Monthly Archives: May 2016

Market Insights 5/31/2016

Stocks Mixed

U.S. stocks came off the lows of the day to allow for a mixed finish among the major domestic equity indexes as Fed rate hike expectations remained elevated throughout the session.

Ahead of Friday’s jobs report, a busy domestic docked was highlighted by a solid personal income and spending report. Treasuries were higher, while traders will receive another heavy dose of economic data tomorrow.

Gold and the U.S. dollar gained ground and crude oil prices were lower.

The Markets…

The Dow Jones Industrial Average decreased 86 points (0.5%) to 17,786

The S&P 500 Index shed 2 points (0.1%) to 2,097

The Nasdaq Composite gained 15 points (0.6%) to 4,948

In heavy volume, 1.4 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude declined $0.23 to $49.10 per barrel, wholesale gasoline was $0.3 lower at $1.61 per gallon

The Bloomberg gold spot price increased $10.07 to $1,215.02 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 95.86

Personal income and spending rise to kick off busy day/week

Personal income was 0.4% higher month-over-month in April, matching the Bloomberg forecast and March’s unrevised increase. Personal spending came in 1.0% higher m/m last month, above expectations of a 0.7% increase, and versus April’s downwardly revised flat reading. The April savings rate as a percentage of disposable income declined to 5.4% from March’s upwardly revised 5.9% rate. The PCE Deflator rose 0.3% m/m, matching forecasts. Compared to last year, the deflator was 1.1% higher, in line with estimates. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations, and the index was up 1.6% y/y, in line with estimates.

The Consumer Confidence Index unexpectedly declined to 92.6 in May from the upwardly revised 94.7 level in April, and compared to the estimated rise to 96.1. This was the lowest level since November as sentiment toward the present situation dropped m/m, while expectations of business conditions dipped. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—declined to -0.1 from the 1.4 posted last month.

The Chicago Purchasing Managers Index fell into contraction territory (below 50), declining to 49.3 in May from 50.4 in April, and versus expectations of a modest rise to 50.5.

The Dallas Fed Manufacturing Index fell to -20.8 for May from April’s unrevised -13.9 level with economists forecasting an improvement to -8.0. A reading below zero denotes contraction.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.4% y/y in March, versus expectations of a 5.2% rise. M/M, home prices were up by 0.9% on a seasonally adjusted basis for March, topping forecasts of a 0.8% increase.

Treasuries ticked higher, with the yield on the 2-year note declining 3 basis points (bps) to 0.88%, while the yields on the 10-year note and the 30-year bond dipped 1 bp to 1.84% and 2.64%, respectively. Bond yields have jumped as of late amid resurfaced Fed rate hike expectations bolstered by Friday’s speech by Federal Reserve Chairwoman Janet Yellen, where she reiterated that it’s appropriate for the Central Bank to gradually and cautiously increase the overnight interest rate and that in the coming months such a move would possibly be appropriate.

Tomorrow, the U.S. economic calendar will continue to be robust, headlined by national reads on the manufacturing sector for May, courtesy of the ISM Manufacturing Index and Markit’s Manufacturing PMI Index, with both expected to cling to expansion territory (above 50) at 50.3 and 50.5, respectively. Also, the day will culminate with the afternoon release of the Federal Reserve’s Beige Book, a read on economic activity across the nation that the Central Bank uses as tool to prepare for its next two-day meeting set to end with its monetary policy decision on June 15. Other reports on Wednesday’s docket include: construction spending, May auto sales, and MBA mortgage applications.

In our opinion, the U.S. economy will likely be buoyed by a perking up consumer and the continued improvement in the labor market, which is also starting to support wage growth. We continue to view one or two hikes this year as the most likely scenario, but have our eye on both the rise in wages and the bump up in inflation. If inflation were to surprise on the upside, the Fed could be forced to be more aggressive, leading to more consternation for investors. But for now, we continue to believe the Fed will be slow and methodical in their quest to return rates to a more “normal” level, which could help to support equities in the second half of the year.

Europe snaps winning streak, Asia finishes mixed

European equities finished lower, with the Stoxx Europe 600 Index snapping a five-session winning streak amid some weakness in financials. Traders may have treaded cautiously ahead of this week’s host of data in the U.S., where rate hike expectations are running high, and as the European Central Bank is set to deliver its monetary policy decision on Thursday. Also, the energy markets awaited this week’s meeting for the Organization of the Petroleum Exporting Countries (OPEC), while focus remained on whether the U.K. will leave the European Union (EU), known as a Brexit. Opinion polls ahead of the June 23 referendum showed support for a Brexit increased, per Bloomberg, to weigh on the British pound, which fell versus the U.S. dollar. For analysis on the issue read the article, Brexit: Will the UK Leave the EU? at www.schwab.com/insights. In economic news, German retail sales surprisingly fell in April and the nation’s unemployment change declined slightly more than expected in May. For the eurozone, lending to households held steady, while borrowing from non-financial businesses accelerated slightly in April. Moreover, the eurozone consumer price inflation estimate dipped 0.1% y/y in May, matching forecasts and compared to the 0.2% decline in the month prior. The euro was little changed versus the U.S. dollar, while bond yields in the region mostly declined.

The U.K. FTSE 100 Index was down 0.6%, France’s CAC-40 Index declined 0.5%, Germany’s DAX Index and Switzerland’s Swiss Market Index dropped 0.7%, Spain’s IBEX 35 Index decreased 0.9%, and Italy’s FTSE MIB Index fell 1.5%.

Stocks in Asia finished mixed, with Japanese listings finding support from some upbeat economic reports, and mainland Chinese markets rallying amid a report from Goldman Sachs that raised expectations the region’s stocks will be included in the MSCI Indexes. Equities trading in Japan rose, with the yen holding onto its recent losses, while reports suggested a highly-anticipated sales tax hike delay could be announced tomorrow. Also, data showed the country’s industrial production unexpectedly grew and household spending declined by a smaller amount than anticipated for April.

Stocks in mainland China and Hong Kong advanced, with Goldman raising its forecast from a 50% chance to 70% that the nation’s A-shares will get inclusion into MSCI Inc’s global benchmark indexes, when a June 15 review concludes. However, oil & gas issues weighed on Australian listings despite an unexpected rise in the nation’s building approvals for April. Indian securities pulled back modestly from a seven-month high, ahead of the release of the nation’s 1Q GDP report. After the closing bell, India’s 1Q GDP accelerated to a 7.9% y/y pace of growth, from 7.3% rate of expansion in 4Q and compared to expectations of a 7.5% rise. Finally, South Korean stocks were higher, shrugging off a larger-than-expected drop in April industrial production.

Market Insights 5/27/2016

Stocks Manage Strong Weekly Gains

U.S. stocks finished the trading session higher to add to a solid weekly advance ahead of the extended Memorial Day weekend, which will have all U.S. markets closed on Monday.

Treasuries were lower as yields ticked higher following an afternoon speech from Fed Chair Janet Yellen, where she hinted at the possibility of an interest rate increase in the coming months.

In economic news, Q1 GDP was revised higher by a slightly smaller-than-expected amount and consumer sentiment was adjusted lower. Gold and crude oil prices declined and the U.S. dollar gained ground.

The Markets…

The Dow Jones Industrial Average increased 45 points (0.2%) to 17,872

The S&P 500 Index added 9 points (0.4%) to 2,099

The Nasdaq Composite advanced 32 points (0.6%) to 4,934

In moderate volume, 825 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq

WTI crude declined $0.15 to $49.33 per barrel, wholesale gasoline was $0.01 higher at $1.64 per gallon

The Bloomberg gold spot price declined $9.47 to $1,210.33 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 95.77

Markets were nicely higher for the week, as the DJIA ascended 2.1%, the S&P 500 Index rallied 2.3% and the Nasdaq Composite surged 3.4%

First revision of Q1 GDP slightly misses forecasts, consumer sentiment revised lower

The second look (of three) at Q1 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 0.8%, revised upward from the 0.5% expansion reported in the first report. This compared to the Bloomberg forecast of a revised 0.9% pace of growth. Q4 GDP expanded by an unrevised 1.4% rate. The upward revision came as private inventory investment, residential fixed investment and exports were adjusted higher, while imports were revised lower. However, Personal consumption was unrevised at a 1.9% gain, with expectations calling for an upwardly revised 2.1% pace of growth. Personal consumption grew by an unrevised 2.4% in Q4.

On inflation, the GDP Price Index was revised to a 0.6% gain, versus forecasts of an unrevised 0.7% increase, while the core PCE Index, which excludes food and energy, was unadjusted at a 2.1% rise, in line with expectations.

The final May University of Michigan Consumer Sentiment Index was revised to 94.7 from the preliminary level of 95.8, and compared to expectations of 95.4, as a downward adjustment for the expectations component of the report overshadowed an upward revision to the current conditions portion. However, the index was up compared to April’s level of 89.0, and sits at the highest level since June 2015. The 1-year inflation outlook declined to 2.4%, from April’s 2.8% rate. The 5-10 year inflation forecast remained at April’s 2.5% level.

In an afternoon speech, Federal Reserve Chairwoman Janet Yellen reiterated that it’s appropriate for the Central Bank to gradually and cautiously increase the overnight interest rate and that in the coming months such a move would possibly be appropriate. Meanwhile, bond yields have rallied as of late amid resurfaced Fed rate hike expectations courtesy of hawkish commentary from Central Bank officials, stronger-than-expected economic data—including continued signs of budding inflation—and the April monetary policy meeting minutes which kept the possibility of a June rate hike on the table.

Treasuries were lower, with the yield on the 2-year note ticking 4 basis points higher to 0.91%, the yield on the 10-year note increasing 2 bps to 1.85% and the 30-year bond rate adding 1 bp to 2.65%.

Please Note: All U.S. markets will be closed on Monday in observance of the Memorial Day holiday.

Europe extends weekly rally, Asia modestly higher to close out the week

European equities finished modestly higher to extend a strong rally that took the Stoxx Europe 600 Index 3.4% higher for the week—its best since February per Bloomberg—and allowed it to post its third-straight weekly gain. However, the energy sector slipped as crude prices moved lower, while the G-7 meeting in Japan delivered little in the way of new agreements. Traders appeared to tread with some caution ahead of today’s speech from U.S. Fed Chairwoman Janet Yellen. The euro and British pound were lower versus the U.S. dollar, while bond yields in the region were mixed. European stocks rallied this week on relatively favorable economic data, eased concerns about the potential for the U.K. to vote next month to leave the European Union (EU)—known as a Brexit—and as the global markets seemed to come to grips with the heightened expectations of a summer rate hike in the U.S.

The U.K. FTSE 100 Index, France’s CAC-40 Index and Germany’s DAX Index ticked 0.1% higher, Spain’s IBEX 35 Index gained 0.3%, and Switzerland’s Swiss Market Index increased 0.8%, while Italy’s FTSE MIB Index declined 0.2%.

Asian stocks finished mostly to the upside, though conviction may have been limited by caution ahead of today’s speech from U.S. Fed Chair Yellen, while the G-7 meeting in Japan of world leaders delivered no new major developments. The communique from the meeting noted risks to growth, and stressed the need for monetary/fiscal and structural policy to play a role, while it reiterated a commitment to avoid competitive currency devaluations. Japanese equities added to a modest weekly gain, amid some choppiness in the yen following a report on the nation’s consumer price inflation, which showed core inflation declined by a slightly smaller amount than expected in April. Also, reports of a potential sales-tax hike delay buoyed sentiment.

Mainland Chinese stocks dipped and those trading in Hong Kong advanced following a report that showed the country’s industrial profits rose in April, but at a smaller rate than the growth registered in March. Australian securities were led higher by technology, financials and oil & gas issues, while basic materials listings weakened slightly.

WEEKLY RECAP: Stocks rally on the week

U.S. stocks participated in a global rally, as technology issues continued their upward momentum, healthcare stocks rose solidly and financials remained in rally mode. Some upbeat economic data, highlighted by a jump in domestic new home sales to the highest level in over eight years, helped the markets come to terms with heightened Fed rate hike expectations. Also, the rally in crude oil persisted, with WTI prices breaching the $50 per barrel mark during the week for the first time since last fall. Moreover, growing confidence that the U.K. will stay in the EU aided the mood and is lightening.

With the summer season approaching, a breakout for U.S. stocks doesn’t appear imminent. But there is hope for the second half of the year, and investors should be aware of the less-told story. A continued sluggish U.S. economy has kept stocks in a trading range for two years, but there could be a bounce in the second half of the year. Now that the market and the Fed are basically on the same page, the beginning-of-year turmoil which accompanied the initial rate hike may not be repeated.

THE WEEK AHEAD: Flood of data set to add to Fed focus

Next week’s holiday-shortened U.S. economic calendar will bring a plethora of key data for the markets to digest in their pursuit to determine if a summer Fed rate hike is in the offing. The ISM and Markit’s Manufacturing and Services Purchasing Managers Indexes (PMIs), personal income and spending, the Fed’s Beige Book, factory orders and the trade balance highlight the docket, but the headlining report will likely be Friday’s May non-farm payroll report. Sluggish wage growth may be a relatively poor indicator of labor market slack. In fact, correcting for worker composition changes, wages are consistent with a strong labor market that is drawing low-wage workers into full-time employment. It also may help to explain why the Fed appears itchier than ever to raise rates again.

International reports slated for next week include: Australia—building approvals, 1Q GDP, trade balance and retail sales. China—PMIs. India—1Q GDP and PMIs. Japan—retail sales, industrial production, overall household spending and 1Q capital spending. Eurozone—European Central Bank monetary policy decision, Consumer Price Index, retail sales, lending figures and PMIs, along with German unemployment change. U.K.—PMIs.

GDP Report: First-quarter better but still weak

Growth raised to 0.8% from 0.5%; economy looking better in spring

The U.S. economy got off to a slow start in the first quarter of 2016, but not quite as slow as initially reported

Gross domestic product rose at 0.8% rate from January to March, up from an initial 0.5% reading, the Commerce Department said Friday. Somewhat stronger home building and restocking of warehouse shelves were behind the upward revision.

The low rate of growth in the first three months of the year is unlikely to be repeated in the spring, however. A raft of evidence such as higher retail sales and rising home purchases suggests the U.S. is on track to expand at a 2%-plus clip in the second quarter.

A slow first quarter followed by an improved second quarter also occurred in each of the past two years. After a sluggish performance in the first quarter, many experts fee the U.S. economy is getting back on track.

What might help the economy is a stabilization in corporate earnings. Adjusted pretax profits rose at a 0.3% rate to mark the first increase since the spring of 2015. Profits are down about 6% in the past year, however.

Consumer spending, the main engine of the economy, rose 1.9% in the first quarter. That was unchanged from the government’s original estimate. Americans spent more on housing, utility bills and health care and pared back purchases of new cars.

Outlays on new home construction surged at 17.1% clip in the first quarter, up from a prior 14.8% estimate. That’s the biggest gain in nearly four years.

The value of inventories — goods produced but waiting to be sold — also increased by $69.6 billion instead of $60.9 billion, revised figures show.

Yet business investment in every other category declined, in some cases sharply. Outlays on structure such as oil rigs sank 8.9% and spending on new equipment such as computers fell 9%.

The nation’s trade picture, meanwhile, was not quite as cloudy as the earlier estimate showed. Exports fell 2% instead of 2.6%. And imports actually declined at a 0.2% rate instead of rising 0.2%. A smaller trade deficit adds to GDP.

Inflation as measured by the Federal Reserve’s preferred PCE index was unchanged. The PCE index rose at a 0.3% annual pace. Most other figures in the revised first-quarter results were little changed. The government will update the GDP report again next month.

Market Insights 5/26/2016

A Pause…..

U.S. equities finished mixed and near the unchanged mark, with financials giving back some of their recent gains and energy stocks losing some steam amid a pause in the recent rally in crude oil prices.

Treasuries finished higher, as yields worked lower, following a mixed read on U.S. durable goods orders, while the U.S. dollar and gold were lower.

The Markets…

The Dow Jones Industrial Average fell 23 points (0.1%) to 17,828

The S&P 500 Index was nearly unchanged at 2,091, Utilities and Consumer Staples saw green today while Materials, Industrials and Financials worked their way into the red.

The Nasdaq Composite ticked 7 points (0.1%) higher to 4,902

In moderate volume, 780 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude fell $0.08 to $49.48 per barrel, wholesale gasoline was $0.02 lower at $1.63 per gallon

The Bloomberg gold spot price declined $4.08 to $1,220.33 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 95.17

Durable goods orders mixed, jobless claims fall more than expected

April preliminary durable goods orders jumped 3.4% month-over-month, compared to Bloomberg’s estimate of a 0.5% increase and March’s upwardly revised 1.9% gain. The volatile headline figure was bolstered by a surge in non-defense aircraft. Ex-transportation, orders rose 0.4% m/m, versus the 0.3% forecasted increase, and March’s positively revised 0.1% gain. Computers and electronic products showed solid growth. However, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, declined 0.8%, compared to projections of a 0.3% increase, and following the downwardly revised 0.1% dip in the month prior.

The manufacturing side of the U.S. economy continues to flirt with a recession. There are many theories about why productivity has disappointed during this recovery, but a contributor seems to be companies being willing to add to labor but not spend money on equipment or technology that could help to boost productivity. This is the component we would like to see turn in order to fuel the next equity move higher. If corporate confidence improves, it should lead to increased capital expenditures, which should lead to an increase in productivity, and in turn economic activity.

Weekly initial jobless claims fell by 10,000 to 268,000 last week, versus estimates calling for claims to decrease to 275,000, as the prior week’s figure was unrevised at 278,000. The four-week moving average rose by 2,750 to 278,500, while continuing claims increased 10,000 to 2,163,000, north of the estimated level of 2,142,000.

Pending home sales jumped 5.1% m/m in April, versus projections of a 0.7% rise and following the upwardly revised 1.6% gain registered in March. Compared to last year, sales were 2.9% higher, versus forecasts of a 0.2% 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 April.

The Kansas City Fed Manufacturing Activity Index for May unexpectedly declined to -5 from April’s -4 level, and compared to the projected rise to -3, with a reading south of zero depicting contraction.

Treasuries were higher, with the yield on the 2-year note declining 5 basis points to 0.88%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 1.83% and 2.63%, respectively.

Please note: the U.S. bond markets will close early at 2 p.m. ET in observance of the upcoming Memorial Day holiday.

For tomorrow, investors will get a second look (of three) at Q1 GDP, forecasted to be revised to a 0.9% annualized quarter-over-quarter (q/q) rate of expansion, while personal consumption is expected to be readjusted higher to a 2.1% q/q increase. As well, the final University of Michigan Consumer Sentiment Index is anticipated to tick lower to a level of 95.4.

Europe and Asia tick higher as global markets continue to rise

European equities finished modestly higher, extending their rally to three days, with basic materials stocks rising on strength in mining issues and automakers gaining noticeable ground. However, financials saw pressure, and energy issues lagged as crude oil prices dipped after their recent run. The euro was higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mixed. The pound has rallied as of late on growing optimism the U.K. will vote next month against leaving the European Union (EU), known as a Brexit. In economic news, U.K. Q1 GDP was unrevised at a 0.4% quarter-over-quarter pace of expansion, as expected, but down from the 0.6% growth seen in Q4.

Stocks in Asia finished modestly higher, with the global markets continuing to chug higher on improved sentiment regarding a potential rate hike in the U.S., while the energy sector has been buoyed by the recent rally in crude oil prices. Japanese securities ticked slightly higher, giving up early gains as the yen jumped late in the session.

Mainland Chinese stocks rose modestly, snapping a two-session losing streak, and those traded in Hong Kong ticked higher ahead of a read on the region’s trade balance. After the closing bell, Hong Kong’s April trade deficit narrowed by a larger-than-expected amount with both exports and imports falling at slower rates than anticipated. Australian equities gained modest ground, led by basic materials and oil & gas issues, and India’s markets rallied, aided by the recently improved global sentiment and forecasts of higher-than-average rainfall in the monsoon season, while South Korean listings declined

Items set for release on the international economic calendar tomorrow include: PPI from Japan, industrial profits from China, consumer confidence from France, trade data from Spain, as well as consumer and business confidence from Italy.

Market Insights 5/25/2016

Positive Momentum Continues

U.S. equities ended a second-straight day with solid gains amid strength in technology and financial stocks. Adding to the rally, eased Brexit concerns, a debt relief deal in Greece, weakness in the yen, continued strength in crude oil prices, and a favorable business confidence report out of Germany helped to lift sentiment. Treasuries finished nearly flat, while gold and the U.S. dollar were lower.

The Markets…

The Dow Jones Industrial Average rose 145 points (0.8%) to 17,851

The S&P 500 Index increased 14 points (0.7%) to 2,091

The Nasdaq Composite gained 34 points (0.7%) to 4,895

In moderate volume, 899 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude added $0.94 to $49.56 per barrel, wholesale gasoline was $0.01 lower at $1.65 per gallon

The Bloomberg gold spot price lost $2.41 to $1,224.80 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 95.38

Service sector activity surprisingly slows, while mortgage applications rise

The preliminary Markit U.S. Services PMI Index in May unexpectedly slid but remained at a level depicting expansion (a reading above 50), declining to 51.2 from 52.8 in April, and compared to the Bloomberg forecast calling for a modest rise to 53.0. 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.

Tomorrow, we will get a look at demand for manufacturing in the form of the preliminary April durable goods orders report. Orders are projected to rise 0.5% month-over-month, after gaining 0.8% in March, while excluding transportation, orders are forecasted to increase 0.3%, following the prior month’s 0.2% decline. Orders for non-defense capital goods excluding aircraft—a proxy for business spending—are anticipated to grow 0.3%, after March’s 0.1% gain. As well, weekly initial jobless claims will be released, forecasted to tick slightly lower to a level of 275,000 from the prior week’s 278,000, while pending home sales are expected to show the pipeline of existing home sales to have risen by 0.6% m/m during April following the 1.4% increase registered in March.

The MBA Mortgage Application Index increased 2.3% last week, after declining by a favorably revised 1.0% in the previous week. The rise came as a 0.4% gain for the Refinance Index was met with a 4.8% jump for the Purchase Index. The average 30-year mortgage rate rose 3 basis points to 3.85%.

Treasuries were little changed, as the yields on the 2-year note and the 10-year note were unchanged at 0.92% and 1.87%, respectively, while the yield on the 30-year bond dipped 1 bp to 2.67%. Bond yields have rallied as of late amid resurfaced Fed rate hike expectations courtesy of hawkish commentary from Central Bank officials, stronger-than-expected economic data—including continued signs of budding inflation—and the April monetary policy meeting minutes which kept the possibility of a June rate hike on the table.

Europe and Asia higher on data, oil, Greek and U.S. optimism

European equities traded broadly higher for a second-straight session, with yesterday’s rally in the U.S. as a jump in home sales helped ease concerns about the potential near-term rate hike helping global sentiment. Oil & gas issues led the way as crude oil prices continued to gain ground. Financials moved higher as Eurozone finance ministers agreed with Greece and the International Monetary Fund (IMF) yesterday on a deal on debt relief and reforms. Moreover, the British pound’s rally remained on growing optimism the U.K. will vote next month against leaving the European Union (EU), known as a Brexit, while a read on German business confidence rose more than expected in May to the strongest level of the year. The euro ticked higher versus the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mostly higher on the heels of the rally in the U.S. yesterday, with a much stronger-than-expected rise in home sales easing concerns about the possibility of a summer Fed rate hike and sluggish global growth. Japanese equities rose solidly, bolstered by the yen giving back Monday’s rally. Although Japanese stocks may see some relief if the yen stabilizes or reverses recent strength, we see the hefty headwinds offsetting the potential positives. Disappointment may be in store for those hoping for a sharp rebound in Japan’s economic growth this year.

Stocks traded in Hong Kong jumped amid the global market boost from the U.S., which appeared to overshadow the People’s Bank of China’s move to fix the yuan at the lowest level in five years. However, mainland Chinese equities gave up early gains and finished lower, with noticeable pressure on airline stocks. Australia’s markets advanced, led by a rally in oil & gas issues, as well as financials, while Indian securities rallied, as the upbeat global mood was met with a stronger-than-average forecast for rainfall during the June-September monsoon season, and South Korean listings rose.

Market Insights 5/24/2016

Jump in Housing Supports Market Rally

U.S. stocks rallied, with technology issues leading the way, amid a rise in crude oil prices and the highest level in new home sales in more than eight years.

News on the equity front was a mixed bag, headlined by Best Buy’s disappointing forward guidance that overshadowed its upbeat Q1 results. Treasuries and gold were lower, while the U.S. dollar rose.

The Markets…

The Dow Jones Industrial Average jumped 213 points (1.2%) to 17,706

The S&P 500 Index rallied 28 points (1.4%) to 2,076

The Nasdaq Composite surged 95 points (2.0%) to 4,861

In moderately-heavy volume, 874 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.54 to $48.62 per barrel, wholesale gasoline gained $0.01 to $1.66 per gallon

The Bloomberg gold spot price tumbled $21.05 to $1,228.08 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 95.61

New home sales jump to highest level in over eight years

New home sales jumped 16.6% month-over-month (m/m) in April to an annual rate of 619,000—the highest level since January 2008—from March’s upwardly revised 531,000 pace, and compared to the Bloomberg forecast of 523,000. The median home price rose 9.7% y/y to $321,100. The supply of new home inventory fell 14.5% m/m to 4.7 months at the current sales pace as sales surged 52.8% m/m in the Northeast and rose solidly in South and West, while the Midwest fell. New home sales are based on contract signings instead of closings.

The Richmond Fed Manufacturing Activity Index fell back into contraction territory (a reading below zero), dropping to -1 in May from the 14 posted in April, while economists had expected a drop to 8.

Treasuries finished lower, as the yield on the 2-year note rose 2 basis points (bps) to 0.91%, while the yields on the 10-year note and the 30-year bond advanced 3 bps to 1.86% and 2.65%, respectively. Bond yields have jumped as of late amid resurfaced Fed rate hike expectations in the wake of stronger-than-expected data, some hawkish commentary from Central Bank officials and the April monetary policy meeting minutes which showed the possibility of a June rate hike has not been ruled out.

Reports of note on tomorrow’s domestic economic calendar include Markit’s preliminary Services PMI Index for May, forecasted to tick higher to a level of 53.0 from the prior month’s 52.8, as well as MBA Mortgage Applications.

Europe moves higher amid data and eased Brexit concerns, Asia lower

European equities traded higher, following upbeat reads on German 1Q GDP and French business sentiment, with oil & gas and basic materials issues rebounding. Also, the euro traded lower versus the U.S. dollar to help the mood in the region and the financial sector rallied as a jump in new home sales bolstered already heightened Fed rate hike expectations. Also, concerns continued to ease about the possibility of a U.K. exit from the EU, known as a Brexit.

The British pound jumped versus the U.S. dollar. Germany’s 1Q GDP was unrevised at a 0.7% quarter-over-quarter rate of growth, matching expectations, but accelerating from the 0.3% pace of expansion posted in 4Q. Moreover, French business confidence unexpectedly improved for May. The reports may have helped overshadow a separate read on German investor confidence, which unexpectedly declined in May. Bond yields in the region were mostly lower, though U.K. rates moved higher.

Asian stocks finished mostly lower as the global markets remain skittish amid rising U.S. rate hike expectations, while the yen held onto Monday’s rally to weigh on the Japanese markets, which was exacerbated by the lack of any agreements from the weekend’s G-7 meeting of finance chiefs that centered on the action in the foreign exchange markets. Although Japanese stocks may see some relief if the yen stabilizes or reverses recent strength, we see the hefty headwinds offsetting the potential positives. Disappointment may be in store for those hoping for a sharp rebound in Japan’s economic growth this year.

Mainland Chinese stocks declined amid soured sentiment toward commodity issues in the wake of the recent declines in raw materials prices that has come courtesy of dampened global growth expectations. However, those traded in Hong Kong ticked higher, aided by consumer services stocks. Australian securities traded lower on weakness in oil & gas stocks, and listings in South Korea also fell, while India’s markets moved higher, snapping a four-session losing streak that had stemmed from the recent rise in U.S. Fed rate hike expectations.

Market Insights 5/23/2016

Stocks Finish Fairly Flat

U.S. equities closed the regular session lower, but nearly unchanged as some decent strength in materials issues was unable to influence stocks higher with health care and consumer discretionary listings lagging.

Treasuries were mixed and little changed following an unexpected slip in Markit’s preliminary U.S. manufacturing report. The U.S. dollar was mostly flat and gold and crude oil prices ticked lower.

The Markets….

The Dow Jones Industrial Average declined 8 points to 17,493

The S&P 500 Index decreased 4 points (0.2%) to 2,048

The Nasdaq Composite lost 4 points (0.1%) to 4,766

In moderately-heavy volume, 804 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.33 lower to $48.08 per barrel, wholesale gasoline was unchanged at $1.64 per gallon

The Bloomberg gold spot price lost $2.23 to $1,252.52 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.26

Markit’s preliminary May manufacturing report unexpectedly dips

The preliminary Markit U.S. Manufacturing PMI Index for May dipped to 50.5 from April’s 50.8 level, and below the modest increase to 51.0 that economists surveyed by Bloomberg were forecasting, though a reading above 50 denotes expansion in activity.

The report kicks off the week’s U.S. economic front, which will bring other key releases of new home sales, preliminary durable goods orders, the second look (of three) at Q1 GDP, and the final University of Michigan Consumer Sentiment Index. However, the attention of the global markets will likely remain on the Fed, with another plethora of officials set to speak, including a speech from Chairwoman Janet Yellen on Friday.

The Fed appears stuck, as the economy has recovered, employment has improved, housing has bounced back, and asset prices have appreciated. However, the economy is still not firing on all cylinders. Many expect economic activity to pick up in the second quarter from the weak first quarter, but whether it will be enough to allow the Fed to raise rates again, it’s too soon to tell.

Treasuries were mixed, with the yield on the 2-year note rising 2 basis points to 0.90%, while the yield on the 10-year note declined 1 bp to 1.83% and the 30-year bond rate was flat at 2.63%. Bond yields have jumped as of late amid resurfaced Fed rate hike expectations in the wake of some hawkish commentary from Central Bank officials and the April monetary policy meeting minutes which showed the possibility of a June rate hike has not been ruled out.

Tomorrow, the U.S. economic calendar will include the aforementioned housing data in the form of new home sales for April, expected to show a 2.3% increase to an annual rate of 523,000 units. Also, some regional data will take shape with the release of the Richmond Fed Manufacturing Index for May, forecasted to decline to 8 from the prior month’s level of 14, but a reading above 0 denotes expansion in activity.

Europe mostly lower and Asia mixed as Fed continues to command attention

European equities traded mostly lower, as the global markets continued to grapple with the possibility of a near term rate hike by the Fed, while oil & gas issues saw some pressure amid the weakness in crude oil prices. Basic materials stocks also weighed on the markets. In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—dipped to 52.9 in May from 53.0 in April, compared to the expected rise to 53.2. However, a reading above 50 denotes expansion, while growth in French services sector activity unexpectedly accelerated and German business activity came in stronger than expected. The euro and the British pound lost ground versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed with the global markets remaining focused on the potential for a summer rate hike out of the U.S., while lower oil prices weighed on the energy sector. Japanese equities declined, with the yen strengthening to pressure sentiment on the heels of this weekend’s G-7 meeting between world finance chiefs in Japan, which delivered little major developments but focus was on the apparent disagreement regarding foreign exchange policy. Japan reported an unexpected widening of its April trade surplus as exports fell slightly more than expected, while imports dropped by a larger amount than projected.

Stocks in mainland China finished higher, while those trading in Hong Kong declined. Australian securities decreased amid weakness in oil & gas issues, which was met with declines in financials and basic materials stocks. Finally, Indian stocks traded lower on the festering uncertainty regarding a potential Fed rate hike and South Korean equities moved higher.

Market Insights 5/20/2016

Stocks Reverse from Yesterdays Session, End Nicely Higher

U.S. stocks finished the trading week in positive fashion as the equity markets reclaimed some of the recent losses that commenced on the heels of the release of the minutes from the Fed’s April monetary policy meeting.

In economic news, existing home sales topped forecasts, while on the equity front, Applied Materials reported upbeat results to help boost the tech sector.

Treasuries and the U.S. dollar were nearly unchanged, gold was a touch lower and crude oil prices were mixed.

The Markets….

The Dow Jones Industrial Average (DJIA) advanced 66 points (0.4%) to 17,501

The S&P 500 Index increased 12 points (0.6%) to 2,052

The Nasdaq Composite rallied 57 points (1.2%) to 4,770

In moderately-heavy volume, 962 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.26 lower to $48.41 per barrel, wholesale gasoline increased $0.01 to $1.64 per gallon

The Bloomberg gold spot price lost $2.23 to $1,252.52 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 95.35

Markets were mixed for the week, as the DJIA declined 0.2%, while the S&P 500 Index added 0.3% and the Nasdaq Composite increased 1.1%

Existing home sales top forecasts

Existing-home sales in April rose 1.7% month-over-month to a 5.45 million annual rate, compared to the Bloomberg forecast of a 5.40 million pace. March’s figure was revised upward to a 5.36 million annual rate. Compared to last year, sales were 6.0% higher and the median existing-home price was up 6.3% at $232,500. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were mixed regionally, with the Northeast gaining ground and the Midwest jumping, while declines were seen in South and the West. Single-family home sales rose modestly, while condominium and co-op sales jumped.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said the report signaled slowly building momentum for the housing market this spring. Yun added, “The temporary relief from mortgage rates currently near three-year lows has helped preserve housing affordability this spring, but there’s growing concern a number of buyers will be unable to find homes at affordable prices if wages don’t rise and price growth doesn’t slow.”

Treasuries were mostly flat, with the yields on the 2-year and 10-year notes nearly unchanged at 0.89% and 1.85%, respectively, while the yield on the 30-year bond dipped 1 basis point to 2.64%. Bond yields have been choppy after Wednesday’s jump that followed the release of the Federal Reserve’s April meeting minutes, which showed the Central Bank hadn’t ruled out the possibility of a June rate hike.

Europe trades higher, Asia finishes mostly to the upside

European equities traded higher, led by healthcare stocks, while commodity-related issues rebounded from recent weakness that has been exacerbated by increased U.S. Fed rate hike expectations. The global markets recovered from the flared-up rate hike concerns in the U.S. that have come from hawkish commentary from the Fed and the Central Bank’s April meeting minutes. Also, the U.K. markets moved nicely higher, aided by this week’s polls that suggested support for the nation to vote against leaving the European Union (EU), known as a Brexit.

Travel-related issues rebounded from initial pressure as the investigation of the EgyptAir plane that disappeared during a flight between Paris and Cairo continued. The euro ticked higher and the British pound was lower compared to the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mostly higher to close out the week, shrugging off the flared-up U.S. rate hike expectations that have come from hawkish commentary from Fed officials and exacerbated by Wednesday’s April meeting minutes. An advance for Japanese equities was aided by some late-day weakness in the yen, while the G-7 meeting in Japan is set to begin. Japanese stocks posted back-to-back weekly gains, bolstered by stronger-than-expected 1Q GDP and machine orders reports.

Japan’s economy struggled in the first quarter and the second quarter is not shaping up to be much better. Yet economists expect a sharp rebound in economic growth this year. We see hefty headwinds offsetting the potential positives for Japan. Stocks trading in mainland China, Hong Kong, Australia and South Korea advanced. Bucking the global trend, Indian equities declined on the increased Fed rate hike focus which has boosted the U.S. dollar versus emerging market currencies including the rupee, which posted its worst weekly drop since January, per Bloomberg.

WEEKLY RECAP: Stocks eke out weekly gain despite rate hike concern flare-up

U.S. stocks finished the week modestly higher, though volatility increased as Fed rate hike expectations resurfaced. The markets appeared to be surprised by the April monetary policy meeting minutes that showed the Central Bank may have been closer to raising rates for a second time than anticipated. Domestic economic data showed inflation continued to gain steam, housing starts topped forecasts, and industrial production easily bested estimates.

The reports accompanied a plethora of hawkish rhetoric from Fed officials to boost the financial sector, along with Treasury yields and the U.S. dollar. Crude oil prices rose to lift the energy sector, despite some pressure from the stronger dollar, supported by supply disruptions in Canada and Nigeria, as well as a decline in U.S. output and an upbeat oil price forecast from Goldman Sachs.

Technology issues also rallied, aided by upbeat earnings reports from Dow component Cisco Systems and Applied Materials. However, consumer discretionary stocks declined as disappointing retail sector results continued to pour in, headlined by Target Corp’s softer-than-expected sales and Dow member Home Depot Inc’s stronger-than-expected Q1 results being overshadowed by signs of slowing sales growth.

Dow member Wal-Mart Stores was a standout winner after surging on its Q1 results and favorable outlook. As noted in our article, What Will It Take to Get Stocks to New Highs?, we continue to have a “neutral” view of U.S. stocks though bouts of volatility are likely to persist amid uncertainty over the Fed, the upcoming U.S. elections, and how fast the global economy will grow. Increased capital investments from businesses is what we think is needed to push the S&P 500 past its all-time high, a level that it has failed to eclipse three times in the last year.

THE WEEK AHEAD: Fed set to remain in focus next week

Next week’s U.S. economic front will bring the key releases of Markit’s business activity reports, new home sales, preliminary durable goods orders, the second look (of three) at Q1 GDP, and the final University of Michigan Consumer Sentiment Index.

However, the attention of the global markets will likely remain on the Fed, with another plethora of officials set to speak, including a speech from Chairwoman Janet Yellen on Friday. The Fed appears stuck, as the economy has recovered, employment has improved, housing has bounced back, and asset prices have appreciated. However, the economy is still not firing on all cylinders. We expect economic activity to pick up in the second quarter from the weak first quarter, but whether it will be enough to allow the Fed to raise rates again, it’s too soon to tell.

International reports due out next week include: China—industrial profits. Japan—trade balance and consumer inflation. Eurozone—Markit’s eurozone business activity reports, along with 1Q GDP, investor and business confidence reports out of Germany. U.K.—1Q GDP.

Market Insights 5/19/2016

Stocks Close Red with Continued Focus on Fed

U.S. equities closed the trading session lower amid heightened expectations of a possible June rate hike, which transpired following yesterday’s release of the Central Bank’s April monetary policy meeting minutes.

The decline for stocks ensued despite some stronger-than-expected earnings releases from Dow members Wal-Mart and Cisco and domestic reports that showed a drop in jobless claims and a nice rise for the Leading Index.

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

The Markets….

The Dow Jones Industrial Average (DJIA) declined 91 points (0.5%) to 17,435

The S&P 500 Index was 8 points (0.4%) lower at 2,040

The Nasdaq Composite shed 27 points (0.6%) to 4,713

In moderately-heavy volume, 934 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil dipped $0.11 to $48.67 per barrel, wholesale gasoline decreased $0.02 to $1.63 per gallon

The Bloomberg gold spot price lost $4.03 to $1,254.47 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.32

Jobless claims pullback, while Leading Index improves

Weekly initial jobless claims fell by 16,000 to 278,000 last week, versus the Bloomberg estimate calling for claims to decrease to 275,000, as the prior week’s jump was unrevised at 294,000. The four-week moving average rose by 7,500 to 275,750, while continuing claims dropped 13,000 to 2,152,000, slightly south of the estimated level of 2,158,000.

The Conference Board’s Index of Leading Economic Indicators (LEI) rose 0.6% month-over-month in April, versus the projected 0.4% increase, and compared to March’s downwardly revised flat reading. Support was widespread, led by the yield curve, building permits and jobless claims, while consumer expectations was the lone component to weigh on the index.

The Philly Fed Manufacturing Index in May remained at a level depicting contraction (a reading below zero) dipping to -1.8 from -1.6 in April, and compared to estimates calling for an improvement to 3.0.

Treasuries ticked higher, with the yields on the 2-year and 10-year notes declining 1 basis point to 0.88% and 1.85%, respectively, while the yield on the 30-year bond dipped 2 bps to 2.64%. Bond yields gave back some of yesterday’s jump that followed the release of the Federal Reserve’s April meeting minutes, which showed the Central Bank hadn’t ruled out the possibility of a June rate hike.

Tomorrow, the lone report on the U.S. economic calendar will be the key release of existing home sales, projected to rise 1.3% m/m in April to an annualized rate of 5.4 million units. Existing home sales are based on contract closings and make up the largest portion of the domestic housing sales market. The recovery in housing has been a bright spot for the economy and National Association of Realtors’ Chief Economist Lawrence Yun noted in last month’s existing home sales report that with rents steadily rising and average fixed rates well below 4 percent, qualified first-time buyers should be more active participants than what they are right now.

This suggests the housing recovery still has room to grow, but it will take increased capital investments from businesses is what we think is needed to push the S&P 500 past its all-time high, a level that it has failed to breach three times in the last year.

European stocks lower on Fed rate hike expectations

European equities finished broadly lower, with commodity issues seeing pressure as the U.S. dollar continued its rally in the wake of yesterday’s release of the U.S. Fed’s April monetary policy meeting minutes. The report bolstered recently heightened expectations that the Central Bank may still raise rates for a second time as early as its June meeting. Travel-related issues saw some pressure amid uncertainty regarding the disappearance of an EgyptAir flight between Paris and Cairo.

In economic news, U.K. retail sales rose more than expected in April. The data comes as the British pound has jumped recently versus the U.S. dollar amid recent polls that have suggested growing support for the U.K. to stay in the European Union (EU). Concerns have grown about the possibility of a U.K. exit from the EU, known as a Brexit, and last week, the Bank of England cut its economic growth forecast and warned that a vote for a Brexit would hamper economic activity. The British pound was little changed versus the U.S. dollar. The euro dipped versus the U.S. dollar and bond yields in the region finished mixed.

Stocks in Asia finished mostly to the downside, though financials gained ground, as yesterday’s April policy meeting minutes out of the U.S. bolstered already resurfacing rate hike concerns. Indian equities were lower, even as election results showed Prime Minister Modi’s main national opponents lost control of two states.

Stocks in mainland China finished flat, while those trading in Hong Kong, Australia and South Korea declined. Japanese securities were nearly unchanged, aided by some weakness in the yen as the U.S. dollar rallied in the wake of the increased Fed rate hike expectations, while a report showed the nation’s March machine orders—a gauge of capital investment—unexpectedly rose. The data follows yesterday’s stronger-than-expected Q1 GDP. Japan’s economy struggled in the first quarter and the second quarter is not shaping up to be much better. Yet economists expect a sharp rebound in economic growth this year. We see hefty headwinds offsetting the potential positives for Japan.

The international economic docket for tomorrow will be light, offering department store sales from Japan, PPI from German and the current account for the Eurozone.

A Reason to Like Europe

Key Points

*Many analysts see consumption driving Eurozone economic growth in the short term, supporting European stocks and other risk assets.

*The U.S. dollar modestly strengthened last week after recent weakness, helping U.S. momentum and growth stocks.

*U.S. inflation data released this week could provide clues regarding how long the Fed can keep interest rates on hold.

European economic growth has been unexpectedly strong lately, driven by consumer spending. We believe this under appreciated trend has further room to play out, supporting the case for European stocks.

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Eurozone gross domestic product (GDP) growth has generally been ticking up, exceeding U.S. and Japanese growth last quarter. Consumption, as evident in the chart above, has been a strong contributor to growth over the last year and a half and likely contributed to the first-quarter uptick. Easier credit, rising employment and greater purchasing power due to wage gains are driving this consumer recovery.

Consumption-driven growth ahead

We see consumption supporting Eurozone GDP growth in the short term, according to new research by many analysts into Europe’s prospects. Labor markets are improving in countries such as Italy, where reforms appear to be showing results. Many leading economic indicators point to stronger consumption. Also, a major headwind to growth is fading as European fiscal policy shifts from austerity to expansion. Another support: The European Central Bank (ECB) is likely to expand its asset purchases if warranted, rather than lower already-negative rates.

Eurozone growth does face longer-term challenges. These include an investment recovery held back by low corporate confidence and a weak banking system. Italian banks are still vulnerable despite recent actions. A worsening immigration crisis and a potential Brexit are near-term risks, but these appear at least partially priced into many under-performing European assets. The price-to-book ratio for European equities is 20% below its long-term average, while short sterling positions are increasingly crowded, according to our analysis.

Bottom line: Better growth and easy monetary policy bode well for European risk assets in the short term. We are “slightly” overweight European equities and still favor a wait and see approuch as there have been many “false starts” in the last few years for Europe.

Global SnapShot

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