Monthly Archives: April 2016

Market Insights 4/29/2016

Stocks Lower

U.S. equities finished a relatively dismal week in some surprisingly optimistic fashion as a solid rally developed in the final thirty minutes of trading to trim losses, though the major indexes still closed lower with the healthcare and technology sectors receiving the brunt of the day’s decline.

Consumer discretionary stocks were top performers, bolstered by Amazon.com’s much better-than-expected quarterly results.

Treasuries finished higher as the domestic docket delivered some mixed reads on personal income and spending, regional manufacturing activity and consumer sentiment. Gold rallied, the U.S. dollar was lower and crude oil prices were mixed.

The Markets…

The Dow Jones Industrial Average declined 57 points (0.3%) to 17,774

The S&P 500 Index lost 11 points (0.5%) to 2,065

The Nasdaq Composite dropped 30 points (0.6%) to 4,775

In heavy volume, 1.3 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.11 lower to $45.92 per barrel, wholesale gasoline was $0.01 lower at $1.60 per gallon

The Bloomberg gold spot price added $26.18 to $1,292.44 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.8% lower at 93.05

Markets were lower for the week, as the DJIA declined 1.3%, the S&P 500 Index lost 1.3%, while the Nasdaq Composite decreased 2.7%

Personal income and spending mixed

Personal income was 0.4% higher month-over-month (m/m) in March, above the Bloomberg forecast of a 0.3% gain, and February’s downwardly revised 0.1% gain. Personal spending was 0.1% higher, below the expected 0.2% increase, and March’s upwardly adjusted 0.2% rise. The March savings rate rose to 5.4% from February’s downwardly revised 5.1% rate. The PCE Deflator ticked 0.1% higher m/m, in line with forecasts. Compared to last year, the deflator was 0.8% higher, matching estimates. Excluding food and energy, the PCE Core Index was 0.1% higher, in line with expectations, and the index was up 1.6% y/y, matching estimates.

The final April University of Michigan Consumer Sentiment Index was revised to 89.0 from the preliminary level of 89.7, and compared to expectations of 90.0, led by a downward adjustment for the expectations component of the report. The index was also lower compared to March’s level of 91.0. The 1-year inflation outlook nudged higher to 2.8%, from March’s 2.7% rate. The 5-10 year inflation forecast came in at 2.5%, following the 2.7% level recorded in March.

The Chicago Purchasing Managers Index held slightly onto expansion territory (above 50), after falling to 50.4 in April from 53.6 in March, and versus expectations of a decline to 52.6.

The Q1 Employment Cost Index rose by 0.6% quarter-over-quarter, in line with forecasts and versus the downwardly revised 0.5% increase posted in Q4.

Treasuries finished higher, with the yields on the 2-year note and the 30-year bond losing 1 basis point to 0.77% and 2.67%, respectively, while the yield on the 10-year note was flat at 1.83%.

Europe sees pressure despite upbeat GDP report, Asia mixed to close out the week

European equities traded lower to close out a negative week that saw the Stoxx Europe 600 Index fall 2.0%. Traders digested a plethora of mixed earnings reports in the region, while the global markets continue to assess yesterday’s disappointing monetary policy decision from the Bank of Japan. Also, today’s solid gain for the euro to extend its weekly jump versus the U.S. dollar is causing some concerns about the impact on corporate profits to flare-up.

Stocks moved lower even as preliminary Eurozone Q1 GDP growth of 0.6% q/q, topped the 0.4% estimate, and accelerated from the 0.3% expansion posted in Q4. In other economic news, German retail sales unexpectedly fell in March and the Eurozone consumer price inflation estimate came in at a larger decline than had been anticipated for April, while France’s consumer spending surprisingly rose. Bond yields in the region finished mixed.

Stocks in Asia finished mixed to end the week, though volume was lighter than usual with Japanese markets closed for a holiday. However, the Japanese yen remained in focus as it extended yesterday’s surge that came in the wake of the Bank of Japan’s monetary policy decision, where it disappointed the markets by not announcing further stimulus measures, opting to take time to assess the impact of its recent move to negative interest rates.

Chinese stocks remained hamstrung by volatility in the commodities markets in the wake of recent moves by exchanges to try to cool speculative trading, per Bloomberg, and as traders reflect on the recent flood of upbeat economic reports the nation has reported. South Korean equities traded to the downside, and Indian listings finished flat. However, strength in basic materials and oil & gas issues boosted Australian securities.

WEEKLY RECAP: Stocks see pressure on a heavy week of earnings and economic data

U.S. stocks were stymied this week, despite another rally in crude oil prices, as earnings season reached its apex and the economic front was robust, with monetary policy decisions in focus. Technology stocks came under pressure after Dow member Apple Inc. missed the Street’s quarterly expectations and offered a disappointing 3Q outlook, while Twitter Inc. posted softer-than-expected revenue and guidance, more than offsetting Facebook Inc’s upbeat results. So far this earnings season, about 77% of the 310 companies that have reported in the S&P 500 have topped profit forecasts, while only about 57% have bested sales projections, per data compiled by Bloomberg.

A ramp up in M&A activity, headlined by Abbott Laboratories’ $25.0 billion agreement to acquire St. Jude Medical Inc., failed to alleviate the pressure on the equity markets, along with the maintained Fed monetary policy stance, which appeared to ease concerns of an imminent rate hike. Treasury yields gave back some their recent rally following the Fed’s decision, which was not contradicted by this week’s domestic economic data as the first estimate of Q1 GDP growth slowed slightly more than expected, durable goods orders missed forecasts, and Consumer Confidence fell more than anticipated. The Bank of Japan (BoJ) stole some of the spotlight, as it disappointed the markets by refraining from deploying further stimulus measures, sending the yen surging to exacerbate global growth sentiment. The U.S. dollar pulled back in the wake of the Fed and BoJ’s decisions.

In our opinion, despite a weak Q1 GDP reading, the U.S. economy appears to be perking up a bit, especially on the manufacturing side. We don’t think we’re off to the races, but we believe modest growth is a good environment for potential stock gains although many feel the markets are fully and fairly valued in the U.S. today. The Fed held monetary policy steady, but indicated further hikes in 2016 were very possible. The market is currently expecting fewer hikes than the Fed, which could lead to some additional volatility as those expectations converge one way or the other. Currency movements have played a large part in global stock market activity. We may be getting to the point of some calming in the currency markets, which could help stocks generally, but central bank uncertainty likely means continued volatility.

THE WEEK AHEAD: Heavy data to kick off May

With earnings season heading into the second half, next week’s U.S. economic calendar will deliver a host of data as markets grapple with the timing of the next Fed rate hike. The ISM and Markit’s Manufacturing and Services Purchasing Managers Indexes (PMIs), factory orders, construction spending and the trade balance will get the ball rolling, while the week will culminate with Friday’s April non-farm payroll report. Recession concerns have been renewed and maybe with good cause and economic data desrves to be closely followed. However, the manufacturing rebound, leading indicators, non-excessive cyclical spending and signs from recession models all suggest although we’re unlikely to exit from a muddle-through state, the risk of recession is objectively low.

Key international reports slated for next week include: Australia—building approvals, the Reserve Bank of Australia monetary policy decision, trade balance and retail sales. China—Manufacturing and Services PMIs. India—Manufacturing and Services PMIs. Japan—vehicle sales and Manufacturing and Services PMIs. Eurozone—Manufacturing and Services PMIs and retail sales. U.K.—Manufacturing and Services PMIs.

U.S. Economy Expands 0.5%, Weakest in 2 Years

The U.S. economy expanded in the first quarter at the slowest pace in two years as American consumers reined in spending and companies tightened their belts in response to weak global financial conditions and a plunge in oil prices.

Gross domestic product rose at a 0.5 percent annualized rate after a 1.4 percent fourth-quarter advance, Commerce Department data showed Thursday. The increase was less than the 0.7 percent median projection in a Bloomberg survey and marked the third straight disappointing start to a year.

Shaky global markets and oil’s tumble resulted in the biggest business-investment slump in almost seven years, and household purchases climbed the least since early 2015, the data showed. While Federal Reserve officials on Wednesday acknowledged the softness, they also indicated strong hiring and income gains have the potential to reignite consumer spending and propel economic growth.

We feel the fact that personal consumption is a bit on the soft side is a disappointment, especially in light of the low gasoline prices, consumption seems to be stuck in a low gear. Consumers are cautious there’s no doubt about it.

Economists’ projections for GDP, the value of all goods and services produced in the U.S., ranged from gains of 0.1 percent to a 1.5 percent. This is the government’s first of three estimates for the quarter before annual revisions in July.

Consumer Spending

Household purchases, which account for almost 70 percent of the economy, rose at a 1.9 percent annual pace last quarter, compared with 2.4 percent in the final three months of last year.
Spending, while slightly better than the 1.7 percent median forecast, was a disappointment in light of the consumer-friendly fundamentals including low gasoline prices, cheap borrowing costs, increased hiring and warmer-than-usual winter weather.

“The first quarter is going to be the worst quarter for consumption for all of 2016,” said one senior U.S. economist. “With financial markets calming down and retracing all of their losses, the fundamental factors that have driven consumption will continue to do so.”

Jobless Claims

Americans have more job security. A separate report from the Labor Department showed filings for unemployment benefits held last week around four-decade lows. Jobless claims rose to 257,000 from the prior week’s revised 248,000 that were the fewest since 1973.

The GDP report showed disposable income adjusted for inflation climbed 2.9 percent in the first quarter, an improvement from the 2.3 percent gain in final three months of 2015. The saving rate ticked up to 5.2 percent from 5 percent.

The biggest factor weighing on the economy last quarter came from companies. Nonresidential fixed investment, or spending on equipment, structures and intellectual property, dropped at a 5.9 percent annualized pace, the biggest decline since the second quarter of 2009.

Last year’s slump in oil prices that extended into early 2016 led to an 86 percent annualized plunge in capital spending on wells and shafts, the most in records back to 1958.

Investment is also languishing as corporations struggle to boost profits against a backdrop of weak overseas demand and restrained domestic purchases.

Customers in the U.S. also limited orders as companies trim stockpiles to bring them more in line with sales. Inventories subtracted 0.33 percentage point from growth after a 0.22 percentage-point drag in the three months ended in December.

Progress in trimming inventories, along with receding headwinds from abroad and a comeback in the prices of oil and other commodities, may keep investment from deteriorating further.
A dearth of eager overseas customers led to a drop in exports in the first quarter. Trade subtracted 0.34 percentage point from overall growth, the most in a year.

Final Sales

Stripping out unsold goods and trade, the two most volatile components of GDP, as well as government expenditures, so-called final sales to private domestic purchasers increased at a 1.2 percent rate, the weakest advance since the third quarter of 2012.

Government spending rose at a 1.2 percent pace, led by states and municipalities.

If the past two years are any guide, the economy will shake off the first-quarter softness. In 2015, GDP rose 0.6 percent before rebounding to a 3.9 percent pace in the second quarter. A year earlier, the economy shrank at a 0.9 percent rate and then advanced 4.6 percent in the April-June period.

Fed policy makers, after skipping an interest-rate hike for a third straight meeting on Wednesday, suggested they remain upbeat about the underpinnings of U.S. growth. Central bankers also said they will continue to “closely monitor” inflation.

The GDP price index rose 0.7 percent in the first quarter. A measure of inflation tied to personal spending and excluding volatile food and fuel costs climbed 2.1 percent, the most in four years and in line with policy makers’ target.

Market Insights 4/28/2016

Stocks Fall Far in Final Hour

After initially fighting back from morning losses, U.S. stocks accelerated declines in the final hour of trading to close the regular session deep in negative territory.

Yesterday’s Fed monetary policy decision appeared to have offset some of the early disappointment following the Bank of Japan’s announcement that it will hold off on additional stimulus measures.

Facebook announced upbeat quarterly results to headline a heavy dose of earnings and some ramped up M&A activity, while Q1 GDP growth came in slightly lower than expected.

Treasuries, gold and crude oil prices were higher and the U.S. dollar traded lower.

The Markets…

The Dow Jones Industrial Average fell 211 points (1.2%) to 17,831

The S&P 500 Index lost 19 points (0.9%) to 2,076

The Nasdaq Composite dropped 58 points (1.2%) to 4,805

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 rose $0.70 to $46.03 per barrel, wholesale gasoline was $0.02 higher at $1.61 per gallon

The Bloomberg gold spot price added $19.20 to $1,266.60 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 93.72

1Q GDP estimate misses forecasts, jobless claims rise by smaller amount than expected

The first look (of three) at Q1 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 0.5%, from the un-revised 1.4% expansion in 4Q, and below the 0.7% growth forecasted by Bloomberg. Personal consumption came in north of forecasts, rising 1.9%, following the un-adjusted 2.4% increase recorded in Q4, and versus the 1.7% gain that was projected. Along with the deceleration in personal consumption, the q/q slowdown in U.S. growth came as the decline in nonresidential fixed investment accelerated, federal government spending decreased, and imports increased. Also, larger decreases in private inventory investment and in exports were partly offset by an upturn in state and local government spending and an acceleration in residential fixed investment.

On inflation, the GDP Price Index came in at a 0.7% rise, above expectations of a 0.5% increase, from an unrevised 0.9% gain seen in 4Q, while the core PCE Index, which excludes food and energy, increased 2.1%, north of forecasts calling for a 1.9% increase, and following the unrevised 1.3% growth in 4Q.

Weekly initial jobless claims rose 9,000 to 257,000 last week, versus estimates calling for claims to increase to 259,000, as the prior week’s figure was revised higher by 1,000 to 248,000. The four-week moving average fell by 4,750 to 256,000, while continuing claims declined by 5,000 to 2,130,000, south of the estimated level of 2,136,000.

The Kansas City Fed Manufacturing Activity Index for April rose to -4 from March’s -6 level, but a reading south of zero depicts contraction.

Treasuries finished higher, with the yield on the 2-year note shedding 4 basis points (bps) to 0.78%, the yield on the 10-year note losing 3 bps to 1.83% and the 30-year bond rate declining 2 bps to 2.69%. Bond yields fell yesterday as the Federal Reserve maintained its monetary policy stance and gave little indication of the timing of further rate hikes.

Tomorrow, the U.S. economic calendar will be busy, yielding the release of personal income and spending, expected to have increased in March by 0.3% and 0.2%, respectively, and the PCE Deflator is forecasted to tick 0.1% higher after dipping 0.1% in February. Additionally, we will receive the 1Q Employment Cost Index, expected to have increased by 0.6% quarter-over-quarter, matching the figure posted in Q4 and the Chicago Purchasing Managers Index for April, expected to show activity in the Midwest declined to 52.6 from the 53.6 posted in March, though a reading above 50.0 represents expansion. The last release for the day will be the final University of Michigan Consumer Sentiment Index for April, forecasted to inch higher to 90.0 from the 89.7 registered in the preliminary release, but down from the 91.0 reading for March.

Europe shows some late-day resiliency, Asia mixed following Bank of Japan disappointment

European equities overcame early pressure and finished near the unchanged mark. Yesterday’s maintained monetary policy stance by the U.S. Federal Reserve, which suggested no imminent rate hike, helped offset pressure that initially came from a surge in the yen as the Bank of Japan disappointed by surprisingly holding off on providing further stimulus measures. Basic materials and oil & gas issues were the top performers on the day and financials were also in focus. The euro was little changed versus the U.S. dollar and bond yields in the region declined. In economic news, German unemployment unexpectedly declined, while the nation’s consumer price inflation decreased in line with expectations.

Stocks in Asia finished mixed following the unchanged monetary policy stance by the Fed in the U.S., which was followed by the disappointing policy decision out of the Bank of Japan (BoJ) to hold off on announcing further stimulus measures. The BoJ’s unexpected decision sent the yen surging and applied heavy pressure on equities trading in the island nation. The BoJ held off on expanding stimulus measures as it assesses the impact of its recent move to negative interest rates. Japan reported larger-than-expected drops in core consumer price inflation and household spending, while its retail sales declined by a smaller amount than expected and industrial production rose more than projected. Chinese stocks diverged as those trading on the mainland declined, while securities traded in Hong Kong ticked slightly higher. South Korean and Indian equities dropped, however, strength in basic materials and oil & gas issues helped push Australian listings higher.

The international economic docket for tomorrow will include consumer credit and the GfK Consumer Confidence Survey from the U.K., Q1 GDP, PPI and CPI from France, CPI and PPI from Italy and Q1 GDP and CPI for the Eurozone.

Apple hints at big acquisition to cure growth ills

Tim Cook says Apple willing to spend more than previous record

Apple Inc. detailed its first decline in iPhone sales Tuesday, part of an earnings report that broke up more than a decade of continued growth for the tech giant. To cure Apple’s growth problems, Chief Executive Tim Cook suggested he may go shopping.

Cook said Tuesday that Apple had acquired 15 companies in the past four quarters, though it appears none were material enough for Apple to inform investors about individually. That could change, though, as the Apple CEO admitted that he is open to a large acquisition.

“We’re always looking in the market about things that could complement things that we do today, become features in something we do, or allow us to accelerate entry into a category that we’re excited about,” Cook said, adding later, “We would definitely buy something larger than we bought thus far”

Apple has never been a very acquisitive company, especially when compared with other Silicon Valley tech giants like Alphabet Inc. GOOGL, Cisco Systems Inc. CSCO or Facebook Inc. FB, Apple’s largest acquisition in its history was the $3 billion purchase of headphone maker Beats Electronics LLC in 2014, and most of Apple’s other purchases have not come close to that total.

With that in mind, Cook’s statement Tuesday turned some heads.

“They haven’t said as much publicly before, so that’s the real change,” JackDaw research analyst Jan Dawson said.

While Apple’s strong cash position seemingly puts it in position to buy whatever it wants, that cash is not as available to the company as some suggest. In addition, Apple committed another $50 billion to dividends and stock buybacks Tuesday, pushing its total shareholder return program to a whopping $250 billion, though the company could use some of the stock it is buying back in an acquisition instead of cash.

Dawson suggested that Apple’s budget for a potential large acquisition would be in the range of $5 billion to $10 billion, and even that price might be difficult when targeting a company based in the United States. With much of Apple’s cash overseas, the company might have to borrow money to fund a deal of that size, which it is already doing to finance the billions it is sending back to investors.

“Anything larger would obviously be even more challenging, unless the asset is in an overseas market where they have cash locally,” Dawson said.

Apple could be in the market for a wide range of companies that would potentially help out in growth areas while fitting into the perceived budget. For instance, Fitbit Inc. FIT, finished Tuesday with a market capitalization of less than $5 billion, and offers wearables with a wider price range than the Apple Watch. On the enterprise side, which Apple has made a focus, a company like Box Inc. BOX, -0.08% — worth $1.6 billion at the close of Tuesday trading — could offer a business-focused complement to Apple’s iCloud. And the startup market could be ripe for deals as unicorns struggle to find funding at higher valuations.

No matter what course Cook takes with Apple to repair its growth issues, he wants everyone to know that he is optimistic about the iPhone maker’s future. After uttering some form of the word “optimism” three times in the previous five earnings calls, Apple’s CEO said it nine times on Tuesday.

“We’re very optimistic that this too shall pass, and that the market — and particularly us — will grow again,” Cook said.

Federal Reserve statement of April 27, 2016

Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Market Insights 4/27/2016

Apple and the Fed…

U.S. equities finished mixed, after the Federal Reserve remained steady in its monetary stance, and as energy stocks were helped along from a rise in crude oil prices, but the technology sector was hamstrung by Dow member Apple’s disappointing quarterly results, which headlined a sundry of earnings announcements.

Treasuries moved higher following the Fed decision, and amid a solid housing report, while the U.S. dollar was lower, and gold gained ground.

The Markets…

The Dow Jones Industrial Average rose 51 points (0.3%) to 18,041

The S&P 500 Index added 3 points (0.2%) to 2,095

The Nasdaq Composite declined 25 points (0.5%) to 4,863

In moderately-heavy volume, 976 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.29 to $45.33 per barrel, wholesale gasoline was $0.01 higher at $1.59 per gallon

The Bloomberg gold spot price added $1.20 to $1,244.60 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 94.51

Fed holds steady, pending home sales positive

The Federal Open Market Committee (FOMC) concluded its monetary policy meeting, keeping its stance unchanged, but opened the door for a rate increase at its June meeting, omitting previous language noting that “global economic and financial developments continue to pose risks,” to instead indicate that it will “closely monitor” the developments. However, the Committee reiterated its position that it will remain data dependent with regards to future rate hikes. In addition, the Committee said, “Labor market conditions have improved further even as growth in economic activity appears to have slowed,” and that “growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”

Pending home sales rose 1.4% month-over-month in March, versus the Bloomberg projection of a 0.5% rise and following the downwardly revised 3.4% gain registered in February. Compared to last year, sales were 2.9% higher, versus forecasts of a 0.8% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose slightly more than expected in March.

The MBA Mortgage Application Index decreased 4.1% last week, after rising 1.3% in the previous week. The decline came as a 5.0% drop for the Refinance Index was met with a 2.4% fall for the Purchase Index. The average 30-year mortgage rate rose 2 basis points higher to 3.85%.

Treasuries moved higher following the Fed decision, as the yield on the 2-year note fell 4 bps to 0.83%, the yield on the 10-year note declined 7 bps to 1.86%, and the 30-year bond rate decreased 5 bps to 2.71%.

Tomorrow, the U.S. economic calendar will bring the first look (of three) at Q1 GDP, projected to show growth slowed to a 0.6% quarter-over-quarter (q/q) annualized pace, from Q4′s 1.4% expansion. Personal consumption is expected to rise 1.7% after Q4′s 2.4% increase. Recession concerns have been renewed courtesy of the continued deterioration in Atlanta Fed’s “GDPNow” model’s latest down-tick to near-flat 1Q economic growth. Liz Ann notes that the model is consistent with many economists’ forecasts of yet another weak first quarter for U.S. economic growth—most recently driven by weaker-than-expected trade data (courtesy of the prior strength in the U.S. dollar). However, she points out the rebound in manufacturing, leading indicators, no excess in cyclical spending and signs from recession models that all suggest although we’re unlikely to exit from a muddle-through state, the risk of recession is objectively low.

As well, weekly initial jobless claims will be reported, forecasted to move higher to a level of 259,000 from the prior week’s 247,000, as well as the Kansas City Fed Manufacturing Index.

Europe higher, Asia lower ahead of Fed decision

European equities finished modestly higher, with strength in oil & gas issues leading the way, as oil prices moved higher. Technology issues showed some resiliency in the face of Apple’s disappointing earnings results in the U.S. Financials saw some pressure amid some mixed reactions to results out of the sector, while the global markets likely treaded cautiously ahead of today’s monetary policy decision from the Fed in the U.S. In economic news, German consumer confidence unexpectedly improved for May, while preliminary U.K. Q1 GDP growth of 0.4% quarter-over-quarter matched expectations, but was a deceleration from the 0.6% expansion posted in Q4. The euro finished modestly higher versus the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mostly lower amid caution ahead of today’s monetary policy decision from the Fed in the U.S., which will be followed by the Bank of Japan’s decision tomorrow. Also, technology issues in the region found pressure from Apple’s disappointing quarterly results. Stocks in Japan declined amid some choppiness from the yen, while mainland Chinese equities and those traded in Hong Kong declined, despite a solid rebound in that nation’s industrial profits for March. Financials fell to weigh on Australia’s markets, along with weakness in oil & gas issues, while the country’s Q1 consumer price inflation unexpectedly declined, reviving expectations of further easing by the Reserve Bank of Australia, which pressured the Australian dollar.

Market Insights 4/26/2016

Ambiguity Rules

When one combines a sundry of economic and earnings reports, a dose of caution ahead of looming monetary policy decisions, both here and abroad, coupled with a pinch of higher crude oil prices, investors got a recipe for uncertainty, resulting in the markets mixed and near the unchanged mark.

Treasuries were mixed, the U.S. dollar was lower, but gold was higher.

The Markets….

The Dow Jones Industrial Average rose 13 points (0.1%) to 17,990

The S&P 500 Index added 4 points (0.2%) to 2,092

The Nasdaq Composite declined 7 points (0.2%) to 4,888

In moderately-heavy volume, 902 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.40 to $44.04 per barrel, wholesale gasoline gained $0.05 to $1.58 per gallon

The Bloomberg gold spot price was $4.48 higher at $1,242.45 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 94.62

Durable goods orders miss forecasts to kick off heavy day of data

March preliminary durable goods orders rose 0.8% month-over-month, compared to Bloomberg’s estimate of a 1.9% increase and February’s downwardly revised 3.1% drop. Ex-transportation, orders declined 0.2% m/m, versus the 0.5% forecasted rise, and February’s unrevised 1.3% decrease. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, came in flat, compared to projections of a 0.6% increase, and following the negatively revised 2.7% decline in the month prior.

The Consumer Confidence Index declined to 94.2 in April from the downwardly revised 96.1 level in March, and compared to the estimated 95.8. Sentiment toward the present situation improved m/m, while expectations of business conditions declined. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 1.4 from the 0.2 posted last month.

The preliminary Markit U.S. Services PMI Index in April rose further into a level depicting expansion (a reading above 50) increasing to 52.1 from 51.3 in March, and above forecasts calling for a rise to 52.0. The release is independent and differs from the Institute for Supply Management’s (ISM) report, as it has less historic value and Markit weights its index components differently.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.4% y/y in February, versus expectations of a 5.5% rise. M/M, home prices were higher by 0.7% on a seasonally adjusted basis for February, below forecasts of a 0.8% increase.

The Richmond Fed Manufacturing Activity Index pulled back but remained in expansion territory (a reading above zero), declining to 14 in April from the 22 posted in March, while economists had expected a drop to 12.

The plethora of data is likely to be taken into account today by the Federal Open Market Committee (FOMC) as it begins in two-day monetary policy meeting, with its decision to come tomorrow afternoon. Economists are not expecting the FOMC to change its policy stance. The U.S. economy continues to trudge ahead at a low growth rate—not able to generate “escape velocity” on the upside, but not looking like a recession. This meeting seems to be off the table for a rate hike, but although the odds of a June hike have diminished, we believe it’s still on the table, and that two rate hikes this year are possible.

Treasuries were mixed, as the yield on the 2-year note fell 1 basis point (bp) to 0.86% while the yields on the 10-year note and the 30-year bond rose 2 bps to 1.94% and 2,76%, respectively.

In addition to the FOMC’s monetary policy decision, tomorrow’s domestic docket will also offer investors a look at pending home sales, expected to have increased 0.5% m/m during March following the 3.5% m/m rise the month prior, as well as MBA Mortgage Applications.

Europe and Asia mixed as earnings and monetary policy decisions eyed

Amid likely caution ahead of this week’s monetary policy decisions out of the U.S. and Japan this week, European and Asian equities finished mixed, with traders cheering some upbeat corporate reports, with reporting seasons around the globe heating up, while likely remaining cautious ahead of this week’s monetary policy meetings from the Fed in the U.S. and the Bank of Japan.

Japanese equities declined, with the yen nudging higher, while Australian securities traded lower with basic materials issues weighing on the index in its return to action following yesterday’s holiday break. However, listings in India moved higher, supported by an upbeat earnings report out of the auto sector, while South Korea’s markets increased on the heels of its preliminary 1Q GDP report, which showed although growth slowed to 0.4% quarter-over-quarter, from 0.7%, the figure matched expectations.

Tomorrow’s international economic calendar will hold CPI from Australia, trade data and the all Industry Index from Japan, industrial profits from China, import prices and consumer sentiment from Germany, and consumer and business confidence from Italy.

Investor Behavior

Investors Missed the Boat After the Financial Crisis

Because they preferred fixed income over U.S. equities in 2009-2012, many investors missed out on the best returns of the bull market.

In today’s chart we are going to examine investor behavior by looking at where people invest their money on an annual basis. The chart shows worldwide fund flows into mutual funds and ETFs by asset class.

**click to enlarge**

Cg6uZ7wWIAE_UjD

Historically, the best predictor of future flows is recent past performance. Asset classes with good performance over the last year tend to get strong flows in the following year. Generally speaking this is not the best way to invest.

For example, in 2009 after the financial crisis and at the beginning of a strong bull market in stocks the largest flowing category was fixed income. Actually, fixed income received the highest flows from 2009 to 2012. The traumatic experience of the financial crisis scared investors out of investing in U.S. equities all the way until 2013. By waiting so long to invest the average investor missed out on the best returns of the bull market.

Another trend is the strong flows into international stocks. This trend goes against the pattern of flows following performance because international stock returns have been much lower than U.S. stocks returns in the last several years. So despite having lower recent returns investors are allocating more money into international stocks. It seems that investors are doing everything they can to avoid buying U.S. equities.

In conclusion, the patterns in this chart show the behavior of the average investor. It is generally not a good idea to follow the crowd in investing. Instead the more prudent choice is to look to invest in unpopular categories. The best example of this is the fantastic returns you could have received in U.S. stocks over the last seven years.

Market Insights 4/25/2016

Slow Start to the Week

U.S. stocks began the new trading week lower, with crude oil prices seeing pressure and caution prevailing ahead of an active earnings season, as well as monetary policy decisions from the Fed and Bank of Japan later this week.

Treasuries were modestly lower as domestic new home sales and regional manufacturing activity both unexpectedly fell, while gold was higher, and the U.S. dollar lost ground.

The Markets…

The Dow Jones Industrial Average fell 27 points (0.2%) to 17,977

The S&P 500 Index declined 4 points (0.2%) to 2,088

The Nasdaq Composite decreased 10 points (0.2%) to 4,896

In moderate volume, 863 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil lost $1.09 to $42.64 per barrel, wholesale gasoline was $0.02 lower at $1.53 per gallon

The Bloomberg gold spot price rose $4.67 to $1,237.70 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 94.85

New home sales surprisingly dip

New home sales declined 1.5% month-over-month (m/m) in March to an annual rate of 511,000 from February’s upwardly revised 519,000 pace, and compared to the Bloomberg forecast of 520,000. The median home price decreased 1.8% y/y to $288,000. The supply of new home inventory rose to 5.8 months at the current sales pace as m/m gains in the Midwest and South were more than offset by flat sales in the Northeast and a tumble out of the West. New home sales are based on contract signings instead of closings.

The Dallas Fed Manufacturing Index declined to -13.9 for April from March’s unrevised -13.6 level with economists forecasting an improvement to -10.0. A reading below zero denotes contraction.

Treasuries were lower, as the yields on the 2-year and 10-year notes, along with the 30-year bond, ticked 1 basis point higher at 0.83%, 1.90% and 2.72%, respectively.

Tomorrow’s economic calendar will give investors a look at preliminary durable goods orders, forecasted to rise 1.9% m/m for March following the 3.0% decline in February. Excluding transportation, orders are projected to increase 0.5%, following the prior month’s 1.3% fall. Demand for non-defense capital goods excluding aircraft is forecasted to increase 0.6%, after February’s 2.5% decline. As well, Markit’s preliminary Services PMI Index is expected to show activity ticked higher during April to a level of 52.0 from the 51.3 registered in March, while the S&P/CaseShiller Home Price Index and Richmond Fed Manufacturing Index are also scheduled for release.

Europe and Asia lower ahead policy meetings

European equities finished lower, with oil & gas and basic materials issues coming under pressure, while the global markets appeared to be treading cautiously ahead of this week’s monetary policy meetings out of the U.S. and Japan. The euro traded higher versus the U.S. dollar, while bond yields in the region moved to the upside. The economic mood in the region was likely being dampened by a report showing German business confidence unexpectedly dipped in April. Also, automakers in the region were hamstrung by continued headlines regarding emission manipulations.

Stocks in Asia also finished mostly to the downside in cautious trading ahead of this week’s monetary policy decisions out of the U.S. and Japan, while markets in Australia were closed for a holiday. Japanese equities declined, with the yen recovering from late last-week’s weakness that came amid ramped up expectations that the Bank of Japan may deliver further stimulus measures following this week’s monetary policy meeting.

Mainland Chinese stocks, as well as those traded in Hong Kong fell amid waning expectations of accelerated stimulus measures from the country’s central bank in the wake of the recent string of upbeat economic data, while resource-related issues found pressure as commodity exchanges announced measures to cool trading in raw materials, per Bloomberg. Elsewhere, South Korean securities and markets in India both traded lower.

The international economic calendar for tomorrow will be light, with Q1 GDP from South Korea and Hong Kong’s trade balance slated for release.

Market Insights 4/22/2016

Stocks Rebound, Finish Mixed

U.S. equities rebounded from session lows to close on both sides of the unchanged mark, though the Nasdaq significantly under-performed its peers courtesy of some disappointing quarterly earnings reports from the tech sector.

Treasuries and gold were lower, while the U.S. dollar and crude oil prices were higher.

The Markets…

The Dow Jones Industrial Average increased 21 points (0.1%) to 18,004

The S&P 500 Index was flat at 2,092

The Nasdaq Composite fell 40 points (0.8%) to 4,906

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

WTI crude oil gained $0.55 to $43.73 per barrel, wholesale gasoline was $0.02 higher at $1.55 per gallon

The Bloomberg gold spot price declined $14.56 to $1,233.49 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 95.07

Markets were mixed for the week, as the DJIA advanced 0.6% and the S&P 500 Index gained 0.5%, while the Nasdaq Composite decreased 0.7%

Manufacturing growth unexpectedly slows

The preliminary Markit U.S. Manufacturing PMI Index for April surprisingly dipped to 50.8 from March’s 51.5 level, and below the 52.0 that economists surveyed by Bloomberg were forecasting, though a reading above 50 denotes expansion in activity.

Treasuries finished lower, with the yield on the 2-year note gaining 1 basis point to 0.81%, and the yields on the 10-year note and the 30-year bond ticking 2 bps higher to 1.88% and 2.71%, respectively.

Europe mostly lower on autos and data, Asia mixed to close out the week

European equities traded mostly to the downside, though oil & gas issues ticked higher on a modest rebound in crude oil prices, while automakers saw some pressure. In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—unexpectedly dipped to 53.0 in April, from 53.1 in March, and compared to the expected improvement to 53.3. However, a reading above 50 denotes expansion. In other economic news, Italy’s industrial sales and orders data came in mixed for February, while the nation’s retail sales moved higher for the month. The euro declined versus the U.S. dollar and bond yields in the region were mixed.

Stocks in Asia finished mixed with yesterday’s flood of earnings reports and lower crude oil prices weighing on the U.S. markets yesterday. Japanese equities staged a solid advance with the yen dropping late in the day to extend the sizable gains for stocks for the week. The yen came under pressure amid increased speculation that the Bank of Japan could expand its stimulus measures at next week’s meeting, while Bloomberg reported that the BoJ could offer banks some negative rate loans. Mainland Chinese stocks rose, snapping a string of losses that has come amid resurfaced liquidity concerns and as traders assess the market’s recent run that came courtesy of a plethora of upbeat economic report. Securities trading in Hong Kong and Australia fell, bogged down by weakness in oil & gas and basic materials issues, while Indian and South Korean equities also declined.

WEEKLY RECAP: Stocks mixed as earnings season ramps up

The S&P 500 and Dow both ticked higher on the week, with oil prices rising to lift the energy sector. Financials provided support for a second-consecutive week as earnings season ramped up and results out of the sector continued to mostly top forecasts. However, the Nasdaq dropped this week, bogged down by Netflix Inc’s Q2 outlook and as technology stocks fell on misses from Alphabet and Dow component Microsoft, as well as a softer-than-expected outlook from Dow member International Business Machines Corp. So far this earnings season, nearly 82% of the 130 companies that have reported in the S&P 500 have topped profit forecasts, per data compiled by Bloomberg. Treasury yields rallied despite housing starts and building permits missing expectations, and the Philly Fed Manufacturing Index unexpectedly falling back into contraction territory. However, existing home sales rose slightly more than expected and homebuilder sentiment suggested conditions remained good.

We believe the return of earnings growth is a key factor in getting global stocks to move materially higher. Historically, the manufacturing purchasing managers index has been a useful indicator of future profit growth. The broad uptick in this index across most countries during March is encouraging. If these and other recent improvements in indicators of global economic growth are sustained, and the stabilization in commodity prices continues, investor confidence may rise in the eventual return of earnings growth.

WEEK AHEAD: Fed decision set to join earnings focus

Along with an accelerating earnings season, next week’s robust domestic economic calendar will be headlined by the first look (of three) at 1Q GDP, which will follow Wednesday’s monetary policy decision from the Federal Open Market Committee (FOMC).

The U.S. economy continues to trudge ahead at a low growth rate—not able to generate “escape velocity” on the upside, but not looking like a recession. The Fed’s extraordinary and unprecedented measures meant to stoke growth have been less effective than anticipated. The April meeting seems to be off the table for a rate hike. But although the odds of a June hike have diminished, we believe it’s still on the table, and that two rate hikes this year are possible.

Other reports on next week’s U.S. economic calendar include: new home sales, durable goods orders, the S&P/CaseShiller Home Price Index, Markit’s preliminary Services PMI Index, personal income and spending, and the final University of Michigan University Consumer Sentiment Index.

International reports next week include: Australia—consumer price inflation. China—industrial profits. Japan—overall household spending, consumer price inflation, retail sales, industrial production, and the Bank of Japan monetary policy decision. Eurozone—consumer price inflation and advance 1Q GDP, along with German business sentiment, employment change and retail sales. U.K.—advance 1Q GDP.