Monthly Archives: October 2015

Market Insights 10/30/2015 – Happy Halloween

Trick or Treat

U.S. equities closed the trading session lower, though stocks finished off October with one of the strongest monthly advances in four years. With a plethora of earnings reports flooding the Street, Dow members Exxon Mobil and Chevron joined the majority of companies that have bested their quarterly expectations.

Treasuries and crude oil prices were higher, while gold and the U.S. dollar were lower. In economic news, personal income and spending and consumer sentiment missed forecasts and regional manufacturing activity surprisingly expanded.

The Markets…

The Dow Jones Industrial Average decreased 92 points (0.5%) to 17,800

The S&P 500 Index lost 10 points (0.5%) to 2,079

The Nasdaq Composite declined 21 points (0.4%) to 5,054

In moderately-heavy volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.53 to $46.59 per barrel, wholesale gasoline was $0.03 higher at $1.37 per gallon

The Bloomberg gold spot price declined by $4.10 to $1,141.87 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 96.99

Markets were higher for the week, as the DJIA advanced 0.1%, the S&P 500 Index rose 0.2%, and the Nasdaq Composite Index gained 0.4%

Personal income and spending slightly miss to headline heavy mixed economic calendar

Personal income was 0.1% higher month-over-month (m/m) in September, below the Bloomberg forecast of a 0.2% rise, while August’s 0.3% increase was revised to a 0.4% advance. Personal spending rose 0.1% m/m last month, below expectations of a 0.2% increase, while August’s 0.4% gain was unadjusted. The September savings rate as a percentage of disposable income rose to 4.8% from the upwardly revised 4.7% posted in August. The PCE Deflator was down 0.1% m/m, matching forecasts, with the prior month’s flat reading unadjusted. Compared to last year, the deflator was 0.2% higher, matching expectations. Excluding food and energy, the PCE Core Index was up by 0.1%, below expectations of a 0.2% rise, and the index was 1.3% higher y/y, versus estimates of a 1.4% increase.

The final October University of Michigan Consumer Sentiment Index was unexpectedly revised lower to 90.0 from the preliminary level of 92.1, and compared to the forecast of an upward revision to 92.5. However, the index was up from the 87.2 level in September. The downward revision came as both components pertaining to current economic conditions and the economic outlook were adjusted to the downside, but both were higher versus September. The 1-year inflation projection was unrevised at 2.7%, down from 2.8% in September, while the 5-10 year inflation outlook was adjusted to 2.5% from 2.6%, and below the 2.7% rate in the month prior.

The Chicago Purchasing Managers Index showed Midwest activity surprisingly jumped back into expansion territory (above 50) in October, rising to 56.2—the highest since January 2015—from 48.7 in September, and versus the expectation of a rise to 49.5.

The 3Q Employment Cost Index rose by 0.6% quarter-over-quarter, in line with forecasts, after rising by an unrevised 0.2% in 2Q.

Treasuries were mostly higher, with the yield on the 2-year note flat at 0.73%, while the yields on the 10-year note and the 30-year bond declined 3 basis points to 2.14% and 2.93%, respectively.

Europe and Asia mixed

European equities finished mixed, mirroring the results from a flood of earnings reports in the region. Also, traders digested the unchanged monetary policy decision from the Bank of Japan. In economic news, the eurozone consumer price inflation estimate for came in flat y/y for October, matching forecasts, and up from the 0.1% dip posted in September. Moreover, the eurozone unemployment rate unexpectedly dipped to 10.8%—the lowest since January 2012—for September, compared to the 11.0% estimate. The euro was higher versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed with traders digesting the Bank of Japan’s (BoJ) monetary policy decision to keep its stimulus measures unchanged, despite signs of slowing economic growth and inflation that is running below its target. Japanese equities advanced despite some strength in the yen and as some had forecasted that the central bank may announce further measures to support the economy. Also, the BoJ’s decision comes even as core consumer price inflation declined in September and the nation’s household spending unexpectedly declined last month. The BoJ cut its inflation forecast further after the closing bell. The decision was overshadowed by a report from the Nikkei newspaper that the government may boost fiscal stimulus. Stocks trading in mainland China and Hong Kong dipped amid some mixed earnings reports from the nation’s largest banks, while consumer products companies tied to baby goods rallied to limit losses after the announcement that the government ended its one-child policy. Australian securities declined, led by weakness in mining issues, partially offset by strength in oil & gas stocks. Finally, equities in South Korea and India traded lower.

WEEKLY RECAP: Stocks extend winning streak to close out October rally

U.S. equities posted their fifth-straight weekly gain, modestly adding to a sharp October rally for the global stock markets, with relatively upbeat domestic earnings reports adding to central bank stimulus efforts in China, Europe and Japan. The technology sector has been a bright spot this earnings season, adding credence to our outperform rating on the group. Although the Fed surprised some by accompanying its unchanged monetary policy decision with a hawkish statement that kept the possibility of a December rate hike alive, stocks counter-intuitively rallied midweek.

Concerns about a Fed rate hike were likely tamped down by another dose of mixed U.S. economic data, with disappointing durable goods orders being impacted by the slowing manufacturing sector, while the first look at 3Q GDP showed growth slightly missed expectations. Stocks also likely continued to rally with concerns about a federal government shutdown being taken off the table as a surprise budget deal averts debt ceiling crisis. Finally, the U.S. dollar retreated and crude oil prices rebounded from last week’s rout, suggesting future quarters should be less negatively impacted, allowing investors to focus on overall demand, which remains fairly healthy.

THE WEEK AHEAD: Employment report likely to garner attention next week

Next week’s U.S. economic calendar will begin with a couple key manufacturing reads from Markit and the ISM, and will culminate with Friday’s release of the October non-farm payroll report. The relatively weak September jobs report should prove to be more of an outlier than the beginning of a deteriorating trend. That said, job gains should moderate over time, which is natural at this stage in the economic cycle.

Additional reports set for release next week include construction spending, factory orders, the trade balance, and consumer credit.

Market Insights 10/29/2015

Equities Tick Lower as GDP Growth Slightly Misses

U.S. stocks showed great resilience and ended the day only slightly lower in the wake of a slightly softer-than-expected Q3 GDP report, while the Street is digesting a plethora of earnings reports and news of mega-merger talks in the health care sector.

Stocks slipped following yesterday’s solid gains that came despite Fed preserving the possibility of a December rate hike after keeping its monetary policy stance unchanged.

Treasuries finished lower, along with the U.S. dollar, gold and crude oil prices. Overseas, European equities declined on some disappointing banking sector results.

The Markets…

The Dow Jones Industrial Average lost 23 points, or .13%, to 17,755

The S&P 500 Index ended nearly unchanged at 2,089

S&P sectors were mixed on the day with Energy +.51%, HealthCare +.45% and Consumer Discretionary +.29% were all higher, while Utilities -.57%, Technology -.27% and Financials -.25% finished the day lower.

The Nasdaq Composite ended the day lower by 21 points, or .42%, to close at 5,074

WTI crude oil lost $0.22 to $45.72 per barrel and wholesale gasoline was flat at $1.33 per gallon

The Bloomberg gold spot price ended $30 and ounce lower, or 2.56% to $1,146 per ounce

3Q GDP slightly misses forecasts

The first look (of three) at 3Q Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 1.5%, from the unrevised 3.9% expansion in 2Q, and below the 1.6% growth forecasted by Bloomberg. Personal consumption came in south of forecasts, rising 3.2%, following the unadjusted 3.6% increase recorded in 2Q, and versus the 3.3% gain that was projected. State and local government spending, nonresidential fixed investment, exports, and residential fixed investment also contributed to the growth in output. However, private inventory investment and increased imports—which are a subtraction in the GDP calculation—weighed on output.

As noted previously, manufacturing has weakened notably, although not showing signs of escalating. But the services sector—a much larger contributor to the U.S. economy—is much healthier. Also, real (inflation-adjusted) retail sales quarter-over-quarter were up 4.2%, while nominal sales have increased at a 4.5% annual rate during the 2009-2015 expansion, exactly the same rate as during the 2001-2007 expansion. As such, fears of a dormant consumer may be overdone.

On inflation, the GDP Price Index came in cooler than expected at a 1.2% rise from an unrevised 2.1% gain seen in 2Q, and compared to the 1.4% increase that was anticipated, while the core PCE Index, which excludes food and energy, rose 1.3%, below expectations calling for a 1.4% increase, and following the unrevised 1.9% growth in 2Q.

Weekly initial jobless claims increased by 1,000 to 260,000 last week, compared to the estimate calling for an increase to 265,000 as the prior week’s figure was unrevised at 259,000. The four-week moving average dropped by 4,000 to 259,250, while continuing claims fell by 37,000 to 2,144,000, south of the forecasted 2,160,000 level.

Pending home sales dropped 2.3% month-over-month (m/m) in September, versus the projected 1.0% rise, and following the unrevised 1.4% drop registered in August. Compared to last year, sales were 2.5% higher, versus forecasts of an 7.3% rise. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose much more than expected in September.

Treasuries were lower in afternoon action, with the yield on the 2-year note advancing 2 basis points to 0.72%, the yield on the 10-year note gaining 6 bps to 2.16%, and the 30-year bond rate rising 7 bps to 2.95%.

Europe lower following Fed decision and banking earnings

European stocks finished mostly lower with traders digesting yesterday’s Fed policy decision that kept some expectations of a December rate liftoff intact, while some disappointing earnings reports out of the banking sector hamstrung the markets. Deutsche Bank AG and Barclays PLC. both saw heavy pressure after their earnings results missed forecasts, with the former announcing job cuts. However, shares of Nokia Oyj rallied after its earnings release, which included plans to return capital to shareholders through dividends and share buybacks. The euro was higher versus the U.S. dollar and bond yields in the region gained ground. In economic news, eurozone economic sentiment surprisingly improved in October and German unemployment fell more than expected this month. Finally, German consumer price inflation came in flat m/m for October, after declining 0.2% in September, and compared to the 0.1% dip that was forecasted.

The U.K. FTSE 100 Index was down 0.7%, France’s CAC-40 Index dipped 0.1%, Germany’s DAX Index declined 0.3%, Spain’s IBEX 35 Index decreased 0.5%, and Italy’s FTSE MIB Index dropped 1.1%, while Switzerland’s Swiss Market Index advanced 0.3%

Third-quarter GDP lands with thud: just 1.5% growth

The U.S. economy cooled off in the third quarter as companies cut back production to prevent a worrisome buildup in inventories, particularly of goods destined for foreign markets.

Gross domestic product — the value of everything a nation produces — rose at a 1.5% annual pace from July through September, the government said Thursday. The U.S. had grown at a crisp 3.9% rate in the second quarter.

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The slowdown stemmed mostly from the biggest drawdown in inventories in three years. Companies also cut spending on structures such as oil platforms and commercial buildings. Yet even as businesses showed more caution, consumers continued to spend money at steady clip, a sign they are not as worried. Consumer spending, the single largest determinant of U.S economic growth, rose at a 3.2% annual pace following an even larger gain in the second quarter.

More confident than at any time since the end of the recession in 2009, consumers have spent heavily on new cars and trucks. Outlays on so-called durable or long-lasting goods climbed 6.7% in the third quarter. What’s fueled the upturn in spending are higher inflation-adjusted incomes, a residue of cheap gas. Millions of Americans have also found jobs over the past several years, giving them more money to spend.

Economists predict consumer spending will show another healthy gain in the final three months of 2015, potentially pushing GDP back toward the 2.5% range or higher. Although the headline number of 1.5% growth was a big weaker than expected, many experts feel the details were quite good.

Still, the third-quarter drop-off almost assures the U.S. will fail to break 3% annual growth in 2015 for the 10th straight year. The last time the economy expanded that fast was in 2005.

More skittish behavior by businesses is the chief reason. U.S. companies such as manufacturers with lots of foreign customers were hit hard during the summer by a dollar whose surging value raised the price of American-made products. At the same time, U.S. energy companies cut spending on rigs, heavy machinery and other expensive equipment after the slump in oil prices.

Worried about an inventory overhang, businesses trimmed production. The value of inventories rose just $56.8 billion from July to September after $100 billion-plus increases in the prior two quarters that marked the biggest back-to-back gains ever.

The effects of the strong dollar were also evident by a meager increase in U.S. exports, up just 1.9% in the third quarter. Imports rose a touch slower at 1.8%. Businesses didn’t hunker down entirely, though. Investment in equipment rose a solid 5.3% and construction companies, buoyed by rising home sales, boosted investment in new homes by 6.1%.

Nor is there any evidence companies are so worried that they are putting more workers out in the street. A separate government report issued Thursday showed that the pace of layoffs in the U.S. remained near the lowest level in decades.

As expected, inflationary pressures in the U.S. economy were muted because of a decline in oil prices at the end of summer. Prices as measured by the PCE index rose at a 1.2% rate, down from 2.2% in the second quarter.

The Federal Reserve expects to see inflation move back toward the 2% range, though that probably won’t occur at least until well into 2016. Low inflation has deterred the central bank from raising its benchmark short-term interest rate, now near zero.

Fed Statement 10/28/2015

The Federal Reserve held off on raising interest rates Wednesday, but signaled a hike could come as early as December despite recent speculation that a slowing economy will prompt the central bank to wait until next year.

With job gains weakening markedly the past two months and the government expected to report third-quarter economic growth of less than 2% at an annual rate Thursday, the Fed’s decision to keep its benchmark rate near zero was widely expected. The central bank hasn’t lifted the rate in nearly a decade and it’s been near zero since the 2008 financial crisis.

In a statement after a two-day meeting, the Fed said, “In determining whether it will be appropriate to raise the target rate at its next meeting,” the Fed will assess progress toward its goals of maximum employment and 2% annual inflation. That marks the central bank’s first reference to bumping up rates at a specific meeting. Fed policymakers will gather Dec. 15-16.

In recent weeks, financial markets and many economists have sharply reduced the odds of such a move.

The Fed on Wednesday suggested recent headwinds have eased. It dropped an assertion its previous statement that global and market developments “may restrain economic activity somewhat” and further suppress inflation. Instead, it simply cited global and financial developments. China’s slowing economy has performed modestly better than expected recently and stocks have rallied.

The Fed also said the economy “is expanding at a moderate pace,” echoing its fairly upbeat September outlook. Policymakers noted “the pace of job gains slowed” recently but added that the unemployment rate “held steady” and household spending and business investment “have been increasing at solid rates.” And it added that labor market slack — such as part-time workers who prefer full-time jobs – “has diminished since early this year.”

The Fed reiterated that the risks to its outlook are “nearly balanced” and that it will boost rates when it “has seen some further improvement in the labor market is reasonably confident” inflation will drift back to its 2% goal over the medium-term.

The generally positive appraisal appeared to distinctly leave the door open to a December move.

Before the meeting, economists said a pronounced downgrade of the Fed’s forecast would signal it has all but ruled out December action. Monthly job growth slowed to an average 139,000 in August and September from upwards of 200,000 the first seven months of the year. And September retail sales were disappointing. Those reports stoked concerns that economic troubles in China and emerging markets were hobbling a previously healthy domestic economy.

Last month, the Fed passed on a rate increase, saying it wanted to assess whether the global turmoil and recent stock market volatility would affect demand in the U.S.. The overseas weakness already has strengthened the dollar, hampering manufacturers’ exports, and along with low oil prices, putting further downward pressure on inflation.

The developments have led to a divide among Fed policymakers over the timing of a rate hike. Fearful of derailing the recovery with a premature move, Fed board members Daniel Tarulllo and Lael Brainard have said they’re leaning toward waiting until 2016. Others, including Fed Chair Janet Yellen, have left open the possibility of a December increase, depending on the economy’s progress in coming weeks. And some, such as Richmond Fed chief Jeffrey Lacker, believe policymakers already should have hoisted rates. He dissented again Wednesday.

Rate hike proponents say the U.S. economy is still on solid footing. With unemployment at a near-normal 5.1%, some economists say the slowdown in payroll growth could partly reflect the sharply reduced ranks of jobless workers. Others note that jobless claims, a reliable gauge of layoffs, have remained near prerecession lows and broader measures of the labor market are improving.

Market Insights 10/28/2015

U.S. Stocks Rally, Fed Policy Maintained

U.S. stocks closed higher after a brief sharp drop following the Fed’s monetary policy decision was quickly overcome and as traders scrutinized the statement for insight to the potential timing of the initial rate hike.

A relatively bullish U.S. oil inventory report fostered a sharp rebound in crude oil prices, while Treasuries were lower. Meanwhile, gold was lower and the U.S. dollar was higher.

The Markets…

The Dow Jones Industrial Average increased 198 points (1.1%) to 17,780

The S&P 500 Index gained 24 points (1.2%) to 2,090, S&P sectors leading the charge included Financials +2.51%, Energy 2.22% and Materials 1.51%. Utilities, -1.06%, Consumer Staples, -.57%

The Nasdaq Composite advanced 66 points (1.3%) to 5,096

In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil surged $2.74 to $45.94 per barrel, wholesale gasoline was $0.06 higher at $1.34 per gallon

The Bloomberg gold spot price fell by $11.51 to $1,155.37 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.8% higher at 97.67

Mortgage applications decline, Fed expectedly holds monetary policy unchanged

The MBA Mortgage Application Index declined 3.5% last week, after rising 11.8% in the previous week. The drop came as a 3.8% decrease in the Refinance Index was accompanied by a 3.1% fall for the Purchase Index, while the average 30-year mortgage rate rose 3 basis points to 3.98%.

The Federal Open Market Committee (FOMC) announced it will leave current monetary policy unchanged, holding the target for its benchmark interest rate near zero. Though the Committee did not update its economic projections or hold a press conference, it did judge “that household spending and business fixed investment have been increasing at solid rates in recent months,” and that “market-based measures of inflation compensation moved slightly lower.” Although employment conditions—one of the Fed’s dual mandates—is signaling it’s time for liftoff, its inflation mandate is sending a more benign message.

Tomorrow’s U.S. economic calendar will be headlined by the first look (of three) at 3Q GDP, projected to show a 1.6% quarter-over-quarter (q/q) annualized rate of expansion, a slowdown from the 3.9% growth posted in 2Q. Personal consumption is expected to decelerate to a 3.3% gain, from the 3.6% increase registered in 2Q. As noted in the Schwab Market Perspective, the U.S. economic picture has become partially cloudy. The manufacturing sector remains weak—but representing only 12% of the U.S. economy, it’s dwarfed by the much healthier services sector, covering 88%, and fears of a dormant consumer may be overdone.

Additional reports expected on tomorrow’s docket include pending home sales, expected to have increased 1.0% m/m for September, and weekly initial jobless claims, forecasted to have increased to 265,000 from the 259,000 level the week prior.

Europe higher, Asia mostly lower ahead of U.S. monetary policy decision

European stocks gained ground, with traders digesting Apple’s stronger-than-expected earnings report in the U.S., as well as a plethora of profit releases in the region. Gains came even as the focus was on the Fed’s monetary policy decision in the U.S. today. In economic news, German consumer confidence slipped in line with forecasts for November, while Italian business, consumer and economic sentiment indicators all improved for September. The euro was modestly higher versus the U.S. dollar and bond yields in the region were mostly lower.

Stocks in Asia finished mostly to the downside in subdued action as traders likely treaded with caution ahead of the monetary policy decision in the U.S. today, while commodity-related stocks, led by energy, weighed on the markets. Mainland Chinese equities fell on festering economic growth concerns, exacerbated by the recent string of disappointing earnings reports in the region and as late-yesterday Hong Kong reported a larger-than-expected drop in September exports. Australian stocks declined, with weakness in oil & gas and basic materials issues bogging down the market. South Korean securities dipped, while some concerns toward rising bad loans in the banking sector weighed on Indian stocks.

However, Japanese stocks advanced, with the yen pausing from its recent rally. Also hopes of further stimulus measures from the Bank of Japan (BoJ) aided sentiment, ahead of its monetary policy decision on Friday. The BoJ is grappling with a Q3 economic slowdown and inflation that is running below its target. However, we believe economic expansion is likely to continue, so we see global deflation as unlikely.

Market Insights 10/27/2015

Street Red Ahead of Fed

On the eve of the monetary policy decision from the Fed, domestic stocks are trading lower, courtesy of a plethora of mixed economic and earnings data. Energy stocks are leading the decline as crude oil prices are seeing pressure, while health care issues are bucking the trend on the heels of stronger-than-expected earnings from Dow members Merck & Co and Pfizer.

Treasuries are gaining ground following disappointing reads on durable goods orders, services sector activity and Consumer Confidence. Gold and the U.S. dollar are modestly higher. Overseas, European equities declined on divergent data on both sides of the pond.

The Markets…

The Dow Jones Industrial Average lost 42 points, or .25%, to 17,581 and

The Nasdaq Composite declined .09 or 5 points to 5,030, while

The S&P 500 Index lost 5 points or .25% to 2,066.

Only 3 S&P 500 sectors finished higher, with HealthCare +1.81%, Consumer Staples .14% and Real Estate .03% the lone winners. Energy was the big loser on the day giving back 1.2%.

WTI crude oil continues to struggle with excess demand and ended the day lower at $43.39 a decline of 1.4%

The Bloomberg gold spot price is traded $1 higher to $1,167 per ounce

Durable goods orders mostly miss, headlining a heavy economic calendar

Durable goods orders decreased 1.2% month-over-month in September, compared to the Bloomberg estimate of a 1.5% drop, with August’s 2.0% decline being revised to a 3.0% fall. Autos rose solidly and defense aircraft orders surged, but nondefense aircraft orders fell sharply. Ex-transportation, orders were down 0.4% m/m, versus forecasts of a flat reading, and August’s flat figure was negatively revised to a 0.9% decrease. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, declined 0.3%, compared to projections of a 0.2% gain, and following the unfavorably revised 1.6% decrease in the month prior, from an initially reported decline of 0.2%. Demand for manufacturing, machinery, primary metals and computers all fell, but orders for communications equipment and fabricated metals products were higher.

The preliminary Markit U.S. Services PMI Index declined to 54.4 in October from 55.1 in September, versus forecasts of an improvement to 55.5, with a reading above 50 denoting expansion.

The Consumer Confidence Index declined to 97.6 in October from the downwardly revised 102.6 level in September, and compared to the Bloomberg estimate of 102.9. Sentiment toward the present situation and expectations of business conditions both deteriorated m/m. Also, on employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—fell to -3.6 from the downwardly revised -0.1 posted last month.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.1% y/y in August, in line with the estimate. M/M, home prices were higher by 0.1% on a seasonally adjusted basis for August, matching forecasts.

The Richmond Fed Manufacturing Activity Index improved to -1 in October from the unrevised -5 level in September, and compared to the expected increase to -3, with a reading below zero denoting contraction.

Treasuries were higher with the yield on the 2-year note declining 3 basis points to 0.61%, the yield on the 10-year note decreasing 4 bps to 2.02%, and the 30-year bond rate trading 2 bps lower to 2.84%.

The Fed offered a surprisingly still-dovish tone in its September policy statement, noting recent global economic and market turmoil, and the central bank is slated to deliver its October statement tomorrow. With no press conference and updated economic projections scheduled for tomorrow’s decision, expectations are low that the Fed will raise rates for the first time since before the financial crisis. The manufacturing sector remains weak—but representing only 12% of the U.S. economy, it’s dwarfed by the much healthier services sector, covering 88%. The mixed economic outlook complicates the Fed’s decision about rates and unfortunately it seems to have backed itself into a corner of sorts. We stand neutral on the market right now with a slight upward bias, but with a nod toward the increased volatility we continue to expect.

Europe lower on data

European equities finished lower, with traders digesting a plethora of mixed earnings and economic reports on both sides of the pond, ahead of monetary policy decisions out of Japan and the U.S. later in the week, with the latter being delivered tomorrow. Oil & gas issues led the markets lower on the recent pullback in crude oil prices, despite BP PLC’s. (BP $35) stronger-than-expected earnings. BASF SE (BASFY $81) fell after the chemical company reduced its full-year revenue and profit guidance. Preliminary U.K. 3Q GDP grew at a 0.5% quarter-over-quarter rate, a deceleration from the 0.7% expansion posted in 2Q, and below the forecasted to 0.6% gain. The euro was lower versus the U.S. dollar, while bond yields in the region moved mostly to the downside.

The U.K. FTSE 100 Index and Switzerland’s Swiss Market Index were down 0.7%, France’s CAC-40 Index decreased 0.8%, Germany’s DAX Index declined 0.9%, Italy’s FTSE MIB Index fell 1.2%, and Spain’s IBEX 35 Index dropped 1.3%.

Market Insights 10/26/2015

Uncertainty Prevails

Investors again appeared to be searching for direction, as stocks began the week mixed and near the flatline, with a number of major events on the week’s horizon, including the monetary policy decisions from the Fed and Bank of Japan.

Treasuries finished higher following a disappointing read on new home sales and an unexpected drop in regional manufacturing activity. Meanwhile, gold, crude oil prices and the U.S. dollar were lower.

The Markets…

The Dow Jones Industrial Average declined 24 points (0.1%) to 17,623

The S&P 500 Index shed 4 points (0.2%) to 2,071

The Nasdaq Composite gained 3 points (0.1%) to 5,035

In moderate volume, 837 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.62 to $43.98 per barrel, wholesale gasoline was $0.02 lower at $1.28 per gallon

The Bloomberg gold spot price declined by $1.19 to $1,163.26 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 96.85

New home sales fall

New home sales dropped 11.5% month-over-month (m/m) in September to an annual rate of 468,000—the lowest level since November 2014—from August’s downwardly revised 529,000 pace, and compared to the Bloomberg forecast of a 549,000 rate. The median home price jumped 13.5% y/y and 2.7% m/m to $296,900. The supply of new home inventory jumped to 5.8 months from 4.9 months in August as sales fell m/m in all regions, led by a near 62% tumble in the Northeast. New home sales are considered a timely indicator as they are based on contract signings instead of closings.

Treasuries finished higher following the data, as the yield on the 2-year note dipped 1 basis point to 0.63%, the yields on the 10-year note and the 30-year bond decreased 4 bps to 2.05% and 2.86%, respectively.

September durable goods orders headlines tomorrow’s U.S. economic calendar, projected to drop 1.5% m/m, after falling 2.0% in August. Excluding transportation, orders are expected to be flat, matching the prior month’s performance, while non-defense capital goods orders excluding aircraft, a proxy for business spending, are expected to increase 0.2%, after decreasing by the same amount in August. As noted on previous occasions, the U.S. economic picture has become partially cloudy. The manufacturing sector remains weak—but representing only 12% of the U.S. economy, it’s dwarfed by the much healthier services sector, covering 88%.

Other items on tomorrow’s docket include: the S&P/Case-Shiller Home Price Index, forecasted to show prices in the 20-city composite rose 5.1% year-over-year during August and 0.1% m/m on a seasonally adjusted basis, as well as Markit’s preliminary Services PMI Index, with economists expecting a level of 55.5 for October, up slightly from the 55.1 posted in September. Also on tap will be October Consumer Confidence, anticipated to remain at September’s 103.0 level; the Richmond Fed Manufacturing Index, forecasted to have improved to a level of -3 for October from -5 in the month prior, with a number below zero denoting contraction; and MBA Mortgage Applications.

Europe rests after strong rally, Asia mixed

European equities finished mostly lower, led by energy and technology stocks, despite a smaller-than-expected decline in German business sentiment, with the markets in the region pausing from their recent rally to a two-month high, ahead of monetary policy decisions this week in the U.S. and Japan. The rally for European stocks culminated with solid gains on Thursday and Friday of last week, as the European Central Bank hinted at further stimulus measures in December, while China announced another round of rate cuts. Germany’s Ifo Business Climate Index, declined to 108.2 in October, from 108.5 in September, marking the first decline in four months amid the festering global growth concerns. However, the index was projected to decline to 107.8. The euro gained ground on the U.S. dollar and bond yields in the region mostly dipped.

Stocks in Asia finished mixed on the heels of rallies in the U.S. and Europe on late-Friday’s announcement from the People’s Bank of China (PBoC) that it cut its benchmark lending rates for the sixth time and broadly reduce its banking sector reserve requirement for the fourth time since November. The moves come as China’s Communist Party begins its fifth plenary session, where it finalizes the nation’s economic and social policies for the next five years. Stocks in Japan advanced, as some upbeat earnings news more than offset some strengthening of the yen. The Bank of Japan is set to deliver its monetary policy decision at the end of this week, with expectations running high that the central bank will deploy further stimulus measures. Elsewhere, Australia’s markets dipped, as modest advances for oil & gas and basic materials stocks were met with weakness in telecom and utilities issues, while Indian equities declined amid some disappointing earnings reports in the nation.

Tomorrow’s international economic calendar will have a host of reports for investors to digest, including consumer sentiment from South Korea, inflation data from Japan, trade figures out of China, 3Q GDP from the U.K. and PPI from Brazil.

3 Takeaways from the Q3 Earnings Season

We are in the thick of the Q3 earnings season, with results more than a fifth of the S&P 500 members already out. No major surprises in the results thus far, with revenue gains hard to come by due to the combined effect of the strong U.S. dollar and global growth challenges.

Including this morning’s reports, we now have Q3 results from 105 S&P 500 members that combined account for 27.5% of the index’s total market capitalization. Total earnings for these 105 index members are up +0.4% from the same period last year on -1.7% lower revenues, with 69.5% beating EPS estimates and 45.7% coming ahead of top-line expectations. Looking at Q3 as a whole, total earnings for the S&P 500 index are expected to be down -4.0% from the same period last year on -5.1% decline in revenues. This would follow the -2.1% decline in earnings on -6.4% lower revenues in the preceding quarter.

Here are the three takeaways from the results thus far:

First, lack of growth remains the most notable metric at this stage, with aggregate earnings growth effectively flat (up only +0.4%) for the results thus far and in the negative when we look at the quarter as a whole. In fact, earnings growth thus far would be in the negative as well once the easy comparisons for Bank of America are excluded from the numbers.

Comparing the earnings and revenue growth rates for the reports thus far with what we had seen from the same group of 105 S&P 500 members in other recent periods. Please recall the 2015 Q2 earnings season was very weak as well, with total earnings for the index down at the end of that cycle. The growth picture is even weaker when looked at on an ex-Bank of America basis.

The second notable thing about the Q3 earnings season is the widespread revenue weakness. Not only is revenue growth non-existent (down -1.7% at this stage), but few companies are able to come out with positive revenue surprises despite the very low levels to which estimates had come down as result of the well-known global growth and unfavorable currency issues. This was a big issue the last earnings season as well, but analysts seem to have failed to make adequate adjustments to their models and estimates for Q3 either, resulting in widespread top-line misses across all sectors.

Third, estimates for the current period have sharply started coming down in recent days, with total earnings for the S&P 500 index currently expected to be down -5.6% from the same period last year. This will be the third back-to-back quarter of declining earnings for the S&P 500 index.

Total earnings for the S&P 500 index are effectively flat this year, but are expected to be up strong next year. It is reasonable to be skeptical of next year’s optimistic looking expectations given how the 2015 estimates evaporated in front of our eyes over the last two quarters. Maybe it will be different this time, but judging from what we have heard from management teams on the Q3 earnings calls in recent days, it is more than reasonable to be skeptical of these growth expectations for the outer periods.

Market Insighst 10/23/2015

Rally Mode

U.S. equities extended their recent rally on the heels of another round of rate cuts from the Chinese central bank and as some tech heavyweights posted stronger-than-expected earnings results.

Treasuries finished lower in the wake of a favorable flash read on domestic manufacturing activity for October, while gold and crude oil prices were slightly lower and the U.S. dollar staged another solid advance.

The Markets……

The Dow Jones Industrial Average increased 158 points (0.9%) to 17,647

The S&P 500 Index added 23 points (1.1%) to 2,075, sectors leading the charge higher included technology, healthcare and financials.

The Nasdaq Composite gained 112 points (2.3%) to 5,032

In moderately-heavy volume, 1.0 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

Crude oil declined $0.78 to $47.26 per barrel, wholesale gasoline was $0.01 lower at $1.30 per gallon

The Bloomberg gold spot price declined by $1.34 to $1,164.70 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% higher at 97.09

Markets were higher for the week, as the DJIA advanced 2.5%, the S&P 500 Index rose 2.1%, and the Nasdaq Composite Index gained 3.0%

Preliminary manufacturing report unexpectedly improves

The preliminary Markit U.S. Manufacturing PMI Index for October surprisingly suggested growth in the manufacturing sector (above 50) accelerated, rising to 54.0 from September’s 53.1 level, and compared to the Bloomberg forecast of a dip to 52.7. Markit said this was the sharpest improvement in business conditions since May, courtesy of faster rises in both output and new order volumes, while input costs fell for the second month running.

Treasuries were lower, with the yields on the 2-year note and the 30-year bond rising 4 basis points to 0.64% and 2.90%, respectively and the yield on the 10-year note increasing 6 bps to 2.08%.

Europe rallies as China joins ECB in boosting stimulus optimism

European stocks rallied broadly, with another round of rate cuts out of China following yesterday’s hint of further stimulus measures in December from European Central Bank (ECB) President Mario Draghi. Also, the plethora of upbeat earnings reports in the U.S. accompanied a favorable preliminary read on eurozone business activity. Markit’s Eurozone Composite PMI Index—a gauge of output from both the manufacturing and services sectors—unexpectedly improved to 54.0 in October, from 53.6 in September, and compared to the dip to 53.4 that was projected. A reading above 50 denotes expansion. The euro was lower versus the U.S. dollar and bond yields in the region mostly gained ground.

Stocks in Asia finished with widespread gains as yesterday’s mostly favorable earnings results from the U.S. were met with a signal from the European Central Bank that it could expand its stimulus measures near the end of the year. Japanese equities surged higher, with yesterday’s weakness in the yen helping bolster gains, along with a preliminary report showing an unexpected acceleration in the nation’s manufacturing growth for October. Stocks trading in mainland China and Hong Kong advanced, while Indian securities also gained, returning to action following yesterday’s holiday. Australian issues rose with all major sectors moving higher. Gains in South Korea were aided by a preliminary read on the country’s 3Q GDP, which grew 1.2% quarter-over-quarter (q/q), rebounding from the 0.3% expansion posted in 2Q and above the expected 1.0% increase.

However, most of the news came after the closing bell, as the People’s Bank of China (PBoC) announced a 25 bps cut of its benchmark interest rate to 4.35% and a 50 bps reduction in the reserve requirement ratio for its banking sector to 17.50%. The moves add credence to our belief the world economy will see the pace of growth improve somewhat in 2016. Faster global economic growth should translate into better sales for companies and drive faster earnings growth than in 2015, potentially supporting the stock markets around the world.

WEEKLY RECAP: Global stimulus and earnings drive fourth-straight weekly gain in U.S.

Stocks began the week lacking conviction amid some mixed earnings reports and another dose of lackluster Chinese data, headlined by the slowest pace of GDP growth since the financial crisis. However, a rally in global equities was sparked by ECB President Draghi hinting at more stimulus efforts at its December monetary policy meeting. Draghi’s signal followed the ECB’s decision to leave its policy stance unchanged and as concerns regarding an imminent Fed rate hike continued to ease. The advance for stocks was amplified by Friday’s announcement that China cut its benchmark lending rates for the sixth time and broadly reduced its banking sector reserve requirement for the fourth time since November.

U.S. housing data likely did little to deter the bulls, with homebuilder sentiment jumping to the highest level since October 2005, housing starts growing more than expected, and existing home sales rising to the strongest pace since February 2007. Although earnings reports late in the week were met positively, they were preceded by Dow member International Business Machines Corp’s disappointing revenue and lowered outlook, while Morgan Stanley severely missed the Street’s quarterly expectations. Of the 173 companies in the S&P 500 that have reported earnings to date for 3Q 2015, 77% have topped expectations and 43% have posted revenues that were above forecasts, per data compiled by FactSet.

The U.S. dollar is taking a lot of the blame for a decidedly mixed earnings season, but the stock market has held up fairly well. We continue to believe the bull market isn’t dead, but it’s in a more mature phase which will be marked by volatility and pullbacks. The Chinese economy appears to have avoided a hard landing and may actually be on an upward trajectory, which should benefit economies (and confidence) around the world.

THE WEEK AHEAD: Fed decision looms but expectations of Fed action is minimal

Next week, the 3Q earnings season will reach its apex, but the U.S. economic calendar is poised to garner attention. Wednesday’s Fed monetary policy decision will be accompanied by key releases including: new home sales, durable goods orders, S&P/Case-Shiller Home Price Index, Markit’s preliminary Services PMI Index, Consumer Confidence, the first (of three) look at 3Q GDP, and personal income and spending.

At this point, futures contracts are indicating virtually no chance of a rate hike next week, while the chances for a December hike have decreased to roughly one in three. The mixed economic outlook complicates the Fed’s decision about rates and unfortunately it seems to have backed itself into a corner of sorts. We stand neutral on the market right now with a slight upward bias, but with a nod toward the increased volatility we continue to expect.

Next week’s international reports that are likely to command attention include: Japan—Bank of Japan monetary policy decision, CPI, retail sales, and industrial production. China—industrial profits. Eurozone—CPI and unemployment, along with German business confidence and retail sales. U.K.—Q3 GDP and consumer confidence.

Market Insights 10/22/2015

Strong Advance on Hopes of ECB Stimulus

Domestic equities rallied in the wake of the European Central Bank’s (ECB) rate decision and comments from ECB President Mario Draghi that hinted at the possibility of further easing, which also fostered a sharp rise in the U.S. dollar versus the euro.

In economic news, investors were treated to better-than-expected reads for U.S. existing home sales, weekly jobless claims and regional manufacturing data, while some domestic earnings reports came in mixed. Treasuries and crude oil prices were higher and gold was lower.

The Markets…

The Dow Jones Industrial Average rallied 321 points (1.9%) to 17,489

The S&P 500 Index advanced 34 points (1.7%) to 2,053

The Nasdaq Composite jumped 80 points (1.7%) to 4,920

In moderately heavy volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil added $0.18 to $45.38 per barrel, wholesale gasoline increased $0.03 to $1.31 per gallon

The Bloomberg gold spot price declined by $0.48 to $1,166.70 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 1.4% higher at 96.35

Housing sales top forecasts, while jobless claims tick higher

Existing-home sales in September rose 4.7% month-over-month to a 5.55 million annual rate, compared to the Bloomberg forecast of a gain to a 5.39 million pace. August’s figure was adjusted slightly downward to a 5.30 million unit rate. Sales are 8.8% higher y/y, and have risen y/y for 12 consecutive months. The median existing-home price was 6.1% above a year ago at $221,900. Single-family home sales rose m/m but multi-family sales were flat, but both are higher y/y. All four major regions experienced m/m sales increases in September, and all were higher y/y.

This was the second highest level of existing home sales since February 2007, suggesting housing continues to grow and supports WT Wealth Managements outperform rating for the financial sector.

Weekly initial jobless claims rose by 3,000 to 259,000 last week, compared to the estimated 265,000 as the prior week’s figure was revised higher by 1,000 to 256,000. The four-week moving average declined by 2,000 to 263,250, while continuing claims grew by 6,000 to 2,170,000, south of the forecasted 2,186,000 level.

The Kansas City Fed Manufacturing Activity Index improved to -1 for October from -8 in September, versus expectations of a decline to -9, with a reading below zero denoting contraction.

Treasuries were higher in afternoon action, with the yield on the 2-year note decreasing 3 basis points to 0.60%, while the yields on the 10-year note and the 30-year bond ticked 1 bp lower to 2.02% and 2.85%, respectively.

The domestic economic calendar for tomorrow will yield Markit’s preliminary manufacturing PMI Index, for October, forecasted to dip from September’s 53.1 level to 52.7, with a level above 50.0 denoting expansion.

Europe rallies on signal from ECB of further stimulus measures, Asia mixed

European equities traded nicely to the upside with traders digesting more earnings reports in the region, while European Central Bank (ECB) President Mario Draghi signaled that the central bank is likely to increase its stimulus measures at its meeting in December to combat inflation that is running below its target. The comments came during the customary press conference that followed the ECB’s decision to keep its monetary policy stance unchanged as expected. The euro fell versus the U.S. dollar on the Draghi comments and bond yields in the region mostly dropped. In other economic news in the region, U.K. retail sales rose more than expected for September, while Spain’s 3Q unemployment rate fell more than anticipated. Also, French business confidence unexpectedly improved in October.

Stocks in Asia finished mixed on the heels of the declines in the U.S. yesterday as traders digested a plethora of mixed earnings data, while caution ensued ahead of today’s monetary policy decision in Europe. Japanese equities declined, retreating from recent gains as the yen strengthened late in the session. Also, traders grappled with Japan’s upcoming earnings season and next week’s monetary policy decision from the Bank of Japan. Mainland Chinese stocks advanced, with small-cap issues rebounding from yesterday’s sell-off and optimism of further stimulus measures by the government buoying sentiment, as the Communist Party is set to kick off its plenary meeting next week to discuss the country’s economic and social plans for the next five years. Securities trading in Hong Kong declined, returning to action following yesterday’s holiday. Australian equities rose, with weakness in basic materials stocks in the wake of the recent drop metal prices being more than offset by a rebound in oil & gas issues amid some M&A news out of the sector. Finally, markets in India were closed for a holiday.