Markets Lose Steam at the Finish Line
U.S. equities finished mostly lower, despite strength in energy stocks amid a surge in crude oil prices on an OPEC production cut agreement, as well as strong gains in financials amid the continued post-election rally in Treasury yields.
Political uncertainty overseas continued to bend the ear of investors, while the U.S. dollar’s steady move higher also fostered some concerns, and gold was lower.
Upbeat reads on personal income and Chicago manufacturing activity followed yesterday’s favorable GDP and Consumer Confidence data, while the Fed’s Beige Book showed continued economic growth.
The Dow Jones Industrial Average rose 2 points to 19,124
The S&P 500 Index lost 6 points (0.2%) to 2,199
The Nasdaq Composite tumbled 56 points (1.1%) to 5,324
In heavy volume, 1.6 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq
WTI crude oil soared $4.21 to $49.44 per barrel and wholesale gasoline jumped $0.10 to $1.48 per gallon
The Bloomberg gold spot price fell $15.19 to $1,173.12 per ounce
The Dollar Index—a comparison of the U.S. dollar to six major world currencies—increased 0.6% to 101.49
Personal income and Chicago manufacturing jump, headlining robust economic docket
Personal income was 0.6% higher month-over-month in October, above the Bloomberg forecast of a 0.4% rise, and compared to September’s upwardly revised 0.4% increase. Personal spending gained 0.3% last month, below the expected 0.5% increase and versus September’s favorably revised 0.7% rise. The October savings rate as a percentage of disposable income was 6.0%. The PCE Deflator was up 0.2%, below expectations of a 0.3% increase. Compared to last year, the deflator was 1.4% higher, south of estimates of a 1.5% gain. Excluding food and energy, the PCE Core Index moved 0.1% higher m/m, in line with expectations, and the index was up 1.7% y/y, matching estimates.
The ADP Employment Change Report showed private sector payrolls rose by 216,000 jobs in November, above forecasts of 170,000, while October’s gain of 147,000 jobs was revised lower to a 119,000 rise. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader November non-farm payroll report, expected to show an increase of 180,000 jobs, while private sector payrolls are projected to rise by 170,000. The unemployment rate is forecasted to remain at 4.9%, and average hourly earnings are projected to rise 0.2% m/m.
The Chicago Purchasing Managers Index jumped further into expansion territory (above 50), after jumping to 57.6—the highest since January 2015—in November from 50.6 in October and versus expectations of a rise to 52.5. New orders, production, inventories and production all rose m/m, while employment declined.
The regional report comes ahead of tomorrow’s national read on November output from the sector, in the form of the ISM Manufacturing Index, projected to rise to 52.4 from 51.9 in October, posting the third-straight month in expansion territory (above 50).
Pending home sales ticked 0.1% higher m/m in October, in line with projections and following the downwardly revised 1.4% gain registered in September. Compared to last year, sales were 0.2% higher. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose in October to near the highest level in a decade.
The MBA Mortgage Application Index fell 9.4% last week, following the previous week’s 5.5% rise. The drop came as a 16.2% tumble for the Refinance Index was accompanied by a 0.2% dip in the Purchase Index. The average 30-year mortgage rate rose 7 basis points to 4.23%.
Culminating today’s robust economic calendar, the afternoon release of the Federal Reserve’s Beige Book—an anecdotal look at national economic activity—showed that the economy continued to expand during the early-October to mid-November period. The report indicated that retail sales, real estate and business service saw increases in activity, and that “a tightening in labor market conditions was reported in seven districts, with modest employment growth on balance.” Inflation, according to the report, was slight, and a few districts mentioned some effects of the presidential election on certain sectors. The FOMC is scheduled to meet December 13–14, with many anticipating the Committee to announce a rate hike. As noted previously, “full” employment is at least in sight, housing is recovering, economic growth has improved and inflation is heating up. A December rate hike may remove some uncertainty, but questions will remain as to the path and frequency of rate hikes in 2017 and beyond. We continue to believe the Fed will be able to go slow in normalizing rates, as they have stated they want to do, but signs of rising inflation could force its hand.
Treasuries finished lower, as the yield on the 2-year note rose 3 basis points (bps) to 1.12%, the yield on the 10-year note jumped 9 basis points to 2.38%, and the 30-year bond rate gained 8 bps to 3.03%. With bond yields continuing a post-election rally, bolstered by elevated December Fed rate hike expectations.
In addition to the aforementioned national manufacturing report, the domestic docket will hold weekly initial jobless claims, with forecasts calling for a slight uptick to a level of 253,000 from the prior week’s 251,000, as well as the final Markit Manufacturing PMI Index for November, with economists expecting no change from the previous reading of 53.9. Rounding out the day will be construction spending, anticipated to have grown 0.6% m/m during October.
Europe higher as oil rallies on OPEC deal, Asia mixed as global uncertainties remain
European equities finished higher, with oil & gas issues leading the way as crude oil prices surged on the announcement of a production cut deal being reached at today’s OPEC meeting, reducing output to 32.5 million barrels a day beginning in January. The rally in oil overshadowed lingering political uncertainty ahead of this weekend’s Italian referendum, which will be followed by other political events in the region. European stocks are heightened by the uncertainty posed by these votes. However, the resulting political uncertainty isn’t sufficient reason to abandon global diversification. We believe having a diversified portfolio can set you up to participate if and when the trends switch.
U.K. banks were in focus after the Bank of England released the results from its stress tests of the sector, with Royal Bank of Scotland Group PLC. seeing pressure after it failed the BoE’s stress test and it announced a revised capital plan. Barclays PLC. and Standard Chartered PLC. were also found to have capital inadequacies though neither was required to submit revised capital plans, per Bloomberg. The Eurozone consumer price inflation estimate rose in line with forecasts. The euro was lower and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mostly higher.
Stocks in Asia finished mixed, despite the upbeat GDP and Consumer Confidence data in the U.S. yesterday, with global market uncertainty festering ahead of today’s key OPEC meeting and upcoming political events in Europe, particularly this weekend’s Italian referendum. Energy stocks finished lower as crude oil prices fell yesterday amid skepticism regarding the outcome of the OPEC meeting. The sector remained under pressure even as oil prices rebounded during the session as headlines fostered optimism that there could be a production cut deal. Japanese equities finished flat, even as the yen continued its slide in late-day action and despite an unexpected rise in the nation’s industrial production.
Mainland Chinese stocks fell amid lingering liquidity concerns and following a recent rally, while those traded in Hong Kong rose slightly, paring some of yesterday’s decline.
Australian securities declined, with oil & gas issues falling and basic materials stocks paring a recent jump, while the nation reported an unexpected tumble in building approvals. Stocks in South Korea gained modest ground, while India’s markets rallied on some strength in the banking sector. After the closing bell, India reported a 7.3% y/y expansion in Q3 GDP, an acceleration from the 7.1% growth in Q2, but below the projected 7.5% increase. With the global markets choppy on flared-up global uncertainties and following the surprise U.S. election.