Monthly Archives: November 2017

Market Insights 11/29/2017

The U.S. equity markets diverged amid continued global economic optimism following an upward revision to Q3 GDP and optimistic signs of progress in the Senate’s tax reform bill.

Treasury yields rose on the heels of a favorable economic outlook from Fed Chair Yellen, to the benefit of financials, but technology stocks tumbled, severely pressuring the Nasdaq.

Crude oil prices were lower, extending losses ahead of tomorrow’s OPEC meeting and following mixed oil inventory data, while gold was lower and the U.S. dollar was little changed.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 104 points (0.4%) to 23,940

The S&P 500 Index fell nearly a point to 2,626

The Nasdaq Composite tumbled 88 points (1.3%) to 6,824

In heavy volume, 922 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.69 to $57.30 per barrel and wholesale gasoline lost $0.04 to $1.73 per gallon

The Bloomberg gold spot price decreased $8.94 to $1,285.04 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 93.24

Q3 GDP revised higher, Fed comes into focus

On inflation, the GDP Price Index was revised to a 2.1% increase, versus expectations of an unrevised 2.2% gain, while the core PCE Index, which excludes food and energy, was adjusted to a 1.4% increase, compared to forecasts of an unrevised 1.3% rise.

The second look (of three) at Q3 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 3.3%, up from the first release’s 3.0% gain. The Bloomberg forecast called for an adjusted 3.2% pace of expansion. Q2 GDP grew by an unrevised 3.1% rate. Personal consumption came in at a 2.3% gain for Q3, lower than the preliminary estimate of a 2.4% increase, and compared to the expectations of a 2.5% increase. Personal consumption grew by an unrevised 3.3% in Q2.

Pending home sales rose 3.5% month-over-month in October, versus projections of a 1.0% rise, and following the negatively-revised 0.4% decline registered in September. Compared to last year, sales were 1.2% higher, versus estimates of a 3.0% gain. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected in October.

The MBA Mortgage Application Index declined 3.1% last week, following the prior week’s 0.1% gain. The decrease came as a 7.7% drop in the Refinance Index more than overshadowed a 1.8% increase in the Purchase Index. The average 30-year mortgage rate remained at 4.20%.

Today the Fed is garnering attention as Chairwoman Janet Yellen delivered her U.S. economic outlook to the Joint Economic Committee of Congress, noting the economic expansion is increasingly broad-based and she continues to expect gradual adjustments in the stance of monetary policy. However, she pointed out that although recent lower readings on inflation likely reflect transitory factors, it is possible that this year’s low inflation could reflect something more persistent.

Treasuries finished lower, as the yield on the 2-year note increased 2 basis points (bps) to 1.77%, the yield on the 10-year note gained 5 bps to 2.38%, and the 30-year bond rate rose 6 bps to 2.82%.

The yield curve has steepened somewhat after a recent bout of flattening that appeared to foster some market weariness, while the U.S. dollar dipped after a two-day rebound, extending a pullback as of late.

The markets shrugged off flared-up geopolitical concerns following yesterday’s missile launch by North Korea, aided by the positive global backdrop and signs of progress regarding the Senate’s tax reform bill, which is expected to be voted on later this week. The House passed its bill two weeks ago, with several key differences setting the stage for a complicated reconciliation process.

Personal income and spending will highlight tomorrow’s economic calendar, with both measures forecasted to have gained 0.3% m/m during October following their respective 0.4% and 1.0% m/m gains the month prior, while weekly initial jobless claims will also be released, expected to tick higher to a level of 240,000 from the prior week’s 239,000. The Chicago Purchasing Manager Survey will be released later in the morning, with economists anticipating a decline in the index to 63.0 for November from October’s 66.2 reading.

Europe and Asia mixed ahead of data, North Korean missile launch has little impact

European equity markets traded mixed, with financials getting a boost as bond yields in the region gained solid ground. Global economic optimism remained elevated, bolstered by signs of progress in tax reform and today’s upbeat revision to Q3 GDP out of the U.S., along with cooled political concerns on this side of the pond. The apparent rotation out of the tech sector that intensified in the U.S. made its way over to Europe late in the session to cause the markets to give up some solid early gains.

Crude oil prices extended a weekly loss ahead of tomorrow’s OPEC meeting and following some mixed inventory data in the U.S. The pound rallied against the U.S. dollar to hamstring the U.K. markets after Britain and the European Union reportedly agreed to reach a Brexit divorce bill, which could pave the way for negotiations of the exit to move forward. German consumer price inflation was mostly hotter than expected, French Q3 GDP rose at a pace that matched forecasts and Eurozone economic confidence improved. The euro moved higher versus the greenback

The U.K. FTSE 100 Index was down 0.9% and Switzerland’s Swiss Market Index traded 0.2% lower, while Germany’s DAX Index was flat, France’s CAC-40 Index ticked 0.1% higher, Italy’s FTSE MIB Index increased 0.2%, and Spain’s IBEX 35 Index rallied 1.2%.

Stocks in Asia finished mixed, following the solid gains in the U.S. yesterday on further signs the economy is running healthy and progress toward tax reform. However, the markets likely treaded with some caution ahead of key economic data out of Japan and China tomorrow, which will coincide with the highly-anticipated OPEC production meeting and potential U.S. tax reform vote, and follow today’s U.S. GDP revision and testimony from Fed Chief Yellen. The markets mostly shrugged off yesterday’s latest missile launch by North Korea.

The yen gave back some recent gains to help lift Japanese equities and overshadow a softer-than-expected retail sales report, while markets in South Korea and India dipped. Mainland Chinese stocks ticked slightly higher, but those traded in Hong Kong fell and Australian listings saw modest gains.

U.S. third-quarter GDP raised to 3.3%, fastest economic growth in three years

Strong business investment gives fresh momentum to economy

The numbers: The U.S. economy’s pace of growth in the third quarter was raised to 3.3% from 3% under the government’s latest revision to gross domestic product.

**click to enlarge chart**

gdp3q17_2nd_chart

The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 3.0 percent. With this second estimate for the third quarter, the general picture of economic growth remains the compelling as non-residential fixed investment, state and local government spending, and private inventory investment were revised up from the prior estimate.

How good is that you ask? It’s the fastest spurt of U.S. growth in three years.

More good news: Adjusted pretax corporate profits rose 4.3% to an annualized $2.22 trillion, marking the biggest gain in a year.

What happened: The improvement in GDP was spearheaded by stronger business investment. Spending on equipment, especially in transportation-related areas, rose 10.4% instead of 8.6%.

Firms have increased spending on ways to deliver goods to customers who order online and to move people around at a time when more are traveling because they are well enough off financially.

The increase in inventories was raised modestly to $39 billion.

Also contributing to stronger GDP was an increase in public spending. Government spending was revised from small decline to a modest increase.

The increase in consumer spending, however, was barely changed at a still-solid 2.3%.

Export growth was lowered a notch to 2.2%, but imports were revised to show a steeper 1.1% decline

The big picture appears very bright. The U.S. has topped 3% growth for two quarters in a row and the economy is poised to make it three for the first time since 2004-2005.

Consumer confidence is at a 17-year high, unemployment is at a 17-year low and businesses are flush with cash amid improving profits. Banks and other financial companies are doing especially well: They accounted for two-thirds of the increase in third-quarter U.S. corporate profits.

If Congress comes through with major tax cuts, businesses could get another jolt of adrenaline in 2018.

Market Insights 11/28/2017

U.S. equities were solidly in the green, with the major indexes notching fresh highs, shrugging continued tax reform uncertainty and anxiety over North Korea’s latest missile test.

The gains came courtesy of a 17-year high in Consumer Confidence, reports of record-breaking Cyber Monday figures, and a more than two-decade high in regional manufacturing activity.

Treasury yields were slightly lower and the U.S. dollar gained ground, while crude oil prices fell ahead of Thursday’s OPEC meeting, and gold reversed to the downside.

The Markets…

The Dow Jones Industrial Average (DJIA) jumped 256 points (1.1%) to 23,837

The S&P 500 Index rose 26 points (1.0%) to 2,627

The Nasdaq Composite gained 34 points (0.5%) to 6,912

In moderate-to-heavy volume, 834 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.12 lower to $57.99 per barrel and wholesale gasoline lost $0.02 to $1.77 per gallon

The Bloomberg gold spot price decreased $1.28 to $1,293.24 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.4% higher to 93.25

Consumer Confidence hits fresh 17-year high, home prices rise more than expected

The Consumer Confidence Index unexpectedly rose to a fresh 17-year high of 129.5 in November from the upwardly revised 126.2 in October, and compared to the Bloomberg estimate of a 124.0 reading. Both the Present Situation Index and the Expectations Index of business conditions for the next six months increased. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 20.2 from the 19.6 level posted in October.

Consumer sentiment is running high and has shown up in record high Cyber Monday sales that came on the heels of robust year-over-year Black Friday weekend sales to bolster the outlook for the holiday season. A strong consumer bodes well for the overall U.S. economy as consumer spending makes up nearly 70% of economic output.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 6.2% year-over-year gain in home prices in September, versus the Bloomberg expectation of a 6.0% gain. Month-over-month (m/m), home prices were up 0.5% on a seasonally adjusted basis for September, above forecasts calling for a 0.3% rise.

Treasuries were mostly higher, with the yield on the 2-year note flat at 1.74%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point to 2.32% and 2.76%, respectively.

The broadest global economic growth in a decade and solid earnings performance have conspired to keep stocks near record highs and be up every month this year. However, the U.S. dollar has pulled back and the markets appear to be getting a bit concerned with what the recent flattening of the yield may be signaling.

The markets are also grappling with OPEC’s looming production meeting this week, as well as flared-up European political uncertainty, which has joined scrutiny of U.S. tax reform. The Senate could vote on its tax reform plan this week after the House passed its bill two weeks ago, with several key differences setting the stage for a complicated reconciliation process.

Tomorrow, investors will get the second look (of three) at Q3 Gross Domestic Product, the broadest measure of economic output, with economists expecting a revised 3.2% quarter-over-quarter (q/q) rate of expansion from the 3.0% in the first report, personal consumption to be adjusted slightly higher to 2.5% from the previously-reported 2.4%, and the GDP Price Index and core PCE to remain at their initial increases of 2.2% and 1.3%, respectively.

Europe higher as U.K. bank stress test results were positive, Asia mixed

European equity markets traded higher, with energy stocks rebounding from a recent pullback that has come amid the weakness in crude oil prices leading up to this week’s OPEC meeting. Financials were modestly higher as the markets digest the Bank of England’s (BoE) banking sector stress test results that showed all banks passed with no need to strengthen their capital positions for the first time, per Bloomberg. U.K. banks were mixed as BoE Governor Carney continued to warn about the risk of a bumpy Brexit process for the sector. Brexit talks remain deadlocked but developments in Ireland, which averted an election, appeared to help ease some of the concerns. Reports suggesting German coalition talks could resume helped cool political uneasiness, along with polls in Spain ahead of next month’s vote in Catalonia. However, uncertainty regarding U.S. tax reform continued to fester.

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

The U.K. FTSE 100 Index was up 1.0%, Germany’s DAX Index and Italy’s FTSE MIB Index gained 0.5%, France’s CAC-40 Index and Switzerland’s Swiss Market Index increased 0.6%, while Spain’s IBEX 35 Index rose 0.8%.

Stocks in Asia finished mixed on the heels of the lackluster session in the U.S. yesterday. The markets remained relatively skittish amid lingering U.S. tax reform and European political uncertainties, the looming OPEC meeting that has weighed on crude oil prices, exacerbated by flared-up geopolitical concerns after reports suggested Japan had noticed radio signals that North Korea could be making preparations for another missile launch. Despite some resurfacing uneasiness, Asian markets remain near record levels.

Stocks in Japan and Hong Kong finished flat, with the yen paring gains seen on the North Korean reports, while headlines regarding the possibility that China could limit investor flows into Hong Kong-listed shares stymied conviction. Mainland Chinese equities rose, rebounding from a recent fall, while those listed in South Korea also moved to the upside, but markets in Australia and India declined.

Market Insights 11/27/2017

U.S. equities finished mixed with energy stocks finding pressure amid a drop in crude oil prices ahead of this week’s OPEC production meeting.

Consumer discretionary stocks got a boost on upbeat holiday spending data, while an unexpected jump in new home sales to a decade high also added some optimism.

Treasury yields were little changed and the U.S. dollar ticked higher, while gold gained modest ground.

The Markets…

The Dow Jones Industrial Average rose 23 points (0.1%) to 23,581

The S&P 500 Index declined 1 point to 2,601

The Nasdaq Composite fell 11 points (0.2%) to 6,879

In moderate volume, 766 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.84 to $58.11 per barrel and wholesale gasoline was $0.01 higher at $1.79 per gallon

The Bloomberg gold spot price increased $6.05 to $1,294.42 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.2% higher to 92.92

The retail sector was mostly higher with the markets paying attention to reports on how the holiday shopping season unofficially kicked off during the Black Friday weekend, and bolstered by today’s online shopping deals known as Cyber Monday. According to Adobe Analytics, online sales on Thanksgiving Day and Black Friday rose 17.9% year-over-year to about $7.9 billion and are estimated to be up 16.5% today to a record $6.6 billion.

However, we do think the picture entering the season is a positive one, with unemployment low, wages trending higher and consumer confidence the highest in almost 17 years. There are 32 days between Thanksgiving and Christmas this year, the second largest number of days possible between the two holidays. And Christmas falls on a Monday, giving shoppers one last weekend to ring the register.

New home sales surprisingly jump to kick off busy week

New home sales unexpectedly jumped to the highest since October 2007, rising 6.2% month-over-month in October to an annual rate of 685,000 units, versus the Bloomberg forecast calling for a drop to 625,000 units and the downward revised # of 645,000 unit pace in September. The median home price was up 3.3% y/y to $312,800. New home inventory fell to 4.9 months of supply at the current sales pace from 5.2 in September.

Sales surged m/m in the Northeast and jumped in the Midwest, while also rising solidly in the South and West. New home sales are based on contract signings instead of closings. Sales of properties in which construction has not yet started reached the highest in over a decade, suggesting housing starts could start to accelerate. The heightened confidence and status of the consumer appears to be translating into increased willingness to make major purchases.

Treasuries were little changed, as the yield on the 2-year note and the 30-year bond were flat at 1.74% and 2.77%, respectively, while the yield on the 10-year note dipped by 1 bp to 2.34%. The yield curve has flattened and the U.S. dollar has found pressure as of late with the markets grappling with tax reform uncertainty, subdued inflation expectations, and broad-based global economic growth.

The Dallas Fed Manufacturing Activity Index dropped more than expected but remained solidly in expansion territory (a reading above zero). The index fell to 19.4 in November from 27.6 in October—the highest since March 2006—and versus forecasts of a decline to 24.0.

Europe dips despite eased German political concerns, Asia mostly lower

European equity markets finished mostly lower, even as the euro dipped slightly after a recent run to a two-month high versus the U.S. dollar. Energy issues saw noticeable pressure as crude oil prices fell ahead of this week’s OPEC production meeting, while the markets shrugged off cooling political concerns in Germany after reports suggested coalition talks could resume after collapsing last week. This joins deadlocked U.K. Brexit talks and festering U.S. tax reform uncertainty to keep the markets on edge.

However, Spanish stocks rose slightly amid eased concerns as polls ahead of next month’s vote in Catalonia are showing pro-Spain parties have as much support as pro-independence forces. The British pound was little changed versus the greenback and bond yields in the region finished mostly lower.

The U.K. FTSE 100 Index was down 0.4%, Germany’s DAX Index declined 0.5%, France’s CAC-40 Index decreased 0.6%, Italy’s FTSE MIB Index dropped 1.1%, and Switzerland’s Swiss Market Index fell 0.7%, while Spain’s IBEX 35 Index ticked 0.1% higher.

Stocks in Asia finished mostly to the downside, with technology issues weighing heavily on South Korean equities, while the Bank of Korea is expected to raise rates after its monetary policy meeting later this week.

Mainland Chinese stocks and those traded in Hong Kong declined, with sentiment being hampered by the recent rally in the nation’s bond yields, which appears to be fostering some profit-taking after this year’s strong gains, while a report showed growth in the country’s industrial profits slowed in October.

Japanese securities traded slightly to the downside, with the yen gaining ground late in the session amid the continued pressure on the U.S. dollar amid yield curve concerns and political uncertainty, but markets in Australia and India bucked the trend, finishing modestly higher.

Longest S&P 500 run without a 3% slump

The most incredible part of the post-election stock market rally is how peaceful it’s been. While the Trump era has brought enormous turbulence to Washington, that volatility has been missing on Wall Street.

In fact, the S&P 500 hasn’t fallen 3% from a previous high point (over one day or several days) since the slump that ended on November 4, 2016, four days prior to the election.

That 388-day stretch is the longest the S&P 500 has ever gone without a 3% or more retreat, according to FactSet. (It’s 18 days longer than the previous record, which was set in 1995.)

It’s a remarkable achievement. The S&P 500 is up a ton since the 3%-decline streak started — 25% to be exact. It’s also surprising because investors famously hate uncertainty, and that’s exactly what President Trump’s unpredictability brings. And yet the VIX volatility index touched an all-time low on Friday.

This steady grind higher on Wall Street has been driven by strong economic growth at home and overseas as well as optimism over Trump’s plan to slash corporate taxes. Taxes will be back on the agenda this week on Capitol Hill.

So what could puncture this record-long period of tranquility for Wall Street?

One possible trigger would be the failure to enact tax cuts. Goldman Sachs recently warned that the S&P 500 could tumble by 5% if tax cuts aren’t enacted.

A vote on the Senate tax bill could come as early as this week. The Senate legislation would save many big companies a ton of money by permanently slashing the corporate tax rate in 2019 from 35% to 20%. The question is whether the heavy cost of those tax cuts will cause deficit hawks like Republican Senators Bob Corker and Jeff Flake to oppose the plan.

If the legislation gets through the Senate, it will have to be reconciled with the bill the House passed earlier this month and that process could be messy.

Still, many analysts think tax cuts will get done by the middle of next year. Goldman Sachs predicts that tax cuts will lift corporate profits by 14% next year, carrying the S&P 500 to 2850. That’s about 9% above current levels. UBS thinks the S&P 500 will hit 2,900 next year without tax cuts and go “a lot higher” — to 3,300 — if tax legislation gets passe”We see corporate tax cuts as likely, and little is priced into stocks,” UBS wrote.

This week the Senate Banking committee is scheduled to hold a confirmation hearing on Tuesday for Jerome Powell, President Trump’s nominee to lead the Federal Reserve after Janet Yellen steps down next year. Once confirmed, Powell will become the first investment banker to head the Fed, as well as the first non-economist to take the helm in decades.

Powell has worked with Yellen on a daily basis for years, so he’s not likely to make any major shifts in monetary policy. But he may loosen regulations set in place after the financial crisis. Though Powell largely supports Dodd-Frank, the sweeping set of reforms instituted after the crisis to make banks healthier, he has argued against the Volcker Rule, a provision of the act meant to prevent banks from making risky bets.

Powell may shed some light on his plan, as well as offer insight into his views on the economy and when the Fed may raise rates, on Tuesday. Yellen herself goes before the U.S. Joint Economic Committee on Wednesday to answer lawmakers’ questions about the economic outlook.

Also this week, on Thursday, OPEC will meet in Vienna to discuss whether to extend production cuts. They’re set to expire in March 2018. There are signs that the market is finally coming into balance, with the giant supply glut easing at long last. OPEC said in September that its coalition recorded its highest level of compliance to date in August.

Oil has been rising steadily this fall, and prices hit a two-and-a-half-year high on Wednesday following an oil spill that shut down the Keystone pipeline. But crude oil prices remain modest compared with the $100 prices of three years ago.

Lastly, today is cyber Monday. Black Friday was all about digital sales. American shoppers spent a record $5 billion in 24 hours — a 16.9% increase in dollars spent online compared with Black Friday 2016, according to data from Adobe Digital Insights, which tracks online spending at America’s 100 largest retail websites. Monday could be an even bigger day for online shopping. Adobe expects Cyber Monday to bring in as much as $6 billion this year. Amazon, Walmart and Target will offer shoppers big savings starting on Sunday.

Random Thoughts

Investors have had a lot to be thankful for this year. Not only have they experienced an above-average price rise in the S&P 500, but they did so with below-normal volatility.

In other words, 2017 may just end up being labeled a “free-lunch year,” since investors got something for nothing. Indeed, the S&P 500 has gained 16.2% year to date through November 24, versus the average annual price rise of 8.9% since 1950, but has experienced only eight days in which it rose or fell by 1% in a single day.

This reading is the third lowest in the past 65 years, behind 1963 and ’64, and well below the average of 47 days, and the median of 39.

The financial press seems to be implying that because of this ultra-low volatility the market will likely experience a sell-off in the final month of the year. History disagrees. During those calendar years in which the count of 1% volatility days was 30 or lower, which happened 24 times since 1950, the S&P 500 gained about 2% in December and rose in price nearly 90% of the time, with both readings being higher that the average rise and frequency of gain for all Decembers.

Also in December, the S&P 500 financials, Industrial’s and real estate sectors most frequently outpaced the overall market, while the consumer staples, energy, materials and tech groups were perennial laggards. History therefore says there is a good chance we won’t end up with a lump of coal in our stockings.

U.S. Market Weekly Summary – Week Ending 11/24/2017

S&P 500 Posts 0.9% Weekly Climb to New Closing High as Telecom, Technology, Industrials Lead Broad Advance

The Standard & Poor’s 500 index rose 0.9% this week to a fresh closing high as the telecommunications, technology and industrial sectors led a broad climb that included all sectors.

The market benchmark ended the week at 2,602.42, up from last Friday’s closing level of 2,578.85 and marking the measure’s highest close ever. The index also posted its highest intra-day level Friday at 2,604.21. The gains came in a week that was shorted by the Thanksgiving Day holiday, with the US stock market closed all of Thursday and ending Friday’s session earlier than usual.

The telecommunications and technology sectors had the biggest percentage increases of the week, up 1.8% each, followed by a 1.2% rise in industrials. No sectors ended the week below last Friday’s closing level.

The telecommunications sector’s advance came as the Federal Communications Commission this week released a plan to repeal “net neutrality” regulations that prevent internet-service companies from charging users more for certain content. The sector is expected to benefit if such a repeal goes through as the existing regulations are seen as preventing telecommunications companies from offering customers a wider selection of services at different price levels.

Among the telecommunications sector’s gainers, AT&T rose 0.9% this week. The gain came not only amid the plan to repeal net neutrality but also as the company expressed confidence that the US district court will permit its merger with Time Warner under “longstanding legal precedent.” The statement came after the Justice Department filed a lawsuit seeking to block the deal; AT&T called the lawsuit “a radical and inexplicable departure from decades of antitrust precedent.”

Also in the telecommunications sector, Verizon Communications shares rose 3.5% this week amid a report saying the company is near a deal with the National Football League for digital-streaming rights that would provide it with the ability to deliver game broadcasts to internet-connected TVs, tablets and phones.

In the technology sector, Qualcomm shares rose 3.3% this week as Broadcom reportedly is considering raising its offer for the company. Qualcomm rejected Broadcom’s $105 billion offer on Nov. 13, saying it was too low.

Among industrial’s, Deere shares jumped 7.2% as the agriculture-equipment company reported fiscal Q4 earnings and revenue above analysts’ expectations as demand for its products increased, especially in South America.

Market Insights 11/24/2017

U.S. stocks modestly added to weekly gains in a shortened session following yesterday’s Thanksgiving break, with volume remaining subdued and the retail sector in focus as Black Friday unofficially kicked off the key holiday shopping season.

Treasury yields moved higher but the U.S. dollar fell, while Markit’s reads on the manufacturing and services sector activity missed forecasts.

Gold was lower and crude oil prices were higher.

The Markets…

The Dow Jones Industrial Average rose 32 points (0.1%) to 23,558

The S&P 500 Index increased 5 points (0.2%) at 2,602

The Nasdaq Composite advanced 22 points (0.3%) to 6,889

In light volume, 363 million shares were traded on the NYSE and 848 million shares changed hands on the Nasdaq

WTI crude oil increased $0.86 to $58.88 per barrel and wholesale gasoline was $0.02 higher at $1.79 per gallon. Elsewhere

The Bloomberg gold spot price declined $3.53 to $1,287.94 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.4% to 92.80

Markets were higher for the week, as the Dow Jones Industrial Average increased and S&P 500 Index grew 0.9%, while the Nasdaq Composite advanced 1.6%

The retail sector was mostly higher as the markets monitored activity on Black Friday, which unofficially kicks off the holiday shopping season, and the National Retail Federation (NRF) expects sales to be up nearly 4.0% year-over-year for the period. The status of the American consumer is vital to the overall economy, and the holiday season can go a long way to determining the fate of retailers.

Low unemployment, increasing wages, and high confidence among consumers paint a positive picture for both the holiday season and the overall economy. Brad concludes that the retail sector may not be as dire as you have been led to believe.

Business activity declines but continues to show expansion

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output decelerated, declining to 53.8 in November, from October’s 54.6 level, and versus the Bloomberg expectation of 55.0. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month also downshifted, decreasing to 54.7, versus forecasts calling for it to remain at October’s 55.3 level. However, readings above 50 for both indexes denote expansion.

Treasuries lost ground, with the yields on the 2-year and 10-year notes, along with the 30-year bond, rising 2 basis points to 1.74%, 2.34%, and 2.76%, respectively.

U.S. stocks moved higher this week back to record high territory after snapping a string of gains in the previous week, with the markets shrugging off lingering tax reform uncertainty, which was joined by a flare-up in German political concerns. Upbeat global earnings and economic sentiment appeared to support stocks, bolstered by a winding down upbeat Q3 earnings season, while stronger-than-expected reads on U.S. Leading Indicators and existing home sales were accompanied by favorable eurozone business activity and confidence reports. Crude oil prices recovered from a recent bout of pressure. Treasury yields were little changed and the U.S. dollar fell amid some relative volatility on the heels of Fed Chairwoman Janet Yellen offering a subdued and uncertain outlook for inflation with December rate hike expectations remaining elevated.

The bull market continues to be undisturbed by myriad actual or potential negative events and momentum favors the bulls for the foreseeable future. However, elevated valuations and growing investor complacency pose risks that could lead to a long-awaited pullback and/or a pickup in volatility from today’s extremely low base. Ee believe the prospects for a tax reform bill being signed into law before the end of the year are improving, but a number of tricky steps must still be overcome. Fortunately, both earnings and revenues are strong; and importantly, the “beat rates” were well above average. The outlook for 2018 is bright, but we are on watch for an expectations bar that gets set too high.

Next week will return to normal and will bring plenty of reports and events for the markets to contend with. OPEC will conduct a meeting, the Senate is expected to vote on its tax reform plan that differs significantly from last week’s House plan that passed, and data will be released on how the holiday shopping season is kicking off. The economic calendar will deliver new home sales, Consumer Confidence, the second look (of three) at Q3 GDP, the Fed’s Beige Book, personal income and spending, Markit’s Manufacturing PMI Index, the ISM Manufacturing Index, and November auto sales.

International markets mostly higher following Thursday’s China selloff

The European equity markets traded mostly higher as the U.S. markets returned to action in an abbreviated session following yesterday holiday break. Financials led the way as bond yields in the region gained ground, while economic data was positive and optimism rose regarding a possible solution to the German political impasse. German business confidence unexpectedly improved to a record high for November, while Germany’s biggest opposition party said it is open to talks on backing a government led by Chancellor Angela Merkel after this week’s failed coalition negotiations, per Bloomberg. The upbeat German business sentiment report follows yesterday’s stronger-than-expected read on Eurozone manufacturing and services sector activity released by Markit. The euro and British pound traded higher versus the U.S. dollar.

Stocks in Asia also finished mostly higher, with Japanese markets returning to action following yesterday’s holiday break and as Chinese markets rebounded slightly from Thursday’s sharp drop that was fostered by increased government regulatory crackdowns and festering concerns toward the recent downside volatility in the bond markets.

International economic reports due out next week include: Australia—building approvals. China—industrial profits, as well as Manufacturing and non-Manufacturing PMIs. India—Q3 GDP. Japan—retail sales, industrial production, household spending, and consumer price inflation statistics. Eurozone—Consumer Price Index, economic confidence, and Markit’s Manufacturing PMI Index, along with German retail sales and unemployment change. U.K.—Markit’s PMI Manufacturing Index.

Market Insights 11/22/2017

U.S. stocks were mostly lower, though the Nasdaq was able to tick higher with volume subdued ahead of the Thanksgiving break.

In economic news, a drop in durable goods orders was met with upward revisions to the prior month’s solid advance.

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

The Markets….

The Dow Jones Industrial Average (DJIA) declined 65 points (0.3%) to 23,526

The S&P 500 Index shed nearly 2 points (0.1%) to 2,597

The Nasdaq Composite increased 5 points (0.1%) to 6,867

In light volume, 661 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.19 to $58.02 per barrel and wholesale gasoline was unchanged at $1.77 per gallon

The Bloomberg gold spot price increased $11.02 to $1,291.63 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—declined 0.7% to 93.2

Durable goods orders mixed, Fed releases its recent meeting minutes

October preliminary durable goods orders were down 1.2% month-over-month, compared to the Bloomberg estimate of a 0.3% gain, and September’s 2.0% rise was revised to a 2.2% increase. Ex-transportation, orders were 0.4% higher m/m, versus forecasts of a 0.5% gain and compared to September’s favorably-revised 1.1% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 0.5%, versus projections of a 0.5% increase, and following the upwardly-revised 2.1% rise posted in the month prior.

Weekly initial jobless claims dropped by 13,000 to 239,000 last week, versus forecasts of a decrease to 240,000, with the prior week’s figure being upwardly revised to 252,000. The four-week moving average rose by 1,250 to 239,750, while continuing claims increased 36,000 to 1,904,000, north of estimates of 1,880,000.

The final November University of Michigan Consumer Sentiment Index was revised higher to 98.5, above forecasts of 98.0, from the preliminary level of 97.8. The index is below October’s level of 100.7. Compared to last month, the expectations and current conditions components of the survey both dipped. The 1-year inflation outlook ticked higher to 2.5% from October’s 2.4% rate, and the 5-10 year forecast dipped to 2.4% from 2.5%.

The MBA Mortgage Application Index ticked 0.1% higher last week, following the prior week’s 3.1% gain. The slight increase came as a 4.8% drop in the Refinance Index was met by a 5.3% jump in the Purchase Index. The average 30-year mortgage rate rose 2 basis points to 4.20%.

At 2:00 p.m. ET, the Federal Reserve released the minutes from its monetary policy meeting that ended on November 1st. The information contained in the report showed that labor market conditions generally continued to strengthen and that real GDP expanded at a solid pace in Q3 despite disruptions from Hurricanes Harvey and Irma. Also, several participants indicated that an increase in the target range for the federal funds rate in the near term “would depend importantly on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee’s objective.” And participants “agreed that they would continue to monitor closely and assess incoming data before making any further adjustment to the target range for the federal funds rate.”

The selection of the new head of the Fed is seen as representing continuity as the Central Bank continues its policy normalization and given the strong economic backdrop, along with signs of wage growth picking up, we believe the Fed will hike rates for the third time this year next month.

Treasuries were higher with the yield on the 2-year note falling 5 bps to 1.73% and the yield on the 10-year note dropping 4 bps to 2.32%, while the 30-year bond rate was 2 bps lower at 2.74%.

Treasury yields and the U.S. dollar found some pressure as the markets grappled with Fed Chief Yellen’s comments, as well as U.S. tax reform uncertainty ahead of next week’s expected Senate vote on its plan that differs significantly from the House’s that passed last week. This is being countered by Q3 earnings season that is winding down and mostly above expectations against a positive global economic backdrop.

Please note: All U.S. markets will be closed tomorrow in observance of the Thanksgiving Day holiday, and will close early on Friday.

The U.S. economic calendar will round out the week on Friday with the release of the preliminary Markit Manufacturing and Services PMI Indexes for November, with economists forecasting readings of 55.0 and 55.3, respectively, with manufacturing ticking higher and services unchanged from the final October prints.

Europe gives up early advance as euro gains ground, Asia advances

European equity markets relinquished early gains and finished mostly lower, with the euro moving higher versus the U.S. dollar, ahead of the release of the Fed minutes and following comments about inflation from Chairwoman Yellen. The British pound also rose compared to the greenback after overcoming a brief drop as the markets digested the nation’s budget release, which included a lowered economic growth forecast.

Bond yields in the region finished mixed. Energy issues managed to eke out gains as crude oil prices recovered somewhat from a recent bout of weakness as the markets awaited next week’s OPEC meeting. Stocks in Germany led to the downside with focus still on the flared-up political uncertainty as nation may face a snap election following the recently failed coalition talks, which joined continued scrutiny of the possibility for U.S. tax reform.

Stocks in Asia finished higher on the heels of the back-to-back gains registered in the U.S. yesterday, with global economic optimism appearing to overshadow flared-up political concerns in Germany and lingering tax reform uncertainty in the U.S. Japanese equities rose ahead of tomorrow’s holiday, even as the yen regained some of yesterday’s drop. Stocks trading in mainland China and Hong Kong finished higher. South Korean and Australian securities traded to the upside, while Indian equities also advanced.

Random Thoughts

We continue to expect the FOMC to raise rates at its December meeting by 25 basis points. We also anticipate as many as three more rate hikes next year, pushing the Fed funds higher by a full percentage point by the end of 2018.

Reasons for the FOMC to maintain its tightening pace include the expectation that the year-over-year change in core CPI will reach 2.1% by the final quarter of next year, thus shifting from a net-negative real-rate environment to a neutral one. We also don’t see the mid-term elections staying the Fed’s hand.

The FOMC raised or lowered the discount or Fed funds rates in 12 of 16 mid-term elections since 1954. Granted, the Fed cut rates more times in the four months prior to the mid-term elections than raised them (12 separate cuts vs. 8 hikes), with the longest one-way moves being five successive pre-election hikes in 1978 and five straight cuts in 1982.