Monthly Archives: October 2017

Market Insights 10/31/2017

The U.S. equity markets gained ground amid some upbeat economic reports, but the advances were tempered as investors await tomorrow’s monetary policy decision.

Earnings again dominated the equity front with mixed results. Treasury yields were mixed and little changed, while crude oil prices were higher, gold was lower and the U.S. dollar was flat.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 29 points (0.1%) to 23,377

The S&P 500 Index ticked 2 points (0.1%) higher to 2,575

The Nasdaq Composite increased 29 points (0.4%) to 6,728

In moderate volume, 871 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.23 to $54.38 per barrel and wholesale gasoline gained $0.02 to $1.73 per gallon

The Bloomberg gold spot price fell $5.33 to $1,270.96 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.52

Home prices rise, Consumer Confidence Soars

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.9% y/y gain in home prices in August, matching expectations. Month-over-month (m/m), home prices were up 0.5% on a seasonally adjusted basis for August, above forecasts calling for a 0.4% rise.

The Consumer Confidence Index increased to a level of 125.9 in October from the upwardly revised 120.6 in September, and compared to the Bloomberg estimate of a 121.5 reading. Both the Present Situation Index and the Expectations Index of business conditions for the next six months improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—increased to18.8 from the 14.7 level posted in September.

Treasuries were mixed, but little changed, as the yields on the 2-year and 10-year notes increased 2 basis points (bp) to 1.60% and 2.38%, respectively, while the 30-year bond rate dipped 1 bp to 2.87%.

Tomorrow’s economic calendar will be a heavy one, beginning with the ADP Employment Change Report, forecasted to show that 196,000 private sector jobs were added during October after increasing 135,000 in the month prior, followed by reads on manufacturing activity in the form of the ISM Manufacturing Index and Markit’s final Manufacturing PMI Index, with the former expected to tick lower to 59.4 and the latter to remain at the preliminary level of 54.5, with both indexes denoting expansion with a reading above 50. Construction spending and MBA Mortgage Applications are also slated for release.

However, the highlight of the day is liable to be the Federal Open Market Committee’s (FOMC) monetary policy decision in afternoon action. No change to the target for its fed funds rate is expected, but the accompanying statement will likely garner heightened scrutiny as the Committee has indicated in past meetings that it expects one more rate hike before year-end. No economic projections or press conference by Chairwoman Janet Yellen will follow the decision. The meeting comes amid the backdrop of global economic optimism, Fed leadership speculation, subdued inflation, and optimism regarding U.S. tax reform.

Europe ticks higher, Asia mixed on data and monetary policy focus

European equity markets traded mostly higher, though volume was lighter than usual with German markets closed for a holiday. Earnings and economic data were in focus, with some heavyweights posting mixed results, and as Eurozone Q3 GDP growth of 2.5% y/y bested expectations of a 2.4% rate of expansion and Q2′s 2.3% rise.

The Eurozone consumer price inflation estimate came in cooler than expected for October, and the markets likely traded with some caution ahead of this week’s Bank of England (BoE) monetary policy decision, which is expected to deliver its first rate hike in over a decade. The BoE’s decision will follow tomorrow’s announcement from the Fed with uncertainty regarding who President Trump will pick to be the Chairman of the Central Bank festering.

The euro dipped and the British pound ticked higher versus the U.S. dollar, while bond yields in the region were mixed.

The U.K. FTSE 100 Index and Germany’s DAX Index gained 0.1%, France’s CAC-40 Index and Italy’s FTSE MIB Index advanced 0.2%, Spain’s IBEX 35 Index jumped 0.8% and Switzerland’s Swiss Market Index rallied 0.7%.

Stocks in Asia finished mixed following the declines in the U.S. yesterday, with the markets awaiting monetary policy decisions out of the U.S. and U.K. later this week, as well as lingering uncertainty regarding who will be the next Fed Chief. The monetary policy decisions were preceded by the Bank of Japan’s announcement today that it will leave its policy stance unchanged.

Economic data was in focus, with Japan reporting an unexpected decline in household spending and a smaller-than-expected drop in industrial production for September, while China said growth in manufacturing and services output slowed this month, with the latter decelerating more than expected.

Stocks in Japan finished flat as the yen gained some ground, while markets in Australia and India both declined.

Chinese equities ticked higher, but those traded in Hong Kong declined modestly and South Korean listings gained solid ground amid some upbeat earnings reports.

Market Insights 10/30/2017

U.S. equities took a breather from their recent tech-fueled rally to fresh record highs ahead of a heavy slate of economic and earnings reports, with investors eyeing Dow member Apple’s results and the Fed monetary policy decision later in the week.

Caution also ensured amid uncertainty ahead of President Trump’s pick for the next Fed Chief this week.

Treasury yields and the U.S. dollar gave back some of their recent runs, despite an upbeat personal spending report and solid read on regional manufacturing activity. Crude oil and gold are moved higher.

The Markets…

The Dow Jones Industrial Average (DJIA) fell 85 points (0.4%) to 23,349

The S&P 500 Index decreased 8 points (0.3%) to 2,573

The Nasdaq Composite ticked 2 points lower to 6,699

In moderate volume, 871 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.25 to $54.15 per barrel and wholesale gasoline lost $0.01 to $1.71 per gallon

The Bloomberg gold spot price rose $2.87 to $1,276.22 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 94.50

Personal income and spending rise, with the latter topping forecasts

Personal income rose 0.4% month-over-month in September, matching the Bloomberg forecast, and compared to August’s unrevised 0.2% increase. Personal spending gained 1.0% last month, above expectations of a 0.9% increase, and versus August’s unrevised 0.1% gain. The September savings rate as a percentage of disposable income was 3.1%. The PCE Deflator was 0.4% higher, in line with expectations and versus the prior month’s unrevised 0.2% gain. Compared to last year, the deflator was 1.6% higher, matching estimates and compared to August’s unrevised 1.4% rise. Excluding food and energy, the PCE Core Index was 0.1% higher m/m, matching expectations, and the index was 1.3% higher y/y, in line with estimates calling for it to match August’s unrevised increase.

The Dallas Fed Manufacturing Activity Index unexpectedly jumped further into expansion territory (a reading above zero). The index rose to 27.6 in October—the highest since March 2006—from 21.3 in September, and versus forecasts of a dip to 21.0. Manufacturing activity has ramped up along with business capital spending (capex).

Treasuries were higher, as the yield on the 2-year note decreased 2 basis points (bps) to 1.57%, while the yields on the 10-year note and the 30-year bond rate dropped 4 bps to 2.37% and 2.88%, respectively.

Treasury yields and the U.S. dollar have given back some gains seen as of late, that have come courtesy of Fed leadership speculation, an upbeat global economic outlook, and optimism regarding U.S. tax reform.

This week, earnings season will remain robust, but a fully-loaded economic calendar will likely go a long way in shaping market direction, continuing tomorrow with the S&P CoreLogic Case-Shiller Home Price Index, with economists anticipating that home prices in the 20-city composite increased 5.9% y/y during August and 0.40% m/m on a seasonally-adjusted basis, as well the Consumer Confidence Index, forecasted to have moved higher to a level 121.4 for October following the 119.8 posted in September.

However, the headlining events for the week will likely be the midweek Federal Open Market Committee (FOMC) monetary policy decision, the ISM Manufacturing and non-Manufacturing Indexes, monthly auto sales, and the nonfarm payroll report.

A flood of upbeat earnings reports from some heavyweights in the tech sector bolstered the markets to end last week. We believe the bull market will continue, and suggest investors remain at their target allocations, but worry a bit about complacency. Third quarter earnings season has been solid so far and economic growth has picked up. But the pick of the next Fed chair—expected this week—could cause an uptick in volatility. Globally earnings have been strong as well and are helping to support stocks, but geopolitical and trade issues could cause some consternation.

Europe and mixed ahead of monetary policy decisions, data

European equity markets finished mixed, with Spanish stocks rallying amid apparent eased political concerns as the Spanish government called for elections in December after taking control of Catalonia last week in response to the region’s parliament declaring independence. Economic data in the region was mostly positive, with German retail sales rising for September, while Eurozone economic confidence improved more than expected for this month.

Global monetary policy remained in focus as this week’s decisions in the U.S. and Japan will be followed by Thursday’s announcement from the Bank of England amid the backdrop of stalled Brexit talks and last week’s dovish takeaway from the European Central Bank’s decision to trim and extend its stimulus measures.

The euro and British pound traded higher versus the U.S. dollar, while bond yields in the region were lower.

The U.K. FTSE 100 Index was down 0.2%, Germany’s DAX Index ticked 0.1% higher, France’s CAC-40 Index finished flat, Switzerland’s Swiss Market Index dipped 0.1%, Spain’s IBEX 35 Index rallied 2.6%, and Italy’s FTSE MIB Index advanced 0.4%.

Stocks in Asia finished mixed, with the markets taking a breather that has been bolstered by late last week’s host of favorable earnings reports out of the U.S. tech sector. Japanese stocks finished flat, pausing from a recent run that has taken the island nation’s markets to highs not seen since 1996, with the yen choppy and a report showing the nation’s retail sales rose in line with forecasts.

Also, traders awaited the Bank of Japan monetary policy decision tomorrow, which will be followed by Wednesday’s Fed decision. Mainland Chinese stocks and those traded in Hong Kong were bogged down by flared-up concerns as the bond markets came under pressure. The upbeat earnings sentiment also supported markets in India and South Korea, while strength in the energy sector helped lift Australian securities.

A slew of data from Japan in addition to the Bank of Japan’s monetary policy meeting will highlight tomorrow’s international economic calendar, including employment data, industrial production, construction orders, housing starts and trade figures, while a look at China’s manufacturing activity is set for release, as well as GDP, CPI, PPI and consumer spending from France, PPI and CPI from Italy, and CPI and GDP from the Eurozone.

Random Thoughts

From April 30, 2017 through October 27, the S&P 500 gained 8.3% in price, significantly outpacing its more traditional May-through-October rise of 1.4%.

What’s more, S&P’s other U.S. and global benchmarks also posted much stronger-than-average results. Not surprisingly, some investors now wonder if this strength will end up stealing from what The Stock Trader’s Almanac calls the best six months of the year.

History says no. There have been 26 times since 1946 that the S&P 500 gained 5% or more in the typically challenging May-October period. In the subsequent November through April period, the S&P 500 climbed an average 8.2%, and rose in price 85% of the time, rather than the 70+ year average gain of 6.7% and 76% frequency of advance.

Finally, in the November-April period following the nine times since 1990 that the S&P 500 posted a M-O gain of 5%+, the average return for the S&P 500’s industrial’s and materials beat the market eight times, while other cyclical sectors also saw above-average frequencies of out-performance. Also, the S&P 500 saw continued gains through year-end eight times, averaging 4.5%.

U.S. Market Weekly Summary – Week Ending 10/27/2017

S&P 500 Posts 0.2% Weekly Increase, Boosted by Stronger-Than-Expected Q3 GDP, Tech Earnings Beats

The Standard & Poor’s 500 index rose 0.2% this week as a Friday rally on stronger-than-expected Q3 economic growth as well as better-than-expected quarterly results from the technology sector outweighed some disappointing earnings and guidance released earlier in the week.

The market benchmark ended the week at 2581.07, up from last Friday’s closing level of 2575.21 and marking a fresh record closing high. The S&P 500 also posted a new intraday high Friday at 2,582.98.

As of Thursday’s market close, the market benchmark had been down 0.6% from last Friday’s closing level amid a number of Q3 reports that included weaker-than-expected results and/or guidance. However, the combination of the Q3 GDP data–featuring a 3% annual growth rate when 2.5% growth had been expected–and strong results from tech companies including Amazon.com (AMZN), Alphabet (GOOGL, GOOG) and Microsoft (MSFT) sent the index up 0.8% in Friday’s session, enough to push the measure into the black for the week.

The technology sector had the biggest percentage gain of the week, up 2.9%. Among its advancers, Amazon posted a 12% jump from a week ago as the e-commerce giant reported Q3 results above analysts’ expectations. Alphabet also released Q3 results above analysts’ expectations, helping the shares of the Google parent climb 2.9% for the week. Microsoft also topped Street views with its Q3 top and bottom lines, helping the technology company’s stock post a 6.3% increase for the week.

The materials sector also rose this week, up 0.7%. Its advancers included Air Products & Chemicals (APD), whose shares rose 4.3% from a week ago as the chemicals-and-gases company reported fiscal Q4 adjusted earnings per share and revenue above analysts’ mean estimates and forecast fiscal 2018 adjusted EPS above the Street view.

Financials made up another sector in the black this week on better-than-expected earnings. Its gainers included Ameriprise Financial (AMP), whose shares jumped 4.2% on the week as the financial-services company posted Q3 operating EPS well above the Street view while its revenue also topped analysts’ expectations.

On the downside, the telecommunications sector had the biggest percentage drop of this week, down 3.2%. Its decliners included AT&T (T), which dropped 4.4% this week as the provider of communications and digital-entertainment services merely met the Street view for its Q3 adjusted earnings per share while its revenue came in weaker than expected.

The health-care sector had the next-largest percentage decline of the week, down 2.1%. Among its decliners, Celgene (CELG) shares tumbled 19% as the biopharmaceutical company reported Q3 revenue below analysts’ mean estimate and said it now expects fiscal-year revenue to come in at the low end of its prior guidance range. The company also reduced its 2020 target for adjusted EPS.

Market Insights 10/27/2017

U.S. equities finished out the week higher, as technology issues jumped on a number of favorable earnings reports, including Google’s parent Alphabet and Dow members Microsoft and Intel. Meanwhile, the consumer discretionary sector got a boost from Amazon’s strong report.

Treasury yields were lower, with Fed leadership uncertainty overshadowing favorable reads on Q3 GDP and consumer sentiment.

Crude oil and gold prices were higher, and the U.S. dollar added to its recent run.

The Markets….

The Dow Jones Industrial Average (DJIA) rose 33 points (0.1%) to 23,434

The S&P 500 Index increased 21 points (0.8%) to 2,581

The Nasdaq Composite soared 145 points (2.2%) to 6,701

In moderate-to-heavy volume, 892 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil jumped $1.26 to $53.90 per barrel and wholesale gasoline gained $0.02 to $1.72 per gallon

The Bloomberg gold spot price rose $5.98 to $1,272.97 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 94.87

Markets were nicely higher for the week, as the DJIA increased 0.5%, the S&P 500 Index gained 0.2% and the Nasdaq Composite advanced 1.1%

First read on Q3 GDP tops forecasts, consumer sentiment remains at 13-year high

The first look (of three) at Q3 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 3.0%, after the unrevised 3.1% expansion in Q2, and above the 2.6% growth projected by Bloomberg. Personal consumption gained 2.4%, topping forecasts of a 2.1% rise and following the unadjusted 3.3% increase recorded in Q2.

Private inventory investment, nonresidential fixed investment, exports and federal government spending joined personal consumption to contribute to the stronger-than-expected growth, and more than offset negative contributions from residential fixed investment, as well as state and local government spending.

On inflation, the GDP Price Index came in at a 2.2% rise, well above expectations of a 1.7% gain and the unrevised 1.0% increase seen in Q2, while the core PCE Index, which excludes food and energy, moved 1.3% higher, matching expectations, and following the unadjusted 0.9% advance in Q2.

Treasuries were higher as the data was met with Fed leadership speculation, as the yield on the 2-year note dropped 3 basis points (bps) to 1.60%, while the yields on the 10-year note and the 30-year bond fell 4 bps to 2.42% and 2.93%, respectively.

The U.S dollar continues to climb, bolstered by global economic and earnings optimism, along with the euro’s extended drop following yesterday monetary policy decision by the European Central Bank and relative optimism of U.S. tax reform as it appears to be nudging down the long road to fruition.

The final October University of Michigan Consumer Sentiment Index was revised lower to 100.7, matching forecasts, from the preliminary level of 101.1. The index was up solidly versus September’s level of 95.1 and sits at a level not seen since January 2004. Compared to last month, the expectations and current conditions components of the survey both improved decisively. The 1-year inflation outlook fell to 2.4% from September’s 2.7% rate, and the 5-10 year forecast remained at 2.5%.

Europe mixed on data and Spanish political turmoil, Asia higher

European equity markets finished mixed, with global earnings optimism rising in the wake of the host of upbeat results from U.S. tech sector heavyweights. Also, a positive global economic backdrop was bolstered by the stronger-than-expected U.S. Q3 GDP growth. The euro added to yesterday’s drop that came courtesy of the European Central Bank’s monetary policy decision to cut and extend its stimulus measures, which appeared to foster a dovish takeaway.

The British pound also saw some pressure as Brexit uncertainty lingered, while bond yields in the region traded mixed. Spanish stocks fell amid ramped up political uncertainty as tensions with Catalonia remain elevated, with the Catalan parliament declaring independence from Spain.

Stocks in Asia finished mostly higher following the flood of upbeat earnings reports out of the U.S. tech sector after yesterday’s close, while the markets continued to digest the dovish takeaway from the European Central Bank’s monetary policy decision to trim and extend its stimulus measures. Japanese equities rallied to extend their recent run to highs not seen since 1996, with the yen losing ground and a report showing the nation’s consumer price inflation rose in September.

Improved global earnings sentiment helped lift mainland stocks in China and Hong Kong, while those traded in South Korea also gained solid ground. Markets in Australia declined amid flared-up political uncertainty after Prime Minister Turnbull lost his parliamentary majority, and securities in India finished flat.

Stocks grind out another positive week

Stocks managed to squeak out a seventh-straight weekly gain, with upbeat Q3 GDP, durable goods, new home sales, and business activity reports preserving global economic optimism, though action was choppy as earnings season fostered mixed responses. The technology sector was a standout winner, buoying the markets amid a glut of positive earnings reports from heavyweights in the group, while telecommunications and healthcare issues fell solidly, bogged down by AT&T Inc’s results and guidance from Celgene Corp.

Energy stocks dipped as Dow member Chevron’s results appeared to fail to live up to lofty expectations for the sector and offset the continued climb in crude oil prices. With earnings season more than half way done, of the 273 S&P 500 companies that have reported, 68% have topped revenue forecasts and 79% have bested profit projections, per data compiled by Bloomberg.

Treasury yields climbed to support financials amid the improved economic sentiment, which also helped the U.S. dollar extend a rally, along with the euro tumbling in the wake of a seemingly dovish takeaway from the European Central Bank’s monetary policy decision.

Next week, earnings season will remain robust, but a fully-loaded economic calendar will likely go a long way in shaping market direction, headlined by the midweek Federal Open Market Committee (FOMC) monetary policy decision, the ISM Manufacturing and non-Manufacturing Indexes, monthly auto sales, and the non-farm payroll report. Other releases that deserve a mention include: personal income and spending, Consumer Confidence, Q3 nonfarm productivity and labor costs, the trade balance, and factory orders.

Along with new records being set by stocks, investor sentiment measures are showing widespread optimism; yet households’ exposure to equities is not at an extreme. We believe the bull market will continue, and suggest investors remain at their target allocations, but worry a bit about complacency. Third quarter earnings season has been solid so far and economic growth has picked up. But the pick of the next Fed chair could cause an uptick in volatility. Globally earnings have been strong as well and are helping to support stocks, but geopolitical and trade issues could cause some consternation.

International reports due out next week to keep an eye on include: Australia—trade balance, building approvals and retail sales. China—Manufacturing and non-Manufacturing PMIs. India—Manufacturing and Services PMIs. Japan—retail sales, household spending, industrial production, and the Bank of Japan monetary policy decision. Eurozone—Q3 GDP and consumer price inflation, along with German unemployment change. U.K.—Bank of England monetary policy decision.

Inventories, trade support U.S. third-quarter economic growth

* Third-quarter GDP rises at 3.0 percent rate

* Consumer spending increases at 2.4 percent pace

* Inventories contribute 0.73 percentage point to GDP growth

The U.S. economy unexpectedly maintained a brisk pace of growth in the third quarter as an increase in inventory investment and a smaller trade deficit offset a hurricane-related slowdown in consumer spending and a decline in construction.

Gross domestic product increased at a 3.0 percent annual rate in the July-September period, also supported by strong business spending on equipment, the Commerce Department said on Friday. The economy grew at a 3.1 percent pace in the second quarter.

The government said while it was impossible to estimate the overall impact of hurricanes Harvey and Irma on third-quarter GDP, preliminary estimates showed that the back-to-back storms had caused losses of $121.0 billion in privately owned fixed assets and $10.4 billion in government-owned fixed assets.

Harvey and Irma struck parts of Texas and Florida in late August and early September. Hurricane Maria, which destroyed infrastructure in Puerto Rico and the Virgin Islands, had no impact on third-quarter GDP growth as the islands are not included in the United States’ national accounts.

Economists had forecast the economy growing at a 2.5 percent pace in the third quarter.

“This is a positive report for an economy that was battered by two hurricanes late in the quarter but it is not as strong as the headline 3.0 percent growth might suggest,” said John Ryding, chief economist at RDQ Economics in New York.

Excluding inventory investment, the economy grew at a 2.3 percent rate, slowing from the second quarter’s 2.9 percent pace. A measure of domestic demand also decelerated to a 2.2 percent rate from the April-June period’s 3.3 percent pace.

With post-hurricane labor market, retail sales and industrial production data already showing an acceleration in underlying economic activity, the mixed GDP report will probably have no impact on monetary policy in the near term.

The U.S. central bank is expected to increase interest rates for a third time this year in December.

The dollar rose to a three-month high against a basket of currencies on the data. Prices for U.S. Treasuries fell, with the yield on the interest rate sensitive two-year note touching a fresh nine-year high.

The economic recovery since the 2007-2009 recession is now in its eighth year and showing little signs of fatigue. The economy is being powered by a tightening labor market, which has largely maintained a strong performance that started during former President Barack Obama’s first term.

Though U.S. stocks have risen in anticipation of President Donald Trump’s tax reform, the administration has yet to enact any significant new economic policies. Trump wants big tax cuts and fewer regulations to boost annual GDP growth to 3 percent.

INVENTORY BOOST

Businesses accumulated inventories at a $35.8 billion pace in the third quarter in anticipation of strong demand. As a result, inventory investment contributed 0.73 percentage point to third-quarter GDP growth, after adding just over a tenth of a percentage point to output in the prior period.

While export growth slowed, that was eclipsed by the steepest pace of decline in imports in three years, leaving a smaller trade deficit, which added four-tenths of a percentage point to GDP growth. Trade has contributed to output for three quarters in a row.

Hurricanes Harvey and Irma, which hurt incomes and undercut retail sales in August, crimped consumer spending in the third quarter. Growth in consumer spending, which accounts for more than two-thirds of the U.S. economy, slowed to a 2.4 percent rate following a robust 3.3 percent pace in the second quarter.

Despite the moderation in consumer spending, inflation perked up in the third quarter, likely as a result of disruptions to the supply chain caused by the storms.

The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, increased at a 1.3 percent rate. That followed a 0.9 percent pace of increase in the second quarter.

With inflation rising, income at the disposal of households increased at a 0.6 percent rate, braking sharply from the second-quarter’s strong 3.3 percent pace.

Investment in nonresidential structures fell at a 5.2 percent pace in the third quarter, the biggest drop in nearly two years, as spending on mining exploration, wells and shafts grew at only a 21.7 percent rate, a sharp decelerating from the second-quarter’s 116.3 percent pace. Spending on nonresidential structures rose at a 7.0 percent rate in the second quarter.

Investment in homebuilding, which was already undermined by land and labor shortages, also took a hit from Harvey and Irma. Spending on residential construction declined at a 6.0 percent rate, contracting for a second straight quarter.

Business investment on equipment rose at an 8.6 percent rate, increasing for a fourth straight quarter. Government investment fell for a third straight quarter.

Market Insights 10/26/2017

After being higher for most of the day, the U.S. stock markets finished mixed, with gains in the tech sector on Twitter’s quarterly results being tempered by health care issues following a disappointing outlook from Celgene.

Treasury yields were higher amid mixed economic data, including a disappointing pending home sales report, while the U.S. dollar rallied with the euro seeing pressure in the wake of the European Central Bank’s decision to cut and extend its stimulus measures.

Crude oil prices were higher and gold was lower.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 72 points (0.3%) to 23,401

The S&P 500 Index increased 3 points (0.1%) to 2,560

The Nasdaq Composite was 7 points (0.1%) lower at 6,557

In moderate volume, 875 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil added $0.46 to $52.64 per barrel and wholesale gasoline gained $0.01 to $1.70 per gallon

The Bloomberg gold spot price lost $11.30 to $1,266.23 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 1.1% higher at 94.70

Jobless claims rise

Weekly initial jobless claims rose by 10,000 to 233,000 last week, but below forecasts of an increase to 235,000, with the prior week’s figure being revised higher by 1,000 to 223,000. The four-week moving average dropped by 9,000 to 239,500, while continuing claims decreased 3,000 to 1,893,000, north of estimates of 1,890,000.

The advance goods trade deficit widened slightly more than expected to $64.1 billion in September, from the upwardly revised $63.3 billion in August, and compared to expectations of $64.0 billion.

Preliminary wholesale inventories increased 0.3% month-over-month in September, versus forecasts for a 0.4% increase, and following August’s downwardly revised 0.8% rise.

Pending home sales were flat m/m in September, versus projections of a 0.5% rise, and following the negatively-revised 2.8% drop registered in August. Compared to last year, sales were 5.4% lower, versus estimates of a 4.2% drop. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpectedly rose in September.

The Kansas City Fed Manufacturing Activity Index for October unexpectedly showed growth (a reading above zero) accelerated, with the index rising to 23, versus forecasts for it to remain at September’s 17 level.

Treasuries were lower, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, were all 2 basis points higher at 1.62%, 2.45% and 2.96%, respectively.

The U.S. dollar rallied as the euro dropped in the wake of the monetary policy decision from the European Central Bank (ECB). Bond yields and the U.S. dollar have received some support from continued global economic and earnings optimism, most recently yesterday’s solid gain in durable goods orders, as well as relative optimism regarding tax reform.

Tomorrow, the economic calendar will culminate with the first look (of three) at Q3 GDP, projected to show growth slowed a bit to a quarter-over-quarter annualized rate of 2.6%, from the 3.1% pace seen in Q2, with personal consumption decelerating to a rise of 2.1% from 3.3%. Although the hurricanes are likely to have some impact, growth is projected to remain steady and post the best two-quarter performance since early 2015, per Bloomberg.

The final University of Michigan Consumer Sentiment Index is also slated for release, with economists anticipating a reading of 101.1, matching the preliminary report, but above the 95.1 posted in September.

Europe higher as ECB trims and extends stimulus measures

European equity markets traded higher, with the euro seeing solid pressure versus the U.S. dollar as the European Central Bank announced following its monetary policy meeting that it will cut its bond buying program in half in January. However, the ECB said it will extend the time frame for its purchases to September, with the possibility of another extension if needed, while committing to a substantial reinvestment of maturing debt in 2018 and for an extended period. The announcement came as the ECB left rates unchanged and the markets paid close attention to President Mario Draghi’s customary press conference that followed the decision, in which he appeared to foster a dovish takeaway regarding his views on inflation and eurozone economic growth.

Bond yields in the region were lower following the ECB’s announcement. The British pound also saw some pressure. Spanish stocks led the way, rallying on eased concerns toward the Catalonia turmoil.

Stocks in Asia finished mixed following the declines in the U.S. yesterday, while the markets digested a flood of diverging earnings reports and awaited the monetary policy decision out of the eurozone from the ECB. Japanese equities gained modest ground, rebounding after snapping a 16-day winning streak yesterday, with some upbeat earnings reports helping overshadow strength in the yen.

Stocks in mainland China advanced, but those traded in Hong Kong decreased, while a disappointing earnings report from the semiconductor sector weighed on South Korean securities, despite the nation reporting stronger-than-expected Q3 GDP growth.

Fed Chair; Big Decision

With the Federal Reserve widely expected to raise interest rates in December for the third time this year, market players are looking to see who will replace Janet Yellen as Fed Chairperson when her term expires in February. U.S. President Donald Trump has selected a pool of five candidates: Stanford University economist John Taylor, current Fed Governor Jerome Powell, current Fed Chair Janet Yellen, as well as Trump’s chief economic adviser, Gary Cohn and former Fed Governor Kevin Warsh, though the first three appear to be the front runners while the chances of the last two have slipped in recent days.

Indeed, Powell and Taylor have increasingly been seen as the leading contenders for the job, with Trump saying last week that he was considering appointing both to serve in top posts at the U.S. central bank. Under that scenario, either Powell or Taylor would take the reins from Yellen when her term expires early next year, and the other would fill the vice chair position left vacant when Stanley Fischer retired earlier this month.

If markets needed yet more uncertainty on the subject, yesterday, during lunch with the Senate’s GOP caucus, the President informally polled the group regarding whether they’d prefer Powell or Taylor. According to Senator Tim Scott of South Carolina, “I think Taylor won, but he did not announce a winner.” Others weren’t so sure: “I couldn’t tell which way he was going,” said John Kennedy, the junior Senator from Louisiana.
No matter who Trump chooses, we’re sure to see a strong reaction across the stock, bond and currency markets. Below is a guide to how markets are likely to react to Trump’s Fed chief nomination, beginning from the most hawkish outcome to the most dovish.

John Taylor

Taylor, 70, is currently a Senior Fellow at Stanford University’s Hoover Institution.

His prior experience includes roles as Undersecretary of Treasury for international affairs from 2001 to 2005 in the George W. Bush administration as well as member of Council of Economic Advisers under presidents Jimmy Carter and George H. W. Bush.

Taylor is known as a proponent of rule-based monetary policy, which serves as a guideline for how central banks should set their benchmark rates in order to achieve both their short-term economic growth goals and their long-term aim of price stability. According to his formula, known as the ‘Taylor Rule’, the Fed Funds Rate should be in a range between 3.75%-4%, compared to the current target of 1%-1.25%.

He’s regarded by market watchers as the most hawkish of the five candidates and his nomination could usher in a period of higher U.S. interest rates combined with a quicker reduction of the Fed’s balance sheet.

Likely market reaction

If Taylor is Trump’s choice, the most noticeable reaction will likely be felt in the bond market. Treasurys will sell off sharply, sending yields spiking violently higher as traders begin to price in a more rapid pace of Fed rate hikes.

The sharp sell-off in the bond market will weigh heavily on risk sentiment and dampen appetite for stocks, resulting in a sharp correction for the major Wall Street benchmarks. Taylor’s nomination will boost the US dollar given the notion that the Fed Funds Rate will be much higher under his watch.

Kevin Warsh

Warsh, 47, has both a Wall Street and government background. He served as a Fed governor from 2006 to 2011. Prior to that he was an economic adviser to President George W. Bush from 2002 to 2006. He also worked for Morgan Stanley as an M&A lawyer for seven years from 1995 to 2002.

Warsh is viewed by the market as hawkish and has previously stated that the Fed should aim for inflation between 1%-and-2%, effectively lowering its inflation target. He quit the Fed in 2011 when he disagreed with the central bank’s second round of quantitative easing and is seen unlikely to pursue a policy path of extraordinary measures if faced with another crisis.

Likely market reaction

Warsh’s hawkish views on inflation would likely trigger a short-term spike in Treasury yields and the dollar, while producing a mildly negative reaction among stock traders, as investors factor in faster interest rates, but to a lower end-point.

Gary Cohn

Cohn, 57, is currently director of the White House National Economic Council and is a former president of investment bank Goldman Sachs, where he worked from 2006 to 2017.

Cohn’s current job position has given him little reason to comment on monetary policy, but he has worried in the past that the Fed has been “constrained” by the actions of other central banks trying to keep their currencies weak. He would most likely follow current Fed policy but with a slightly more hawkish tilt.

Likely market reaction

Cohn’s nomination would be met positively by the stock market, where Wall Street players view him as market-friendly. In the bond market, the gap between short and long-term debt yields would narrow due to an increase in inflation expectations, which would push the dollar higher.

Jerome Powell

Powell, 64, has served as a Fed Governor since 2012, when he was appointed by President Barack Obama, and is widely considered as the Republican Party’s alternative to renominating Janet Yellen.

Prior to serving at the Fed, Powell was a Senior Treasury official under George H.W. Bush. He also has experience working in the private sector, where he was a partner in private equity firm Carlyle Group from 1997-2005.
Powell has never cast a dissenting vote against the Federal Open Market Committee’s decisions on monetary policy since joining in ’12, and in line with Yellen supports gradually raising interest rates as long as the economy continues growing and inflation is expected to rise.

Importantly, Powell is seen as unafraid of reversing the current plan to wind down the Fed’s $4.5 trillion balance sheet if the economic or market outlook changed.

He is considered on Wall Street as a rules-and-regulations guy and has advocated easing some aspects of the Dodd-Frank regulations as well as discussing ways to revise the Volcker Rule.

Powell is widely viewed as the least hawkish candidate—apart from Janet Yellen—compared to his peers on the shortlist.

Likely market reaction

Powell’s nomination is unlikely to rock markets as he is seen as the safe bet and one who would not veer much from current Fed policy.

News of his nomination will probably send buyers into stocks and bonds due to the view that he would follow the Fed’s current dovish policy stance, while weighing on the dollar.

Janet Yellen

Yellen, 71, has been the head of the Federal Reserve since taking over for Ben Bernanke in February 2014. She also served as a Fed governor, President of the San Francisco Fed, and the Fed’s vice chair from 2010 to 2014.

Led by Yellen, the Fed in late 2015 began raising interest rates from the low levels seen after the 2008 financial crisis and recently announced a decision to allow its $4.5 trillion portfolio of securities to shrink. She has been cautious about generating strong reactions from financial markets by ensuring policy changes have been well telegraphed ahead of time.

Likely market reaction

A Yellen nomination would be the most obviously market-friendly outcome as traders and investors are already familiar with how she works and there is less guesswork.

When Might Trump Reveal His Pick?

Trump is expected to make his decision ‘very shortly’ according to people familiar with the matter. Indeed, on Monday he said the decision was “very, very close.” Expectations are that at the latest the announcement will occur by November 3rd, when the President embarks on his tour of Asia.

According to PredictIt, a prediction market that offers prediction exchanges on political and financial events, Powell leads the race for Fed chair, with Taylor and Yellen closing in behind him.

No matter the outcome, stock, bond and currency traders will be busy handicapping the outcome, positioning themselves for the decision in the days ahead, as they look to take advantage of wild swings in volatility.

Random Thoughts

Despite the S&P 500 being higher in price in August, September and thus far in October, history says that investors should not be concerned that this strength will steal from Santa.

This year is on course to mark the 13th time that the “500” was higher in each of these typically challenging months. In the prior 12 times, the market recorded even higher prices by year-end 11 times, gaining an average of 3.6%.

Factors that we think should keep stock prices on an upward trajectory include the projected increase in S&P 500 EPS of 10% in 2017 and 11% in 2018, a tax-cut package that is expected to be passed late this year (which has made its way into investor optimism, but not EPS estimates, due to the lack of detail), and an improvement in organic global GDP growth in 2018, now estimated at 2.8% for the U.S., vs 2.3% in 2017, and 3.9% worldwide from 3.6%.

Market Insights 10/25/2017

Despite a surprising jump in new home sales to near a decade high and a much stronger-than-expected rise in durable goods orders, U.S. equities lost ground amid a heavy dose of mixed earnings reports.

Treasury yields ticked higher, as did gold, while the U.S. dollar was lower and crude oil prices were mixed.

The Markets…

The Dow Jones Industrial Average (DJIA) fell 112 points (0.5%) to 23,329

The S&P 500 Index decreased 12 points (0.5%) to 2,557

The Nasdaq Composite declined 35 points (0.5%) to 6,564

In heavy volume, 909 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil lost $0.29 to $52.18 per barrel and wholesale gasoline increased $0.02 to $1.69 per gallon

The Bloomberg gold spot price rose $1.34 to $1,277.92 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 93.70

Durable goods orders easily beat estimates, new home sales surprisingly jump

September preliminary durable goods orders were up 2.2% month-over-month, compared to the Bloomberg estimate of a 1.0% gain, and August’s 2.0% rise was unrevised. Ex-transportation, orders were 0.7% higher m/m, versus forecasts of a 0.5% gain and compared to August’s upwardly revised 0.7% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, grew 1.3%, well above projections of a 0.3% increase, and following the positively-revised 1.3% rise posted in the month prior.

New home sales surprisingly surged 18.9% m/m in September to an annual rate of 667,000 units, well above the forecasts calling for a decline to 554,000 units and the upwardly revised 561,000 unit pace in August. The median home price was up 1.6% y/y to $319,700. New home inventory fell to 5.5 months of supply at the current sales pace from 6.3 in August. Sales jumped m/m in the Northeast, South, and Midwest, and were up solidly in the West. New home sales are based on contract signings instead of closings. This was the highest pace of sales since October 2007 and the biggest monthly gain since January 1992.

The MBA Mortgage Application Index fell 4.6% last week, following the prior week’s 3.6% rise. The drop came as a 3.0% decrease in the Refinance Index was met with a 6.1% fall in the Purchase Index. The average 30-year mortgage rate rose 4 basis points to 4.18%.

Treasuries finished modestly lower, as the yield on the 2-year note was flat at 1.59%, while the yields on the 10-year note and the 30-year bond ticked 1 bp higher to 2.43% and 2.95%, respectively.

Tomorrow’s economic calendar will be a busy one, beginning with weekly initial jobless claims, forecasted to rise to a level of 235,000 from the prior week’s 222,000, as well as the advance goods trade balance, with economists anticipating the deficit to widen to $64.0 billion during September. Pending home sales is also on the docket, expected to have increased 0.3% m/m during September following the 2.6% m/m drop in August. Wholesale inventories and the Kansas City Fed Manufacturing Activity Index will round out the day.

Europe lower despite upbeat economic data, Asia mixed as Japan ends winning streak

European equities traded lower amid the down session in the U.S. as the markets digested mixed earnings reports on both sides of the pond, while caution likely set in ahead of tomorrow’s monetary policy decision by the European Central Bank. The markets shrugged off positive economic data in the region that preceded the stronger-than-expected housing and manufacturing reports in the U.S. German business confidence unexpectedly improved for October, while U.K. Q3 GDP quarter-over-quarter growth of 0.4% topped forecasts calling for it to match Q2′s 0.3% rate of expansion.

The euro was higher versus the U.S. dollar, while the British pound rallied to stymie the U.K. markets. All of the world’s top 20 economies are growing this year—a rare occurrence over the last decade, underpinning our positive outlook for global earnings. Bond yields in the region finished mixed, with the Spanish political turmoil and Brexit uncertainty lingering.

The U.K. FTSE 100 Index fell 1.1%, Germany’s DAX Index declined 0.5%, France’s CAC-40 Index decreased 0.4%, Italy’s FTSE MIB Index was down 0.8%, Spain’s IBEX 35 Index traded 0.5% lower, and Switzerland’s Swiss Market Index dropped 1.2%.

Stocks in Asia finished mixed, with most markets gaining ground on the heels of yesterday’s advance in the U.S. on a host of positive earnings reports, which appeared to boost global earnings economic optimism.

Mainland Chinese stocks and those traded in Hong Kong rose, equities listed in South Korea and Australia nudged higher, with the latter posting a cooler-than-expected consumer price inflation report, while markets in India rallied.

Stocks in Japan declined, snapping a 16-day winning streak that has taken the index to highs not seen since 1996, with traders assessing the recent run that has contributed to the global market rally and that there seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about.

In addition to tomorrow’s European Central Bank monetary policy meeting, items on the international economic calendar will include: preliminary Q3 GDP from South Korea, import/export prices from Australia, consumer confidence from Germany, employment figures from Spain, and confidence data from Italy.