Monthly Archives: July 2016

Market Insights 7/29/2016

A Mixture of Uncertainty

U.S. equities ended today’s session in the same fashion as it has seen all week, mixed and near the flat line, as investors continued to search for some sort of catalyst amid another sundry of divergent reports on both the equity and economic fronts.

Meanwhile, a much softer-than-expected Q2 U.S. GDP report was offset somewhat by relatively favorable reads on consumer sentiment and regional manufacturing activity.

Treasuries were higher, as yields dipped, while gold, while the U.S. dollar tumbled, and crude oil prices inched higher.

The Markets….

The Dow Jones Industrial Average fell for the fifth-straight session, shedding 24 points (0.1%) to 18,432

The S&P 500 Index added 4 points (0.1%) to 2,174

The Nasdaq Composite increased 7 points (0.1%) to 5,162

In heavy volume, 1.2 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil was $0.46 higher at $44.60 per barrel, wholesale gasoline gained $0.02 to $1.32 per gallon

The Bloomberg gold spot price jumped $18.04 to $1,353.79 per ounce

the Dollar Index—a comparison of the U.S. dollar to six major world currencies—plunged 1.3% to 95.52

Markets were mixed for the week, as the DJIA lost 0.8%, the S&P 500 Index ticked 0.1% lower, while the Nasdaq Composite advanced 1.2%

First read on Q2 GDP disappoints

The first look (of three) at Q2 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 1.2%, from the downwardly revised 0.8% expansion in Q1, and well below the 2.5% growth forecasted by Bloomberg. Personal consumption came in slightly south of forecasts, rising 4.2%, following the positively adjusted 1.6% increase recorded in Q1, and versus the 4.4% gain that was projected. The preliminary Q2 GDP report showed the solid gain in personal consumption was accompanied by favorable contributions from exports and imports, though output was negatively impacted by private inventory investment, residential and nonresidential fixed investment, and state and local government spending.

On inflation, the GDP Price Index came in at a 2.2% rise, above expectations of a 1.9% increase, from an upwardly revised 0.5% gain seen in Q1, while the core PCE Index, which excludes food and energy, increased 1.7%, matching forecasts, and following the upwardly revised 2.1% growth in Q1.

The final July University of Michigan Consumer Sentiment Index was revised to 90.0 from the preliminary level of 89.5, and compared to expectations of a slight rise to 90.2. Expectations and current conditions components of the report were both revised higher. The index was down compared to June’s level of 93.5. The 1-year inflation outlook ticked higher and the 5-10 year inflation forecast held steady.

The Chicago Purchasing Managers Index remained in expansion territory (above 50), dipping to 55.8 in July from 56.8 in June—which was the highest since January 2015—and versus expectations of a decline to 54.0.

The Q2 Employment Cost Index grew by 0.6% q/q, matching forecasts and the increase posted in 1Q. Today’s data was in line with our view that wages and housing appear to be helping bolster spending and confidence among the all-important consumer, while business confidence and spending remain hamstrung. Additionally, some inflation measures heating up may force the Federal Open Market Committee’s (FOMC) hand and we believe the risk of an actual inflation problem remains low; but we could have an inflation scare.

Treasuries finished higher following the GDP report, with the yield on the 2-year note declining 6 basis points (bps) to 0.66%, while the yields on the 10-year note and the 30-year bond fell 5 bps to 1.45% and 2.18%, respectively. Bond yields have been mixed in the wake the FOMC leaving its monetary policy stance this week.

Financials lead Europe higher, Asia mixed in reaction to Bank of Japan decision

European equities finished mostly higher, with financials leading the way, buoyed by a plethora of positive earnings results. Also a troubled Italian lender announced that it has received an alternative rescue proposal to help ease ramped up concerns in the nation’s banking sector. The move for the sector came ahead of key European banking stress tests results that are due out after the closing bell in the U.S. Traders digested a smaller-than-expected expansion of stimulus measures out of Japan, as well as the softer-than-expected Q2 GDP in the U.S. These were accompanied by the preliminary estimate of Q2 Eurozone GDP, which slowed to a q/q growth rate of 0.3%, as expected, from the 0.6% expansion posted in Q1. Also, the Eurozone consumer price inflation estimate for July came in hotter than anticipated. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region were mostly lower. Amid the heightened volatility in the global markets following a plethora of data and monetary policy decisions.

The U.K. FTSE 100 Index ticked 0.1% higher, France’s CAC-40 Index and Switzerland’s Swiss Market Index rose 0.4%, Germany’s DAX Index increased 0.6%, Spain’s IBEX 35 Index gained 1.3%, and Italy’s FTSE MIB Index advanced 2.0%.

Stocks in Asia finished mixed, with Japanese stocks posting wild swings in the wake of the Bank of Japan’s (BoJ) monetary policy decision to hold off on more aggressive stimulus measures and instead just boost its buying program of exchange traded funds (ETFs). The yen rallied sharply following the decision, though BoJ Governor Kuroda reiterated that further easing will be done if needed and said the central bank has not hit a policy limit, per Bloomberg. Japanese equities were able to post gains after briefly falling sharply on the heels of the BoJ’s decision. Ahead of the announcement, Japan reported cooler-than-expected core consumer price inflation and a larger-than-expected drop in household spending, while its industrial production grew more than anticipated for June.

Mainland Chinese shares declined, though stocks did post a solid monthly gain, buoyed by recent relatively favorable economic data, while those in Hong Kong fell sharply. Australian securities ticked higher, with healthcare and consumer services issues outweighing some weakness in basic materials stocks, while markets in India and South Korea traded lower.

WEEKLY RECAP: Mixed week full of data and monetary policy decisions

U.S. stocks finished mixed on the week that saw Q2 earnings season reach its apex, while results from Dow member Apple Inc., Facebook Inc. and Alphabet Inc bolstered a solid gain for technology issues. For the 316 companies in the S&P 500 that have reported results thus far, 58% have topped revenue forecasts, while 81% have bested earnings expectations, per data compiled by Bloomberg.

The global markets grappled with an unchanged monetary policy decision from the U.S. FOMC and a disappointing stimulus announcement from the Bank of Japan. Treasury yields and the U.S. dollar both came under pressure as the FOMC decision was followed by much softer-than-expected U.S. Q2 GDP growth. As such, crude oil prices fell to weigh on the energy sector. For analysis of the stock market sectors amid the heightened volatility and renewed pressure on oil prices and the U.S. dollar.

THE WEEK AHEAD: Another week of heavy data looms

With earnings season remaining robust, next week’s domestic economic calendar will also be plentiful, headlined by key July services and manufacturing reports from the Institute for Supply Management (ISM) and Markit, while culminating with Friday’s July non-farm payroll report. U.S. economic data has been positive as of late helping push the Dow and S&P 500 to all-time highs in July.

Other notable releases on next week’s economic calendar include: personal income and spending, monthly auto sales, factory orders and the trade balance.

Along with manufacturing and services reports across the board, next week’s international reports worth noting include: Australia—the Reserve Bank of Australia monetary policy decision. Eurozone—retail sales and German factory orders. U.K.—Bank of England monetary policy decision.

U.S. GDP Grew at a Disappointing 1.2% in 2nd Quarter

Economic growth was well below expectations; cautious business investment offset robust consumer spending

The U.S. economic growth sputtered this spring with cautious businesses largely offsetting more robust consumer spending.

Gross domestic product, the broadest measure of goods and services produced across the U.S., grew at a seasonally adjusted annual rate of 1.2% in the second quarter, the Commerce Department said Friday. The figure was well below the 2.6% growth economists surveyed by The Wall Street Journal had forecast.The gain marks only a slight acceleration from the first quarter, when GDP advanced at a downwardly revised 0.8% pace. The first quarter was previously seen as increasing 1.1% from the prior period.

The economy has grown at less than a 2% pace for three straight quarters. Since the recession ended seven years ago, the expansion has failed to achieve the breakout growth seen in past recoveries. The average annual growth rate during the current business cycle remains the weakest of any expansion since at least 1949.

Lackluster growth could be a concern to Federal Reserve officials considering whether the economy is strong enough to absorb higher interest rates later this year. It could also influence voters weighing the economic track record during Barack Obama’s administration before electing a new president in November.

Annual revisions, also released Friday, did show the economy expanded 2.6% in 2015 from 2014, marking the best yearly gain since 2006.

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In the second quarter, consumer spending rose strongly. Personal consumption, which accounts for more than two-thirds of economic output, expanded at a 4.2% rate, the best gain since late 2014. Outlays on goods advanced 6.8%. Spending on services climbed 3%. But nonresidential fixed investment, a measure of business spending, declined at a 2.2% pace, the third straight quarterly drop. Companies spent less on buildings and equipment. Firms also pared back inventories sharply. The change in private inventories subtracted 1.16 percentage points from overall growth. That was the category’s fifth-straight decline and the largest drag from inventories in two years.

Weak business investment could suggest firms don’t have confidence in the global economy. Manufacturers especially have been challenged by a strong dollar, which makes U.S.-made goods more expensive overseas. The energy industry has also been constrained with relatively low oil and natural gas prices curtailing investments in mining and wells.

Residential fixed investment, including on home building and major improvements, fell at a 6.1% pace during the second quarter. The category had been a consistent contributor to economic gains since the early 2014.

International trade, however, was a positive, adding 0.23 percentage point to overall growth. Exports in the quarter rose at a 1.4% pace. Imports, which subtract from GDP, fell slightly. The latest figures don’t capture any effect from the U.K.’s Brexit decision because the vote took place during the final days of the quarter, which ended June 30.

Spending at all levels of government declined at a 0.9% during the quarter, led by a decrease in federal defense spending.

The latest economic figures come against a backdrop of modestly firmer inflation.

The price index for personal consumption expenditures rose at a 1.9% from the prior quarter. Core prices, which exclude volatile food and energy costs, rose 1.7%. Those readings are only slightly below the Fed’s target of a 2% annual inflation rate. The advance GDP figures are based on incomplete information and often get revised as more data becomes available.

Market Insights 7/28/2016

Markets Seek Direction

U.S. equities finished mixed and again nearly unchanged for a third-straight session on the heels of an assortment of earnings reports, headlined by Facebook’s upbeat results and disappointing guidance and an earnings miss from Ford.

Adding to the mix, investors continued to weigh yesterday’s unchanged monetary policy decision from the Fed, while awaiting the Bank of Japan’s policy announcement slated for tomorrow.

Treasuries were also mixed following a larger-than-expected rise in jobless claims and a disappointing regional manufacturing report, while the U.S. dollar, crude oil and gold were lower.

The Markets…

The Dow Jones Industrial Average declined 16 points (0.1%) to 18,456

The S&P 500 Index rose 3 points (0.2%) to 2,170

The Nasdaq Composite closed 15 points (0.3%) higher at 5,155

In moderate volume, 860 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.78 to $41.94 per barrel, wholesale gasoline lost $0.02 to $1.30 per gallon

The Bloomberg gold spot price decreased $2.53 to $1,337.55 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 96.71

Jobless claims rise more than expected

The Kansas City Fed Manufacturing Activity Index for July fell to -6 from June’s 2 level, compared to forecasts of a rise to 4, with a reading south of zero depicting contraction.

Treasuries finished mixed, as the yield on the 2-year note lost 1 basis point to 0.71%, the 10-year note was flat at 1.50%, and the 30-year bond rate was 1 bp higher at 2.22%. Bond yields came under some pressure yesterday in the wake of the Federal Open Market Committee (FOMC) leaving its monetary policy stance unchanged. The Fed kept rates unchanged but the statement had a notably more positive tone. The labor market has strengthened, inflation is up, global uncertainty has eased, and financial conditions have loosened. The September FOMC meeting should be considered on the table for a rate hike.

Weekly initial jobless claims rose 14,000 to 266,000 last week, versus the Bloomberg estimate of an increase to 262,000, with the prior week’s figure downwardly revised to 252,000. The four-week moving average declined by 1,000 to 256,500, while continuing claims rose 7,000 to 2,139,000, north of the estimated level of 2,136,000.

Tomorrow, the U.S. economic calendar will bring the first read (of three) on Q2 GDP, projected to show growth accelerated to an annualized quarter-over-quarter pace of 2.5%, after expanding by 1.1% in 1Q. Personal consumption is anticipated to accelerate solidly to a 4.3% growth rate after Q1′s 1.5% increase. The consumer is the key driver of U.S. growth and the economy continues to show meaningful signs of improvement. Wages are starting to perk up, appearing to help retail sales post another solid gain in June, while housing continues to be a relative bright spot in the economy, indicating better confidence among consumers.

As well, the Consumer Confidence Index is on tap for tomorrow, forecasted to move higher in July to a level of 90.6 from the 89.5 posted in June, as well as the Chicago Purchasing Managers Index, with economists expecting a reading of 54.0 for July, down from the 56.8 registered in June, and the Q2 Employment Cost Index, expected to show a 0.6% increase, matching the prior quarter’s rise.

European equities lower, Asia mixed on monetary policy focus

European stocks finished lower, with the global markets reacting to yesterday’s unchanged monetary policy decision from the Fed in the U.S. The Bank of Japan is set to deliver its monetary policy decision tomorrow, with expectations of further stimulus measures running high. Also, financials saw some pressure ahead of tomorrow’s results from the European bank stress tests and amid some negative reactions to earnings results in the sector, while lower crude oil prices stymied the energy sector. In economic news, German consumer price inflation came in hotter than expected for July, while Eurozone economic confidence improved for this month. The euro was higher and the British pound traded lower versus the U.S. dollar, while bond yields in the region were mostly to the downside.

Stocks in Asia finished mixed as the global markets digest a plethora of earnings reports, along with the unchanged monetary policy decision in the U.S. yesterday, while awaiting tomorrow’s conclusion of the monetary policy meeting by the Bank of Japan (BoJ). Expectations have ramped up that the BoJ will deploy more aggressive measures to bolster the economy in the form of coordinated fiscal and monetary stimulus. For more on Japan’s potential increased stimulus measures see Jeffrey Kleintop’s, article, What investors need to know about helicopter money, at www.schwab.com/oninternational. The yen gained some ground in the wake of the Fed’s decision, weighing on Japanese stocks.

Mainland Chinese equities ticked higher and those traded in Hong Kong declined slightly, with the markets still grappling with talk that the China Banking Regulatory Commission is discussing stricter curbs on wealth-management products. Meanwhile, Australian securities rose, aided by some strength in basic materials stocks, while markets in South Korea declined, and India finished higher

In addition to the Bank of Japan monetary policy meeting, the island nation is set to release a slew of other reports, including inflation data, personal income, employment figures, industrial production, construction orders, housing starts and retail sales. Other reports on tomorrow’s international economic docket include PPI from Australia, trade data from China, as well as GDP figures and CPI from France, Spain and the Eurozone.

Market Insights 7/27/2016

Fed Stays Put, Stocks Do Same

U.S. stocks finished mixed and nearly unchanged for a second-straight day, albeit with a nice gain for the Nasdaq on the back of an earnings beat from Apple.

With investors weighing a variety of earnings and economic data, including the widely-expected decision from the Federal Reserve to remain steady on interest rates.

Crude oil prices tumbled following a bearish U.S. government oil inventory report, and the U.S. dollar was lower, while Treasuries and gold were higher.

After the close yesterday, Apple Inc. reported fiscal Q3 earnings-per-share (EPS) of $1.42, two cents above the FactSet estimate, as revenues fell 14.5% year-over-year to $42.4 billion, north of the projected $42.2 billion. Apple’s gross margin came in slightly ahead of expectations, along with its shipments of iPhones and iPads. The companies Q4 revenue guidance had a midpoint that exceeded forecasts. Shares were sharply higher today ending the day above $103.

The Markets….

The Dow Jones Industrial Average inched 2 points lower to 18,472

The S&P 500 Index lost nearly 3 points (0.1%) to 2,167

The Nasdaq Composite closed 30 points (0.6%) higher to 5,140

In moderately-heavy volume, 973 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.00 lower to $41.92 per barrel, wholesale gasoline lost $0.02 to $1.32 per gallon

The Bloomberg gold spot price jumped $19.01 to $1,339.27 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 96.79

Durable goods orders fall, ahead of Fed decision

June preliminary durable goods orders dropped 4.0% month-over-month (m/m), compared to Bloomberg’s estimate of a 1.4% decline and May’s downwardly revised 2.8% drop. Ex-transportation, orders decreased 0.5% m/m, versus the 0.3% forecasted increase, and May’s negatively revised 0.4% decline. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, rose 0.2%, roughly in line with projections, and following the downwardly revised 0.5% decline in the month prior.

Pending home sales rose 0.2% m/m in June, versus projections of a 1.2% gain and following the unrevised 3.7% drop registered in May. Compared to last year, sales were 0.3% higher, versus forecasts of a 3.0% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which came in higher than expected for June.

The MBA Mortgage Application Index fell 11.2% last week, after decreasing 1.3% in the previous week. The drop came as a 15.1% tumble for the Refinance Index was accompanied by a 3.3% decline for the Purchase Index. The average 30-year mortgage rate rose 4 basis points (bps) to 3.69%.

Finally, in what was likely today’s headlining event, at 2:00 p.m. ET, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, where the Fed kept its policy stance unchanged at a targeted range of 0.25%-0.50% for the Fed funds rate. The Committee said that near-term risks to the economic outlook have diminished, while also noting that since its last meeting in June, the pace of improvement in the labor market has risen, with job gains during the month “strong,” and that economic activity expanded at a moderate pace. While there was a near unanimous opinion that the FOMC would stay put at its meeting today, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility.

Treasuries were higher, as the yield on the 2-year note fell 4 bps to 0.72%, and the yields on the 10-year note and the 30-year bond declined 6 bps to 1.51% and 2.22%, respectively. Bond yields have rebounded a bit as of late from record lows on some favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year.

Tomorrow’s domestic economic calendar will slow down a bit, with reports slated for release to include weekly initial jobless claims, forecasted to increase to a level of 262,000 from the prior week’s 253,000, as well as the Kansas City Fed Manufacturing Activity Index, with economists anticipating an improvement to a level of 4 for July from June’s 2 mark, with a reading above zero denoting expansion in activity.

Europe higher as earnings and economic data help sentiment, Asia mixed

European equities traded mostly higher, following upbeat global earnings results, though caution may have prevailed ahead of today’s U.S. Fed monetary policy decision. Continued reports of further Japanese stimulus measures likely underpinned sentiment and economic data in the region was also positive, with August German consumer confidence topping expectations and U.K. preliminary Q2 GDP growing at a 0.6% quarter-over-quarter pace, exceeding forecasts of a 0.5% rate of expansion and the 0.4% growth posted in Q1. Also, Eurozone lending statistics showed June loans to non-financial businesses and households were higher y/y. The euro ticked higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mostly lower. Amid the backdrop of heightened volatility in the region as the markets grapple with the impact of a Brexit.

Stocks in Asia finished mixed amid some likely caution ahead of today’s monetary policy decision in the U.S., while reports of stimulus measures pressured the yen and boosted Japanese equities, gaining for the first time in three sessions, following media reports that Prime Minister Abe announced plans for further stimulus measures to support the nation’s economy. The reports come as the Bank of Japan (BoJ) is set to deliver its monetary policy decision at the end of the week.

Mainland Chinese stocks fell, with sentiment stymied by talk that the China Banking Regulatory Commission is discussing stricter curbs on wealth-management products, per Bloomberg. However, those traded in Hong Kong advanced, buoyed by strength in technology issues. Australian securities finished flat, with gains for technology and basic materials stocks being countered by weakness in oil & gas and healthcare issues, while markets in India were higher, and South Korea was lower.

Fed appears willing to lift rates in September

Central bank says near-term risks to the outlook have diminished

The Federal Reserve on Wednesday opened the door a bit to making an interest-rate increase at its next meeting in September. The Fed said in its policy statement released after a two-day meeting “that near-term risks to the economic outlook have diminished,” .

That’s a stronger hint of possible move than most Fed watchers were expecting. After a two-day meeting of its policy-making committee, as expected, the Fed kept its benchmark fed funds rate unchanged in a range between 0.25 and 0.5%. The decision to hold rates steady was widely expected. The Fed was seen as willing to wait to see how markets evolve after U.K. citizens voted last month to leave the European Union.

After an initial drop, U.S. stocks have rebounded sharply in the wake of the so-called Brexit. Interest rates have also fallen.

In the statement, Fed officials painted a picture of an improving economy.

“Information received since the Fed policy committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate, job gains were “strong” in June, and household spending has been growing at a brisk clip, the Fed said. Yet the central bank also noted that business investment remained “soft.”

At the same time, Fed officials said they would continue “to closely monitor inflation indicators and global economic and financial developments”

Analysts will examine the minutes of the meeting, to be released on Aug. 17, for clues about a possible rate hike. Another signal could come on Aug. 26 when Chairwoman Janet Yellen speaks at the Fed’s summer retreat in Jackson Hole, Wyoming.

In June, 11 Fed officials expected two or more rate hikes this year when while six penciled in one move.

Markets remain skeptical that the Fed will be able to raise rates.

Prior to the statement, fed-funds futures didn’t fully price in even one move this year, seeing about a 41% chance of a hike in December, according to the CME Group’s FedWatch tool.

Market Insights 7/26/2016

Stocks Mixed

U.S. stocks finished the trading session mixed and nearly unchanged amid a slew of economic and earnings data, and some noticeable caution ahead of tomorrow’s conclusion to the Fed’s monetary policy meeting.

Treasuries were modestly higher, crude oil prices were mixed, while the U.S. dollar was slightly lower and gold gained ground.

The Markets…

The Dow Jones Industrial Average declined 19 points (0.1%) to 18,474

The S&P 500 Index gained nearly 1 point to 2,169

The Nasdaq Composite closed 12 points (0.2%) higher to 5,110

In moderate volume, 810 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil was $0.21 lower at $42.92 per barrel, wholesale gasoline gained $0.01 to $1.34 per gallon

The Bloomberg gold spot price increased $4.26 to $1,319.86 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 97.13

Services sector read unexpectedly declined, regional manufacturing data jumps higher

The preliminary Markit U.S. Services PMI Index for July ticked lower to 50.9 from June’s final reading of 51.4, with a level above 50 indicating expansion in activity, and compared to the Bloomberg forecast calling for a modest 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 Consumer Confidence Index ticked slightly lower to 97.3 in July from the downwardly revised 97.4 level in June and compared to the estimated decline to 96.0. The sentiment towards the present situation continued to rise after two months ago registering the lowest level since November, while expectations of business conditions moved lower. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 0.7 from the -0.5 posted in June.

The Richmond Fed Manufacturing Activity Index unexpectedly jumped into expansion territory (a reading above zero), surging to 10 in July from the -7 posted in June, while economists had anticipated the index to remain in contraction territory, forecasting a reading of -5.

New home sales increased 3.5% month-over-month in June to an annual rate of 592,000 units and compared to forecasts of 560,000 units. The median home price rose 6.1% y/y to $306,700. The supply of new home inventory decreased to 4.9 months at the current sales pace as sales declined m/m in the Northeast and South and rose in the West and Midwest. New home sales are based on contract signings instead of closings.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.2% y/y in May, just shy of expectations for a 5.5% rise. Month/month, home prices were down by 0.05% on a seasonally adjusted basis for May, below forecasts of a 0.1% increase.

Treasuries were modestly hgier, as the yields on the 2-year and the 10-year note fell 2 basis points (bps) to 0.75% and 1.56%, respectively, while the 30-year bond rate ticked 1 bp lower to 2.28%. Bond yields have rebounded a bit as of late from record lows on some favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year.

Tomorrow, the headlining event will likely be the conclusion of the Federal Open Market Committee’s (FOMC) two-day monetary policy meeting, where it is widely expected that the FOMC will keep its stance unchanged. While there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting this week, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility.

In addition to the FOMC, the economic calendar will hold the preliminary durable goods orders report, forecasted to show a 1.4% m/m decline for June, while ex-transportation, orders are expected to have increased 0.3% m/m. As well, pending home sales will be reported, expected to have risen 1.2% m/m in June, while MBA Mortgage Applications will round out the day’s docket.

European equities mostly higher, Asia mixed as Japan falls and China rallies

European equites pared earlier declines and finished mostly higher in late-afternoon action with gains in commodity listings helping to ease losses in energy and bank issues. Traders may have exercised some caution ahead of this week’s monetary policy decisions from the U.S. Federal Reserve and Bank of Japan and as more than 200 companies listed on the Stoxx Europe 600 Index are reporting earnings this week. The British pound continued its decline versus most of its peers today after a Bank of England policy maker said he’s begun to favor immediate stimulus for the U.K. economy. Euro-area bonds finished lower as some early support from speculation that the European Central Bank (ECB) will extend stimulus measures in September faded. The ECB made no changes to its policy stance at last week’s meeting. German 10-year bunds dipped to halt a three-day advance, ahead of the key central bank meetings later this week, while the euro lost ground versus the U.S. dollar.

Stocks trading in Asia were mixed as Japanese shares declined on some fresh strength in the yen, while Chinese issues were nicely higher amid some economic optimism in the country. Japan’s markets dropped on the heels of yesterday’s decline for U.S. equities and as a read for producer price inflation came in slightly hotter than expected. Export related issues were among the worst performers as the yen rallied to extend gains from Monday ahead of Friday’s conclusion to the Bank of Japan’s two-day monetary policy meeting with the current majority of market participants expecting the central bank to ease monetary policy further.

Stocks in China were the top performers in the region, led by consumer companies, while a 10-day volatility gauge dropped to a two-year low yesterday. Securities traded Hong Kong joined the advance, as casino stocks rallied following some upbeat earnings releases from the gambling sector. Australian listings ticked higher and speculation of a rate cut by the Reserve Bank of Australia hasn’t deterred traders from doubling long positions on the country’s dollar as they are wagering that the Reserve Bank of New Zealand may drop rates by a wider margin. Stocks in India declined, while separately the nation’s market regulator announced a desire to slow down high frequency trading in the next three months.

Market Insights 7/25/2016

Drop in Crude Unnerves Markets

Despite more upbeat news on the manufacturing front, U.S. equities finished lower as a drop in crude oil prices weighed on energy issues, and caution appeared to prevail ahead of a heavy dose of economic reports this week, headlined by the FOMC’s monetary policy meeting mid-week.

Treasuries, the U.S. dollar and gold were also all lower.

In M&A action, Verizon Communications Inc. announced it has entered into a definitive agreement to acquire the operating business of Yahoo! Inc. for approximately $4.8 billion. The deal is subject to customary closing conditions, approval by Yahoo’s shareholders, and regulatory approvals, and is expected to close in Q1 of 2017. Yahoo added that, until the closing it will continue to operate independently, offering and improving its own products and services for users, advertisers, developers and partners.

The Markets…

The Dow Jones Industrial Average declined 78 points (0.4%) to 18,493

The S&P 500 Index lost 7 points (0.3%) to 2,168

The Nasdaq Composite ticked 3 points (0.1%) lower to 5,098

In moderate volume, 763 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil was $1.16 lower at $43.13 per barrel, wholesale gasoline lost $0.03 to $1.33 per gallon

The Bloomberg gold spot price decreased $6.23 to $1,316.50 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 97.28

Regional manufacturing activity tops estimates

The Dallas Fed Manufacturing Index ascended to -1.3 for July from June’s unrevised -18.3 level with economists forecasting an improvement to -10.0. A reading below zero denotes contraction in manufacturing activity. The Dallas Fed noted that the production index component, a key measure of state manufacturing conditions, came in near zero after two months of negative readings, suggesting output stopped falling this month.

An increase of earnings reports will be accompanied by a heavier than normal release from the U.S. economic calendar this week, beginning in earnest tomorrow with the release of new home sales, which are forecasted to have risen 1.6% month-over-month during June to an annual rate of 560,000, as well as the S&P/CaseShiller Home Price Index, with economists expecting a year-over-year advance of 5.54% for May and a 0.2% increase m/m on a seasonally-adjusted basis. As well, investors will get the latest reads on consumer confidence, the Richmond Fed Manufacturing Index, and Markit’s preliminary Manufacturing PMI Index.

Reports likely to be the headline events for the week, however, include Friday’s first look (of three) at Q2 GDP, which will follow Wednesday’s monetary policy decision from the Federal Open Market Committee (FOMC), with no changes expected to its current policy stance, while earnings season will continue to ramp-up. While there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting this week, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility.

Treasuries finished lower, as the yield on the 2-year note rose 3 basis points (bps) to 0.74%, the yield on the 10-year note was unchanged at 1.57%, and the 30-year bond ticked 1 bp higher to 2.29%. Bond yields have rebounded as of late from record lows on favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year.

Europe and Asia mixed after giving up early gains

European equities pared early gains and finished trading mostly lower as some initial support from better-than-expected business climate data released from Germany seemingly faded as the decline in crude oil prices weighed on energy issues. Business sentiment in Germany declined, but less than was forecasted according to the Ifo’s recent survey results, suggesting a robust business climate in the wake of the Brexit vote and the recent string of terror attacks in Germany in the past few weeks. It’s been just over a month since the U.K. voted in favor of Brexit. At the time of the vote we noted that the stock market typically recovered after initial shocks like Brexit, but that recovery usually took about three months.

In other economic news in the region, U.K. manufacturing confidence slipped to its lowest level since early 2009, adding to the haze of uncertainty that has been growing since the Brexit vote as the world awaits a clear plan and timeline from the British government in how it will negotiate its new relationship with the European Union. The euro and British pound advanced versus the U.S. dollar and bond yields in the region finished mixed higher.

Stocks in Asia finished mostly higher on Monday as investors may have been exercising some caution ahead of a couple of high-profile central bank monetary policy meetings taking place later this week in the U.S. and Japan. Japanese equities finished slightly to the downside, but mostly flat as the island nation reported a larger-than-expected trade surplus for June, though exports were shown to have declined for the ninth-consecutive month.

Stocks traded in both Mainland China and Hong Kong finished slightly higher with some volatile trading occurring on lower-than-average volume as traders in the world’s second largest economy may be searching for some economic clues as data from the country is expected to be light for the week. Meanwhile markets in Australia, South Korea’s and India finished higher.

Is the Earnings Picture Improving?

The ongoing Q2 earnings season is in many respects no different from other recent weak and largely uninspiring reporting cycles. After all, growth is on track to be in the negative for the 5th quarter in a row and the same for the current period doesn’t look that encouraging either. That said, there are some tell-tale signs of improvement in the aggregate earnings picture that will likely add to confidence in expectations for the second half and beyond.

We saw this at first with J.P. Morgan when they reiterated their earlier outlook despite renewed interest rate pressures and the Brexit uncertainty. A host of other players, ranging from Microsoft and Johnson & Johnson to General Motors have come out with results that were not only better than expected, but actually showed pockets of real momentum. Importantly, while estimates for the current period have started coming down, the magnitude and pace of revisions doesn’t appear to be as severe as we have become used to seeing at comparable stages in other reporting cycles.

We will see if this trend will continue in the coming days, but the overall picture emerging from the 100 or so S&P 500 members that have reported already paint a reassuring earnings picture.

Q2 Scorecard (as of July 21st)

We now have Q2 results from 103 S&P 500 members that combined account for 25.8% of the index’s total market capitalization. Total earnings for these 103 index members are down -2.1% from the same period last year on +1.4% higher revenues, with 68.9% beating EPS estimates and 56.3% coming ahead of top-line expectations.

The takeaways are:

First, the earnings growth remains negative and weaker compared to the 4- and 12-quarter averages, but it is an improvement over what we saw in the preceding quarter.

Second, revenue growth is not only positive, but also tracking above what we saw from this group of 103 S&P 500 members in 2016 Q1 and the average for the preceding four quarters.

Third, positive EPS surprises for this group of companies are tracking below historical periods. This suggests that estimates may not have been that low after all.

Fourth, positive revenue surprises are about as numerous as was the case in the preceding quarter. But the proportion of positive surprises is notably tracking above the 4-quarter average and even modestly above the 12-quarter average. What this means is that not only is revenue growth tracking above other recent periods, but so are positive surprises.

For Q2 as a whole, combining the actual results from the 103 index members with estimates from the still-to-come 397 companies, total earnings are expected to be down -3.6% from the same period last year on -0.5% lower revenues. The blended Q2 growth rate has started improving as companies come out with better than expected results (the growth rate was -6.2% two weeks ago).

On an ex-Energy basis, the blended Q2 earnings growth is now -0.2%. If the trend that we are seeing from the 103 index members remains in place through the end this reporting season, then the ex-Energy growth pace for the quarter will most likely be in the positive.

Beyond the current period (September quarter), meaningful growth is expected to resume from Q4, which is then expected to continue into 2017. Easier comparisons for the Energy sector arrive in Q4, when the sector’s earnings growth turns positive. But the expected growth in Q4 and beyond isn’t solely a function of easy comparisons for the Energy sector – the expectation is for positive momentum from a broad cross section of sectors. Those expectations will most likely need to come down. But it will be interesting to see to what extent they will have to come down.

Market Insights 7/22/2016

Stocks Higher, Again

U.S. equities finished the regular trading session higher as investors weighed some mixed earnings reports, headlined by upbeat results from Dow member General Electric. In domestic economic news, Markit’s preliminary July manufacturing activity read was better than expected.

Treasuries were mixed, gold and crude oil prices were lower and the U.S. dollar rallied.

Overseas, stocks in Europe were mixed and equities in Asia were mostly lower as global traders hoped for indications of additional stimulus from the European Central Bank and Bank of Japan.

The Martkets…

The Dow Jones Industrial Average advanced 54 points (0.3%) to 18,571

The S&P 500 Index added 10 points (0.5%) to 2,175

The Nasdaq Composite increased 26 points (0.5%) to 5,100

In moderate volume, 741 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil was $0.56 lower at $44.19 per barrel, wholesale gasoline was unchanged at $1.36 per gallon

The Bloomberg gold spot price decreased $7.46 to $1,323.97 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 97.41

Markets were higher for the week, as the DJIA gained 0.3%, the S&P 500 Index increased 0.6% and the Nasdaq Composite advanced 1.4%

U.S. manufacturing posts better-than-expected increase

The preliminary Markit U.S. Manufacturing PMI Index for July improved to 52.9 from June’s downwardly revised 51.3 level, and above the forecasted modest rise to 51.5, with a reading above 50 denoting expansion in activity.

Treasuries were mixed with the yield on the 2-year note up 3 basis points at 0.70%, the yield on the 10-year note 1 bp higher at 1.57%, while the yield on the 30-year bond was down 1 bp at 2.28%. Bond yields have rebounded as of late from record lows on favorable U.S. economic data, as well as eased U.K. Brexit concerns and expectations of a Fed rate hike this year.

Europe mixed, Asia lower

European markets finished mixed, as traders digested a plethora of manufacturing activity reports in the region, as well as yesterday’s decision from the European Central Bank (ECB) to leave its monetary policy unchanged where it lacked any clues as to if the ECB will become more aggressive in its stimulus measures following the June vote by the U.K. to leave the European Union (EU), known as a Brexit. Manufacturing data in Germany and the Eurozone as a whole continued to show expansion, despite a slight downtick in the readings, and France saw improvement. However, activity out of the U.K. plunged to a level depicting contraction, further fueling concerns of the economy post-Brexit. Amid the backdrop of heightened volatility in the region as the markets grapple with the impact of a Brexit.

In other economic news, Italy’s retail sales came in well ahead of forecasts, while industrial sales in the nation fell well short of expectations. The euro and the British pound were slightly lower versus the U.S. dollar, while bond yields in the region were mixed.

The U.K. FTSE 100 Index was up 0.5%, France’s CAC-40 Index inched 0.1% higher, Germany’s DAX Index lost 0.1%, and Italy’s FTSE MIB Index was down 0.2%, while Spain’s IBEX 35 Index and Switzerland’s Swiss Market Index gained 0.2%.

Stocks in Asia finished lower, as hopes of aggressive stimulus measures from the Bank of Japan (BoJ) were tempered following a radio interview with BoJ Governor Kuroda—that was pre-recorded in June—that doused the notion of so-called helicopter money, as well as inaction by the European Central Bank yesterday to offer any hint of further aid. Japanese equities pared a recent rally, as the comments sent the yen sharply higher. The tempered sentiment toward central bank easing overshadowed an increase in Japan’s manufacturing activity, with Markit’s preliminary Manufacturing PMI Index showing a reading of 49.0 for July, up from 48.1 in June, and closing in on the 50 level that indicates the demarcation point between expansion and contraction in activity.

Chinese stocks declined despite action from the People’s Bank of China (PBoC) where it pegged the yuan 3% higher versus the greenback and while the country’s leaders dictated some clear differences on how to reform the country’s state-owned enterprises (SOEs) raising contradicting viewpoints of whether to reinforce the sector or to trim SOEs down. Elsewhere, securities in Australia and South Korea dipped, while Indian equities bucked the regional trend, finishing higher in a somewhat subdued session.

WEEKLY RECAP: Stocks see another weekly advance

U.S. equities managed gains for the week, as the Dow & S&P 500 indexes continued to chart record-high territory, though the blue-chip benchmark ended a nine day winning streak on Thursday. Earnings season began to heat up with financial heavyweights including Bank of America Corp. and Morgan Stanley and Dow components Goldman Sachs Group Inc. (GS $161) and American Express Co. all releasing quarterly results that bested analysts’ bottom-line expectations. Some tech titans including Dow members International Business Machines Corp. (IBM $160), Microsoft Corp. and Intel Corp. also announced quarterly results that topped forecasts.

As record-highs continued for the equity markets as a whole, the energy sector was unable to spark significant gains and lagged for the week. The energy sector may finally be taking a backseat in the minds of investors and while it may not seize the market’s attention the way it used to, the energy sector remains important. Much of the global economy depends on access to oil, and also its price. And we’ve seen oil prices move considerably in the past two years.

THE WEEK AHEAD: Fed set to conclude monetary meeting prior to GDP release next week

Next week’s robust domestic economic calendar will likely be headlined by Friday’s first look (of three) at 2Q GDP, which will follow the mid-week monetary policy decision from the Federal Open Market Committee (FOMC), with no changes expected to its current policy stance, while earnings season will continue to ramp-up. It appears there’s a near unanimous opinion that the Federal Open Market Committee (FOMC) will stay put at its meeting next week, market expectations for a rate hike later this year have risen over the past couple of weeks, coming closer to what we have believed was the more realistic possibility. Separately, they also point out that commentary from second quarter earnings season has so far been relatively cautious, although the results have been better than the relatively low expectations so far.

Other reports on next week’s U.S. economic calendar include: new home sales, pending home sales, durable goods orders, the S&P/CaseShiller Home Price Index, Markit’s preliminary Services PMI Index, consumer confidence, the Kansas City Fed Manufacturing Activity Index, and the final University of Michigan Consumer Sentiment Index.

Major international economic releases for next week include: Japan—trade data, the Leading Index, CPI, retail sales, industrial production and vehicle production. China—industrial profits. Australia—CPI, PPI, export and import prices and private sector credit. Eurozone—consumer confidence, CPI and 2Q GDP. Germany—CPI, retail sales, import prices, GfK consumer confidence and Ifo business climate survey. U.K.—2Q GDP, GfK consumer confidence, Index of Services and consumer credit.

Market Insights 7/21/2016

Markets Pause

U.S. equities were lower, bringing the recent run that has brought the Dow and S&P 500 to record highs to a rest, despite a host of upbeat earnings and economic reports.

Treasuries finished higher, with yields drifting lower, as the fall in stocks was met with domestic economic reports that showed existing home sales unexpectedly rose, jobless claims surprisingly slipped and the Leading Index topped forecasts.

Crude oil prices and the U.S. dollar were lower, while gold moved higher.

The Markets…

The Dow Jones Industrial Average fell 78 points (0.4%) to 18,517

The S&P 500 Index declined 8 points (0.4%) to 2,165

The Nasdaq Composite lost 16 points (0.3%) to 5,074

In moderate volume, 800 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil was $1.00 lower at $44.75 per barrel, wholesale gasoline was unchanged at $1.36 per gallon

The Bloomberg gold spot price increased $15.42 to $1,331.48 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 96.93

Existing home sales unexpectedly rise, while jobless claims surprisingly dip

Existing-home sales in June rose 1.1% month-over-month to a 5.57 million annual rate—the highest annual pace since February 2007—compared to the Bloomberg forecast of a 5.48 million pace. May’s figure was revised lower to a 5.51 million annual rate. Compared to last year, sales were 3.0% higher and the median existing-home price was up 4.8% at $247,700. Housing supply came in at a 4.6-month pace at the current sales rate. Sales were lower in the Northeast and flat in the South, while rising in the West and Midwest. Single-family and condominium and co-op sales both grew.

June sales were bolstered by a greater share of sales to first-time buyers not seen in nearly four years and National Association of Realtors (NAR) Chief Economist Lawrence Yun said sustained job growth as well as this year’s descent in mortgage rates is undoubtedly driving the appetite for home purchases. “Looking ahead, it’s unclear if this current sales pace can further accelerate as record high stock prices, near-record low mortgage rates and solid job gains face off against a dearth of homes available for sale and lofty home prices that keep advancing,” Yun added.

Weekly initial jobless claims dipped 1,000 to 253,000 last week, versus the Bloomberg estimate of an increase to 265,000, with the prior week’s figure unrevised at 254,000. The four-week moving average declined by 1,250 to 257,750, while continuing claims dropped 25,000 to 2,128,000, south of the estimated level of 2,137,000.

The Philly Fed Manufacturing Index in July unexpectedly fell back to a level depicting contraction (a reading below zero) after falling to -2.9 from 4.7 in June, and compared to estimates calling for a dip to 4.5.

The Conference Board’s Index of Leading Economic Indicators (LEI) increased 0.3% m/m in June, versus the projected 0.2% gain, and compared to May’s unrevised 0.2% decline. Support came from the components pertaining to jobless claims and the yield curve.

Treasuries finished higher, as the yield on the 2-year note lost 3 basis points (bps) to 0.68%, the yield on the 10-year note fell 2 bps to 1.56% and the 30-year bond rate dipped 1 bp to 2.30%.

The only item on tomorrow’s economic calendar is the preliminary Markit Manufacturing PMI Index, forecasted to tick higher to a level of 51.5 for July from the prior month’s 51.3.

Europe and Asia mixed after ECB leaves policy stance unchanged

European equities finished mixed, as traders digested a plethora of divergent earnings and economic reports as well as the expected decision from the European Central Bank (ECB) to leave its monetary policy unchanged, with its benchmark rate at zero and the deposit rate in negative territory. The euro was lower versus the U.S. dollar, and bond yields in the region were modestly higher, as the markets paid close attention to ECB President Mario Draghi’s customary press conference.

Draghi noted that the euro area financial markets have weathered the spike in uncertainty and volatility on the heels of the June vote by the U.K. to leave the European Union (EU), known as a Brexit, “with encouraging resilience.” He also noted that financing conditions remain highly supportive and continue to support its baseline scenario of an ongoing economic recovery and an increase in inflation rates. Draghi added that over the coming months when it has more information it will be in a better position to reassess the most likely paths of inflation and growth and the risks around those paths. He reiterated that the ECB will act if needed by using all available instruments within its mandate.

Stocks in Asia finished mixed, though Japanese equities rose, continuing their recent rally as the yen remained under pressure amid reports that the Bank of Japan (BoJ) was considering a larger-than-expected stimulus plan. However, after the markets closed, the yen rallied as a radio interview with BoJ Governor Kuroda—that was pre-recorded in June—aired with him rejecting the idea of so-called helicopter money. It is important to point out that Kuroda had rejected the idea of adopting a negative interest rate policy (NIRP) just days before the BoJ did it early this year so the comments may be getting discounted.

Mainland Chinese stocks advanced, rising for the first time in four days, while those traded in Hong Kong rose to enter a bull market, as it has rallied 20% off its February low.

Australian securities increased, despite some continued weakness in basic materials stocks, but South Korea’s markets dipped and India’s bourse declined amid some concerns about earnings growth and banking sector loan quality.