over-month (m/m) in August, compared to the Bloomberg estimate of a 2.3% drop, with July’s 2.0% gain being revised to a 1.9% rise. Transportation orders dropped solidly, led by motor vehicles and nondefense aircraft and parts, partially offset by a solid gain in orders for defense aircraft and parts. Ex-transportation, orders were flat m/m, versus forecasts of a 0.1% gain, and July’s 0.6% increase was negatively revised to a 0.4% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, declined 0.2%, in line with projections, and following the downwardly revised 2.1% increase in the month prior, from an initially reported gain of 2.2%. Machinery orders rose m/m, while demand for computers, communications equipment and appliances all declined.

Weekly initial jobless claims grew by 3,000 to 267,000 last week, compared to estimates of a rise to 272,000 from the prior week’s unrevised at 264,000. The four-week moving average declined by 750 to 271,750, while continuing claims dipped by 1,000 to 2,242,000, north of the forecasted 2,240,000 level.

New home sales rose 5.7% m/m in August to the highest annual rate of 552,000 units since February 2008 from July’s upwardly revised 522,000 pace, and compared to forecasts of a 515,000 rate. The median home price ticked higher y/y and m/m to $292,700. The supply of new home inventory fell to 4.7 months as sales were higher m/m in all regions except the Midwest, and all were up solidly y/y. New home sales are considered a timely indicator as they are based on contract signings instead of closings.

Treasuries were higher, with the yield on the 2-year note declining 2 basis points to 0.68%, and the yields on the 10-year note and the 30-year bond dropping 3 bps to 2.13%, and 2.92%, respectively.

One hour after the closing bell, Federal Reserve Chairwoman Janet Yellen will deliver a speech on the topic of inflation dynamics and monetary policy. Uncertainty is running high regarding if the Central Bank will raise interest rates this year and per Bloomberg, traders are pricing in about a 43% chance of a rate hike in December, and a 51% probability in January. Last week the Fed held off on a rate hike and appeared to throw the markets a curveball by offering a still-dovish statement. The lack of a rate hike was not the big surprise, but the still-dovish accompanying statement was a little unexpected. Recent global economic and market turmoil appear to have been the proximate cause for the punt, although still-low inflation gave the Fed cover as well. We believe the Fed will act this year; but that the pace of hikes will be very slow relative to recent history.

Tomorrow, the domestic economic calendar will be headlined by the final look (of three) at 2Q Gross Domestic Product (GDP), with economists forecasting a 3.7% quarter-over-quarter rise in domestic output, unrevised from the second look, but up from the preliminary forecast of a 2.3% increase and personal consumption is expected to have inched higher to a gain of 3.2% from the previously reported 3.1% increase, while the GDP Price Index and the core PCE index are estimated to remain at their respective levels. Markit will deliver its preliminary Services PMI Index for September, expected to inch lower to 55.6 from the 56.1 posted in August and we will also receive the final University of Michigan Consumer Sentiment Index for September, forecasted to improve to 86.5 from the 85.7 registered in the preliminary release.

Europe lower, Asia mixed

European equities finished lower, with oil & gas, industrials and basic materials stocks leading the way on festering global growth concerns, while traders may have treaded lightly ahead of tonight’s speech by Fed Chair Yellen. Volkswagen AG’s emissions cheating scandal continued to hamper the auto sector, with reports of further departures from the company’s board and management, while shares of BMW AG fell after denying emissions cheating questions following a report by a German magazine that its X3 sport utility vehicle exceeded the European limit for air pollution. Stocks shrugged off a report showing German business confidence unexpectedly improved in September, as well as the announcement that Norway’s central bank surprisingly cut its benchmark interest rate. The euro traded higher versus the U.S. dollar and bond yields in the region were mixed.

Stocks in Asia finished mixed with caution prevailing, while Japanese markets returned to action following a three-day break for holidays. Japan’s Nikkei 225 Index fell 2.8%, on the heels of some modest strength in the yen and as the markets played catch up to the rest of the region, which have seen volatility remain elevated amid the lingering global growth concerns. Also, the auto sector in Japan was pressured by the fallout from Volkswagen’s emissions scandal.

Mainland Chinese stocks moved higher on continued optimism that President Xi’s U.S. visit will be beneficial to the nation’s exports to lend support to a slowing economy. Also, sentiment that the worst may be over for the mainland stock market’s recent tumble as the deleveraging process wanes may have buoyed the index, per Bloomberg. Australian equities advanced, aided by some strength in financials and mining companies, while securities in South Korea and India also finished to the upside.

Market Insights 9/23/2015

Uncertainty Abounds

Uncertainty surrounding Fed monetary policy and global growth continued to plague the minds of investors, with U.S. equities ending a volatile day lower. Another disappointing read on manufacturing activity out of China added an additional component to the ambiguity, even though manufacturing reports out of the U.S and Europe were somewhat upbeat. Treasuries were mixed, crude oil prices tumbled again and gold prices were higher, while the U.S. dollar was lower.

The Markets…

The Dow Jones Industrial Average fell 51 points (0.3%) to 16,280

The S&P 500 Index ticked 4 points (0.2%) lower to 1,939

The Nasdaq Composite lost 4 points (0.1%) to 4,753

In moderate volume, 779 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.88 to $44.48 per barrel, wholesale gasoline was $0.04 lower at $1.42 per gallon

The Bloomberg gold spot price rose $4.90 to $1,129.70 per ounce

Manufacturing output slightly stronger than expected, while mortgage apps jump

The preliminary Markit U.S. Manufacturing PMI Index for September remained at August’s 53.0 level, compared to the Bloomberg forecast of a dip to 52.8, with a reading above 50 denoting expansion. Markit said output growth picked up slightly but incoming new work and employment numbers rose at slower rates.

The MBA Mortgage Application Index rose 13.9% last week, after dropping 7.0% in the previous week. The jump came as a 17.7% surge in the Refinance Index was accompanied by a 9.1% gain for the Purchase Index, while the average 30-year mortgage rate remained at 4.09%.

Treasuries were mixed, with the yields on the 2-year note and the 30-year bond flat at 0.70% and 2.95%, respectively, while the yield on the 10-year note rose 2 basis points to 2.15%.

The headlining release on tomorrow’s U.S. economic calendar will likely be the August durable goods orders report. Headline orders are projected to drop 2.3% month-over-month after rising 2.0% in July, while excluding transportation, orders are anticipated to tick 0.1% higher following the prior month’s 0.6% gain. Non-defense capital goods orders excluding aircraft, considered a proxy for business spending, are projected to dip 0.1%, on the heels of July’s 2.2% advance.

Tomorrow the domestic docket will include new home sales, forecasted to have risen 1.6% month-over-month during August to an annual rate of 515,000 units, as well as weekly initial jobless claims, with economists anticipating a slight increase to a level of 272,000 from the prior week’s 264,000.

Europe mixed, Asia lower on continued global concerns after disappointing China data

European equities finished mixed to follow up yesterday’s tumble on global growth concerns and U.S. Fed monetary policy uncertainty. Oil & gas stocks were the best performers and financials lagged behind. Global growth concerns remained in the face of another disappointing read on Chinese manufacturing activity, partially offset by separate reports that were relatively upbeat as U.S. manufacturing output modestly topped forecasts and business activity continued to expand in the eurozone for September.

Markit’s preliminary Eurozone Composite PMI Index—a gauge of output from both the services and manufacturing sectors—declined to 53.9 from 54.3 in August, and compared to the decrease to 54.0 that was expected. However, a reading above 50 denotes expansion and the report showed new orders hit a five-month high and the “amount of raw materials bought by manufacturers rose at the fastest rate since February of last year in preparation for increased future production.” Should You Give European Stocks a Chance?, we lean toward a bullish perspective, as we think political risks surrounding Spanish elections are overstated, economic growth is on the mend, and reforms are underway to improve Italy’s growth potential.

In other economic news, France’s final 2Q GDP report was unrevised at a flat quarter-over-quarter pace of growth, matching expectations, and down from the 0.7% expansion posted in 1Q. The euro traded higher versus the U.S. dollar, while bond yields in the region moved mostly to the upside, with European Central Bank President Mario Draghi telling the European Parliament that it is too soon to say whether risks to the economic outlook warrant a step-up in ECB stimulus, per Bloomberg.

Stocks in Asia finished lower amid festering Chinese economic growth concerns, exacerbated by a preliminary read on the nation’s manufacturing output, which posted the lowest level in 6 ½ years. The Caixin/Markit China PMI Manufacturing Index declined to 47.0 in September—the lowest level since March 2009—from 47.3 in August, and compared to the projected improvement to 47.5. Also, concerns that the Chinese government may begin to pare its support aimed at stabilizing the markets appeared to ramp up to pressure sentiment as President Xi noted in a speech during his visit to the U.S. that China’s stock market has reached a “phase of self-recovery and self-adjustment.” Volume remained lighter than usual, with the Japanese markets continuing to be shuttered by holidays and will return to action tomorrow.

Market Insights 9/22/2015

Bears Romp

Looking to add to the gains seen yesterday, the bulls fell well short and U.S. equities finished solidly lower amid the continued Fed rate hike uncertainty and global growth concerns.

Commodities, including gold and crude oil, fell on the growth anxiety, adding an extra negative element to the market atmosphere, while automakers came under further pressure amid the fallout from Volkswagen’s U.S. emissions-rigging admission and healthcare stocks felt the effect of yesterday’s pledge by Presidential candidate Clinton to take on the industry regarding drug pricing.

Treasuries finished higher in the midst of the negativity, while the U.S. dollar also gained ground.

The Markets…

The Dow Jones Industrial Average tumbled 180 points (1.1%) to 16,330

The S&P 500 Index dropped 24 points (1.2%) to 1,943

The Nasdaq Composite plunged 72 points (1.5%) to 4,757

In moderately-heavy volume, 956 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.60 to $46.36 per barrel, wholesale gasoline was $0.02 higher at $1.42 per gallon

The Bloomberg gold spot price declined $8.30 to $1,124.50 per ounce

Regional manufacturing activity unexpectedly falls into contraction territory

The Richmond Fed Manufacturing Activity Index fell to -5 in September—the first negative reading since April—from the unrevised 0 level in August, and compared to the expected increase to 2, with a reading below zero denoting contraction. New order volume fell sharply along with order backlog and capacity utilization, which more than offset accelerated growth in employment and continued wage expansion.

Treasuries were higher, as yields fell, the yield on the 2-year note declined 4 basis points to 0.67%, the yield on the 10-year note dropped 6 bps to 2.14%, and the 30-year bond rate fell 8 bps to 2.94%.

The domestic economic calendar for tomorrow will yield Markit’s preliminary manufacturing PMI Index, for September, forecasted to remain at August’s 53 level, with a level above 50 denoting expansion, and MBA Mortgage Applications.

Europe lower amid drop in automakers drop and commodity stocks, Asia higher

European equities fell broadly, with U.S. Fed rate hike uncertainty lingering and global growth concerns festering to apply pressure on oil & gas and basic materials stocks. The global growth concerns came ahead of tonight’s read on Chinese manufacturing activity, which will be followed by tomorrow’s Markit business activity reports in Europe and the U.S. Fed policy uncertainty has flared up as of late after the Central Bank held off on a rate hike last week.

Also, automakers fell, led by another tumble for shares of Volkswagen AG as the German automaker announced that it will set aside about $7.3 billion in provisions to prepare for potential fines regarding its admission of rigging emissions tests for diesel vehicles in the U.S. Other automakers traded lower as France’s prime minster called for an expanded European investigation of the industry.

The euro traded lower versus the U.S. dollar, while bond yields in the region moved to the downside.

Stocks in Asia finished mostly higher on the heels of the solid advance in Europe and modest gains in the U.S. yesterday, though conviction remained constrained by Fed rate hike uncertainty in the U.S. and global growth concerns ahead of tonight’s manufacturing report out of China. Volume was also lighter than usual with markets in Japan remaining closed for holidays. Equities in China and Hong Long finished higher, with focus on Chinese President Xi’s state visit to the U.S. this week, while brokerage stocks received a boost from speculation of a possible exchange link between London and Shanghai.

Oil & gas stocks helped boost Australia’s market, despite some weakness in basic materials issues, while stocks in South Korea rose, with strength in local automakers lending some support on the possibility that the Volkswagen emissions investigation may yield benefits for their sales. However, Indian issues failed to move with the trend, with metals producers and industrials seeing pressure on the festering global growth concerns and Fed uncertainty.

Market Insights 9/21/2015

Choppy Action To Start The Week

U.S. equities finished higher on elevated volatility amid a disappointing read on domestic existing home sales, while the omnipresent Fed uncertainty continues to hang over the markets. Treasuries finished lower, as did gold, while crude oil prices and the U.S. dollar were sharply higher.

The Markets…

The Dow Jones Industrial Average rose 126 points (0.8%) to 16,510

The S&P 500 Index added 9 points (0.5%) to 1,967, Financials led the way with a gain of 1.15%, followed by Technology better by +1% and Consumer Discretionary higher by +.87%. The only sector lower was HealthCare giving back 1.33% on the day.

The Nasdaq Composite inched 2 points higher to 4,829

In moderate volume, 811 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil jumped $1.94 to $46.96 per barrel, wholesale gasoline was $0.04 higher at $1.40 per gallon

The Bloomberg gold spot price declined $5.20 to $1,132.60 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 1.1% higher at 95.86

Existing home sales decline more than expected in August

Existing-home sales in August dropped 4.8% month-over-month to a 5.31 million annual rate—on the heels of three-straight monthly gains—compared to the Bloomberg forecast of a decline to a 5.50 million pace. July’s figure was adjusted slightly downward to a 5.58 million unit rate. However, sales are 6.2% higher y/y, and have risen y/y for 11 consecutive months. The median existing-home price was 4.7% above a year ago at $228,700. Single-family and multi-family sales both declined m/m but were higher y/y. None of the four major regions experienced m/m sales increases in August, but all were still higher y/y.

The National Association of Realtors noted that despite August’s decline, positive aspects of the report were that price appreciation the last two months has started to moderate from the unhealthier rate of growth seen earlier this year, and the share of first-time homebuyers showed a positive turnaround. A continued bright spot for the US economy—and helping to boost second quarter GDP—has been housing, with homebuilder sentiment at the highest level in a decade, while new home starts and existing home sales are both near eight-year highs. Construction spending is up over 70% year-over year! Future gains also appear to be lining up. Household formation is up dramatically over the past few months, while the homeownership level has fallen below long-term averages. Inventories remain low, with the number of existing and new home available for sale as a percentage of the working age population is near a thirty-year low.

Treasuries were lower, as the yield on the 2-year note gained 2 basis points to 0.71%, the yield on the 10-year note increased 7 bps to 2.21%, and the 30-year bond rate traded 9 bps higher to 3.02%.

Tomorrow’s economic calendar will be light, with the Richmond Fed Manufacturing Index the only report slated for release, with the index of manufacturing activity in the Mid-Atlantic region for September expected to rise to a level of 2 from the zero posted in August, with zero being the demarcation point between expansion and contraction.

Europe rebounds from Friday’s Fed rout, Asia lower

European equities finished mostly higher, rebounding from Friday’s drop that came in the wake of the U.S. Fed’s decision to not begin to hike rates and start the process of monetary policy normalization. Schwab’s Chief Investment Strategist, Liz Ann Sonders, offers analysis of the Fed’s decision in her article, When Doves Cry…Yeah! Fed Punts and Keeps Rates Unchanged, at www.schwab.com/marketinsight. The euro traded lower versus the U.S. dollar and bond yields in the region moved mostly higher. Greek stocks saw modest pressure after the weekend’s election showed the country’s Syriza Party won, installing recently resigned Alexis Tsipras back as the country’s Prime Minister.

Stocks in Asia finished mostly lower on the heels of Friday’s drop in the U.S. following the decision last week by the Fed to hold off on raising rates, which appeared to spark concerns about global growth. Volume was lighter than usual with Japanese markets closed for a holiday that will have the nation’s bourses closed until Thursday. Stocks in China reversed early losses to finish higher, with assessments of the Chinese economy from a plethora of entities easing concerns about a collapse of the economy, but markets in Hong Kong and South Korea dropped, with the latter snapping a four-session winning streak. Mining and financials saw heavy declines, in turn pressuring stocks in Australia, while shares in India saw its losses kept in check as last week’s Fed decision to not lift rates boosted speculation that India’s central bank could announce rate cuts following its meeting next week, per Bloomberg.