Category Archives: Daily Insights

Random Thoughts

The S&P 500 is in pullback mode, after having fallen 6.9% in price from its September 20 high.

Investors are now wondering what happens next. History tells us that we should see a pop after the drop, even beyond what was experienced on Friday. One indicator, the number of S&P 1500 sub-industries that are trading above their 10-week (50-day) moving averages, fell to two standard deviations below the mean, implying a near-term oversold condition.

In addition, those groups that were beaten up the most – such as the cyclical sectors – tend to lead in the recovery in a “worst-to-first” kind of move. Unfortunately, the full decline might not yet be over. There were 26 years since WWII in which the S&P 500 endured at least two round-trip sell-offs exceeding 5%, with the second being deeper than the first in more than two out of every three years.

However, since we don’t think this decline will morph into a new bear market, we remind investors that it may be better to buy than bail and encourage them to fill out their shopping lists.

Market Insights 10/12/2018

U.S. equities finished out a rough week solidly higher, following a two-day market rout that came courtesy of Fed and bond yield concerns.

Earnings from Dow member JPMorgan Chase & Co, Citigroup, Wells Fargo and PNC were in focus as Q3 earnings season kicked off.

Treasuries reversed lower and the U.S. dollar was higher, following economic reports that showed consumer sentiment surprisingly dipped and import prices rose.

Gold was lower after a recent rally and crude oil prices were higher.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 287 points (1.2%) to 25,340

The S&P 500 Index increased 39 points (1.4%) to 2,767

The Nasdaq Composite rallied 168 points (2.3%) to 7,497

In heavy volume, 960 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.37 to $71.34 per barrel and wholesale gasoline was up $0.01 at $1.94 per gallon

The Bloomberg gold spot price fell $5.56 to $1,218.53 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 95.23

Markets were sharply lower for the week, as the DJIA fell 4.2%, the S&P 500 Index lost 4.1%, and the Nasdaq Composite declined 3.7%

Consumer sentiment surprisingly dips, import prices rise

The October preliminary University of Michigan Consumer Sentiment Index unexpectedly dipped to 99.0 from September’s final read of 100.1, and compared to the Bloomberg expectation for a slight rise to 100.5. The current economic conditions and expectations components of the report both slipped slightly. The 1-year inflation forecast ticked higher to 2.8% from 2.7%, while the 5-10 year inflation forecast declined to 2.3% from the previous 2.5% rate.

The Import Price Index rose 0.5% month-over-month for September, versus projections of a 0.2% rise, and following August’s upwardly-revised 0.4% decline. Compared to last year, prices were higher by 3.5%, north of forecasts calling for a 3.1% increase and compared to the previous month’s upwardly-revised 3.8% gain.

Treasuries finished lower, as the yield on the 2-year note was flat at 2.85%, while the yields on the 10-year note and the 30-year bond rose 2 basis points to 3.15% and 3.33, respectively.

The markets continue to grapple with the recent jump in global bond yields, led by Treasuries, which have been supported by hawkish commentary from Fed Chairman Jerome Powell. The Fed Chief’s comments appeared to foster concerns that the Central Bank could make a policy mistake by continuing to hike rates in the face of signs of decelerating global growth, escalated trade tensions, European political uncertainties, and festering concerns toward emerging markets, notably China.

Europe turns lower, Asian markets recover

European equities turned lower in late-day action despite an upbeat Eurozone manufacturing report and favorable Chinese trade data, as well as the U.S. markets looking poised to follow Asian markets in recovering from a sharp weekly drop.

The markets appeared to remain skittish regarding the recent rise in bond yields and resurfaced worries that the U.S. Fed could be heading toward a policy mistake, two major sources that led this week’s global market tumble. Stocks reversed lower even as the euro and British pound lost ground amid the U.S. dollar’s recovery.

Bond yields in the region were mixed, with Italian budget uneasiness remaining and U.K. Brexit uncertainty lingering. Eurozone industrial production grew at a rate that doubled expectations for August, while German consumer price inflation rose in line with estimates for September.

Stocks in Asia mostly trimmed a weekly tumble that included drops for the U.S. and European markets. The global pullback came courtesy of global market skittishness regarding the recent rise in bond yields and flared-up concerns that the Central Bank in the U.S. may continue to tighten policy despite a host of potential global risks, including trade and the lingering emerging market uneasiness.

Stocks in Japan gained modest ground, with the yen giving back some of a recent rally, while South Korean equities rebounded and markets in Australia nudged higher. Stocks in mainland China and Hong Kong bounced higher, with stronger-than-expected rises in the nation’s September exports and imports likely aiding the recovery.

Shares in India moved solidly to the upside, ahead of reports after the closing bell that showed the nation’s consumer price inflation came in cooler than expected and industrial production grew more than forecasted.

Stocks post sharp weekly drop as rate rally and Fed unnerve global markets

After moving back to near record highs earlier this month and despite Friday’s rebound, U.S. stocks fell sharply for the week, along with markets in Asia and Europe, as global sentiment was unnerved by the velocity of the recent rise in bond yields, headlined by the rally in Treasury yields.

Skittishness also continued to ramp up regarding the potential that the Fed may be on the verge of a monetary policy mistake amid a host of simmering global risks, such as lingering trade tensions, decelerating global growth, persisting European political uncertainties and festering emerging market concerns.

Industrials, materials, and financials sectors all tumbled over 5% to lead a broad-based selloff, while tech stocks saw heavy pressure and energy issues dropped. Crude oil prices and Treasury yields pulled back from multi-year highs, while the U.S. dollar dipped and gold found support amid the global uneasiness and as a trifecta of September U.S. inflation figures were subdued.

The recent stock market action reminds us how quickly things can change. It’s also a reminder that seemingly-subtle shifts in the direction of fundamental data can lead to significant moves in the markets. Heading into this month, markets were breathing easier over the apparent trade agreement among the United States, Mexico and Canada; however, the potential higher stakes battle continues to escalate with China, which has been one of the market risks we’ve been citing all year.

Plus, the ongoing tight labor market, and a seemingly more hawkish Federal Reserve and you had the recipe for a major pullback. The correlation between bond yields and stocks has shifted to an inverse relationship; both here and globally, which could be sounding a further warning sign for investors.

Although a ramping up earnings season will likely command attention, next week’s economic calendar will bring some key reports that could compete for market interest. Retail sales will get the ball rolling and be followed by industrial production and capacity utilization, JOLTS Job Openings, the minutes from the Fed’s September meeting and the Index of Leading Economic Indicators. Housing data will be robust next week, courtesy of the NAHB Housing Market Index, housing starts and building permits and existing home sales.

Market Insights 10/10/2018

The U.S. equity markets saw solid declines amid the continued rise in global bond yields, while trade concerns continue to ratchet higher with worries of how it could affect results and guidance with the unofficial start to Q3 earnings season around the corner.

Lingering political uncertainties across the pond added another layer to the anxiety.

Treasuries were mixed and the U.S. dollar lost some ground, even as wholesale price inflation rebounded, while crude oil prices pared a recent rally that has also contributed to the global uneasiness, and gold was modestly higher.

The Markets…

The Dow Jones Industrial Average tumbled 832 points (3.2%) to 25,599,

The S&P 500 Index fell 95 points (3.3%) to 2,786, and

The Nasdaq Composite plunged 316 points (4.1%) to 7,422

In heavy volume, 1.1 billion shares were traded on the NYSE and 3.0 billion shares changed hands on the Nasdaq

WTI crude oil lost $1.79 to $73.17 per barrel and wholesale gasoline shed $0.06 to $2.02 per gallon

The Bloomberg gold spot price rose $3.40 to $1,193.17 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 95.54

Wholesale price inflation rises, mortgage applications dip

The Producer Price Index (PPI) showed prices at the wholesale level in September rose 0.2% month-over-month matching the Bloomberg forecast, and compared to August’s unrevised 0.1% dip. The core rate, which excludes food and energy, was up 0.2% m/m, in line with expectations, and versus August’s unrevised 0.1% decline. Y/Y, the headline rate was 2.6% higher, versus projections of a 2.7% gain and August’s unrevised 2.8% rise. The core PPI rose 2.5% y/y last month, matching estimates, and compared to August’s unrevised 2.3% increase.

The MBA Mortgage Application Index decreased 1.7%, following the prior week’s flat reading. The decline came as a 2.6% drop in the Refinance Index was met with a 1.1% fall in the Purchase Index. The average 30-year mortgage rate jumped 9 basis points (bps) to 5.05%.

Wholesale inventories were revised higher to a 1.0% m/m rise for August from the preliminary estimate of a 0.8% gain, where it was expected to remain. July’s figure was unrevised at a 0.6% increase. Sales were up 0.8% m/m, compared to July’s upwardly-revised 0.2% gain, and versus estimates of a 0.5% rise. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at July’s 1.26 months rate.

Treasuries finished mixed, as the yield on the 2-year note was 2 bps lower at 2.87%, while the yield on the 10-year note rose 1 bp to 3.21% and the 30-year bond rate gained 2 bps to 3.39%. The global markets have been unnerved by the recent rise in bond yields, led by a rally in Treasury rates to multi-year highs and some momentum gained for the U.S. dollar.

The moves have come amid expectations that the Fed will continue to tighten monetary policy, lingering trade uncertainty, higher oil prices, festering political uneasiness in Europe, and the ongoing skittishness toward emerging markets.

The second installment of September inflation data will come tomorrow in the form of the Consumer Price Index (CPI), forecasted to match August’s reading of a 0.2% m/m increase, while excluding food and energy, prices are also projected to have risen 0.2% m/m following the prior month’s 0.1% increase. Rounding out the economic calendar will be weekly initial jobless claims, expected to remain unchanged from last week’s 207,000 figure.

Europe lower as concerns continue, Asia mostly higher though caution remained

European equities finished lower as losses in the U.S. markets intensified with bond yields continuing to gain ground to exacerbate the skittishness toward the impact of higher borrowing costs that has roiled the markets as of late. Also, the euro and British pound gained ground on the U.S. dollar.

Luxury goods makers saw some pressure, with shares of LVMH Moet Hennessy Louis Vuitton SE dropping after the French company’s sales figures garnered some scrutiny by analysts and the company also confirmed that China is enforcing customs rules more strictly amid the heightened trade tensions, per Bloomberg.

Italy’s budget fight with the European Union and festering U.K. Brexit uncertainty also continued to hamstring conviction. In economic news, U.K. and French industrial and manufacturing production results came in mixed, the U.K. trade deficit widened more than expected, and U.K. GDP growth for August came in flat.

Stocks in Asia finished mostly to the upside, but caution continued in the face of the recent rise in global bond yields, lingering European political uncertainties, and festering skittishness toward emerging markets.

Japanese equities nudged higher, with the yen holding onto yesterday’s advance and as the nation reported an unexpected jump in core machine orders—a gauge of capital investment—for August.

Chinese securities and those traded in Hong Kong also ticked higher, along with Australian stocks, while markets in India rallied following a recent pullback that has come from the aforementioned rise in bond yields and emerging market concerns, exacerbated by the jump in oil prices and the nation’s lingering banking system uneasiness.

Stocks in South Korea fell sharply in a return to action following yesterday’s holiday break when stocks in the region saw some pressure.

Random Thoughts From the CIO

Interest rate fears combined with a dash of tariff and inflation concerns have driven the S&P 500 sharply lower in the past 5 trading days.

Investors are having a hard time digesting the possibility of a more hawkish Fed when the 10-year Treasury yield is above 3.2%.

We don’t believe the Fed’s plan to raise interest rates once more in 2018 and three times in 2019 is a problem. That’s because the Fed funds rate has historically traded at an average of 1.3 percentage-points above the year-over-year change in Headline CPI since 1948. Today’s Fed funds rate at 2.125% is nearly 140 basis points lower than what should be a “normal” Fed funds rate of 3.5%.

Therefore, monetary policy remains in a stimulative, net-negative real rate environment (rates are below inflation). Also, Action Economics sees the 10-year yield hovering around 3.35% by this time next year, while the 2-year is forecast to yield 3.10%, allowing the 2-10 yield curve to remain positively sloped.

Market Insights 10/9/2018

U.S. equities finished mixed in a roller-coaster session with investors getting a break from the recent rally in Treasury yields that has unnerved the markets as of late.

Energy and technology stocks led to the upside, but financials dipped ahead of Friday’s key earnings reports from the banking sector.

The U.S. dollar ticked lower and gold was modestly higher, while crude oil prices were mixed.

The Markets…

The Dow Jones Industrial Average declined 56 points (0.2%) to 26,431

The S&P 500 Index was down 4 points (0.1%) to 2,880

The Nasdaq Composite inched 2 points higher to 7,738

In moderate volume, 805 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.67 to $74.96 per barrel and wholesale gasoline lost $0.01 to $2.08 per gallon

The Bloomberg gold spot price rose $1.35 to $1,189.43 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 95.70

Small business optimism slips from a record high

The National Federation of Independent Business (NFIB) Small Business Optimism Index for September declined more than expected to 107.9 from a record high of 108.8, versus the Bloomberg expectation of a dip to 108.3.

Treasuries were higher in a return to action following yesterday’s holiday break, as the yield on the 2-year note was little changed at 2.88%, while the yields on the 10-year note and 30-year bond decreased 4 basis points to 3.20% and 3.37%, respectively.

Treasury yields have rallied as of late to multi-year highs and the U.S. dollar has gained some traction to unnerve global sentiment. The markets are grappling with expectations that the Fed will continue to tighten monetary policy, lingering trade uncertainty, higher oil prices, festering political uneasiness in Europe, and the ongoing skittishness toward emerging markets.

Tomorrow, investors will get their first look at September inflation figures in the form of the Producer Price Index (PPI), with economists projecting both the headline figure and the core rate, which excludes food and energy, rose 0.2% m/m, following the respective 0.1% m/m declines posted in August. The final read on wholesale inventories for August will also be released, forecasted to be unrevised at the previously-reported 0.8% m/m increase. MBA Mortgage Applications will round out the economic calendar.

Europe turns higher as technology issues recover, Asia mostly lower

European equities turned to the upside, with the euro losing ground on the U.S. dollar, while technology issues recovered, along with real estate stocks, as U.S. bond yields gave back a recent jump that has been a source of global market uneasiness. Energy issues also contributed to the upside move amid the continued gains in oil prices but global markets appeared to remain skittish on the heels of the recent rise in global bond yields and as trade tensions between the U.S. and China continue to be elevated. Italian fiscal uneasiness persisted as the nation continues to grapple with the European Union regarding its budget targets, and U.K. Brexit uncertainty lingered.

The British pound moved higher versus the greenback and bond yields in the region were mostly higher, though rates in Italy gave back some of a recent surge. In economic news, Germany’s August exports unexpectedly dipped and its imports fell more than expected, with the nation’s trade surplus surprisingly expanding. Stocks shrugged off a lowered global economic forecast from the International Monetary Fund.

Stocks in Asia finished mostly to the downside, with Japan returning to action following yesterday’s holiday, while South Korean markets took the day off. Global uneasiness continued in the wake of the recent uptick in global bond rates, headlined by the rally in U.S. yields, while trade tensions between China and the U.S. remained escalated.

Japanese equities fell, as the yen extended recent gains, while Australian securities also saw a solid decline. Chinese stocks finished mixed after yesterday’s selloff, as those traded on the mainland nudged higher and listings in Hong Kong dipped. Stocks in India traded lower, with the market remaining hampered by the rising bond yields, rallying crude oil prices, and persisting uneasiness toward the emerging markets,

Market Insights 10/8/2018

The U.S. equity markets finished mixed in choppy action, with the continued rise in global bond yields again making market participants nervous, despite policy easing measures from China’s central bank.

Treasury markets were closed in observance of Columbus Day and the economic calendar was void of any reports to provide any sway, while the U.S. dollar moved higher, gold tumbled, and crude oil prices were little changed.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 39 points (0.2%) to 26,487

The S&P 500 Index was down 1 point to 2,885

The Nasdaq Composite fell 53 points (0.7%) to 7,734

In moderate volume, 796 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil inched $0.05 lower to $74.29 per barrel and wholesale gasoline was unchanged at $2.09 per gallon

The Bloomberg gold spot price tumbled $15.44 to $1,188.19 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 95.75

Bond markets closed and economic docket quiet today

The bond markets were closed in observance of the Columbus Day holiday and the U.S. economic calendar was void of any releases today. Following last week’s surge in interest rates, the yield on the 2-year note sits at 2.89%—the highest since 2008—the yield on the 10-year note jumped to 3.23%—a level not seen since 2011—and the 30-year bond rallied to 3.40%—the strongest rate since 2014. The U.S. dollar gained ground.

The markets continue to grapple with signals the Fed is likely to continue to tighten monetary policy following hawkish commentary in the past week from Chairman Jerome Powell and Friday’s September non-farm payroll report.

The focus on the Fed and rally in global bond rates will likely not fade this week, with the economic calendar yielding a trifecta of September inflation reports, headlined by the Consumer Price Index (CPI) and the Producer Price Index (PPI). The docket will bring a read on how consumers are feeling as October begins, with the preliminary University of Michigan Consumer Sentiment Index.

Adding another wrinkle for the markets to contend with, Q3 earnings season is set to kick off with some major banking sector results on display on Friday. Expectations for profit growth this quarter remain high, which could foster some choppiness, but the Street will likely pay close attention to guidance and commentary regarding the current skittishly-optimistic global market environment.

Europe and Asia lower amid continued yield concerns

European equities finished lower, in the wake of last week’s decline in the global markets as bond yields broadly rallied, led by the U.S., while Italian budget concerns festered. Also, mainland Chinese markets fell in a return to action from a week-long holiday, despite moves by the nation’s central bank to loosen policy.

The euro and British pound were lower as the U.S. dollar gained ground, while bond yields in the region were mixed, though U.S. bond markets were closed for a holiday and Italian rates rallied. German industrial production unexpectedly declined for August.

Stocks in Asia finished mostly lower to begin the week following last week’s decline that came courtesy of a rise in global bond yields. Volume was lighter than usual as markets in Japan were closed for a holiday.

China was in focus after mainland markets returned to action following a week-long holiday and as the People’s Bank of China cut the reserve requirement ratio—the amount of cash banks need to keep on hold. The move came as economic data has been softer-than-expected, trade tensions remain elevated and emerging market turmoil continues to unnerve the markets.

Mainland Chinese equities dropped sharply, and those traded in Hong Kong were also solidly lower, while markets in Australia and South Korea saw their share of losses. Stocks in India bucked the trend and nudged higher, digesting late-Friday’s surprise announcement from the Reserve Bank of India to leave its monetary policy stance unchanged, versus expectations of a rate hike.

Indian markets have been hampered by the aforementioned emerging markets uneasiness, this year’s drop in the rupee, and recent rally in oil prices.

A 21.3% Year-Over-Year Gain in S&P 500 Operating EPS is Expected

Third-quarter 2018 earnings reporting season has started. As of October 4, 2018, S&P consensus estimates pointed to a 21.3% year-over-year gain in Q3 S&P 500 operating results and a 21.9% increase for all of 2018, after reporting a 25.2% advance in Q2 2018 EPS and an 11.9% rise for all of 2017.

Indeed, Q2’s gain notched the 26th consecutive quarter in which actual earnings growth exceeded end-of-quarter estimates. For this quarter, earnings are projected to be up for 10 of 11 sectors, with above-market growth coming from the energy, financials, information technology and materials sectors.

The weakest advances are expected for consumer staples, real estate and utilities. The new communications services sector does not have a meaningful comparison of index EPS, but the group’s cap-weighted growth in aggregated net income of the underlying constituents shows a near-16% rise for this quarter and a 17.2% gain for all of 2018. S&P 500 revenues are forecast to be up 8.2% in Q3 and 8.5% for the full year, versus a gain of 6.9% for 2017.

Finally, the S&P 500 currently trades at 17.3X next 12-month (NTM) estimates, which is a 5.5% premium to the 16.4X average since 2000 and 9% above the median of 15.8X.

Market Insights 10/5/2018

Uneasiness surrounding the surge in global bond yields hampered stocks in the final session for the week.

Treasury yields extended a weekly surge after the September labor report showed jobs were added at a lower-than-expected rate, but the previous two months were revised upward, and the unemployment rate hit a 48-year low.

The U.S. dollar dipped, gold was higher, and crude oil prices were little changed.

The Markets…

The Dow Jones Industrial Average fell 108 points (0.7%) to 26,447

The S&P 500 Index was down 16 points (0.6%) to 2,886

The Nasdaq Composite tumbled 91 points (1.2%) to 7,788

In moderate volume,840 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil inched $0.01 higher to $74.34 per barrel and wholesale gasoline was down $0.01 at $2.09 per gallon

The Bloomberg gold spot price gained $4.00 to $1,203.92 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 95.64

Markets were lower for the week, as the DJIA fell 0.1%, the S&P 500 Index lost 1.0%, and the Nasdaq Composite tumbled 3.2%

September labor report mixed, trade deficit a bit smaller than expected

Non-farm payrolls rose by 134,000 jobs month-over-month in September, compared to the Bloomberg forecast of a 185,000 increase, but the rise of 201,000 seen in August was revised to a gain of 270,000 jobs. The total upward revision to job gains for August and July was 87,000. Excluding government hiring and firing, private sector payrolls increased by 121,000, versus the anticipated gain of 180,000, after rising by 254,000 in August, revised from the 204,000 increase that was initially reported. Job gains occurred in professional and business services, in health care, and in transportation and warehousing. However, the September figure was affected by Hurricane Florence, with the Labor Department noting that it may have contributed to some of the weakness seen in the leisure and hospitality industry.

The unemployment rate declined to 3.7%—a 48-year low—from 3.9%, versus estimates of a dip to 3.8%, while average hourly earnings were up 0.3% m/m, matching projections and August’s downwardly-revised increase. Y/Y, wage gains were 2.8% higher, in line with estimates, and versus August’s 2.9% gain. Finally, average weekly hours remained at August’s unrevised 34.5 rate, as expected.

Today’s report appears to be keeping Fed expectations in tact as the solid upward prior month revisions, the drop in the unemployment rate, and continued growth in wages suggests the labor market remains tight.

A tight labor market is good news for “Main Street” but has implications for “Wall Street” as it raises additional late-cycle risks as it relates to the stock market. Expectations are now that the Fed will hike once more this year, and three times next year, in keeping with an upgraded economic outlook. While the removal of the “accommodative” language is seen as giving the Fed more flexibility both in future actions as well as communications.

The trade balance showed that the deficit widened by a slightly smaller amount than expected to $53.2 billion in August, compared to forecasts of $53.6 billion. July’s deficit was revised modestly lower to $50.0 billion. Exports were down 0.8% m/m at $209.4 billion, while imports gained 0.6% m/m to $262.6 billion.

Treasuries were lower following the employment data, as the yield on the 2-year note rose 1 basis point to 2.88%, the yield on the 10-year note gained 4 bps to 3.24%, and the 30-year bond rate advanced 5 bps to 3.40%

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $20.1 billion during August, above the $15.0 billion forecast of economists polled by Bloomberg, while July’s figure was adjusted downward to an increase of $16.6 billion from the originally reported $16.7 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $15.2 billion, while revolving debt, which includes credit cards, rose by $4.8 billion.

Europe and Asia lower as global uneasiness remains

European equities finished broadly lower, with global uneasiness lingering as the rise in global bond yields persisted, led by Treasury rates in the U.S. after a mixed September non-farm payroll report. Italy’s budget battle continued and U.K. Brexit uncertainty festered to continue to add another layer of skittishness to the markets. The euro was little changed versus the U.S. dollar, even as German factory orders rose more than expected, and the British pound gained ground amid some positive commentary from European Union and U.K. leaders regarding the potential to strike a Brexit deal. Bond yields in the region extended a run.

Stocks in Asia finished mostly lower, following yesterday’s slide in the global markets as uneasiness appeared to surface in the wake of the upward moves in bond yields, led by Treasury rates in the U.S. that was bolstered by stronger-than-expected economic data and some hawkish takeaways from recent appearances by Fed Chairman Jerome Powell. The markets in the region were likely cautious ahead of today’s labor report in the U.S. and while volume remained lighter than usual with mainland Chinese markets remaining closed for a holiday. Stocks in Japan decreased, snapping a string of weekly gains, with the yen rising noticeably yesterday amid the aforementioned global uneasiness. Stocks declined despite a larger-than-expected rise in Japanese household spending for August. Equities in Hong Kong and South Korea were also lower.

Listings in India dropped sharply, with the nation’s market remaining hampered by festering banking system uneasiness, concerns about the impact of the surge in crude oil prices, and the aforementioned bond yield moves. Also, the lingering uneasiness toward the emerging markets has contributed to the pullback, along with this year’s drop in the rupee, while the markets awaited an expected rate hike after the closing bell from the Reserve Bank of India (RBI). However, the RBI surprised the markets by keeping its monetary policy stance unchanged, citing economic risks, trade tensions and the recent rally in oil prices.

Markets in Australia bucked the trend, gaining modest ground, aided by strength in financial and energy issues.

WEEKLY RECAP – Stocks decline for the week despite data, rally in rates unnerves global markets

U.S. stocks finished lower on the week that saw sentiment swing from economic optimism to being unnerved by a U.S.-led rally in global bond yields. The ISM Manufacturing Index slipped more than expected in September but remained solidly in expansion territory, while its counterpart non-Manufacturing Index showed growth in the key services sector unexpectedly accelerated to the second highest pace of all-time.

In the wake of the data, and bolstered by a host of appearances from Fed Chairman Jerome Powell that seemed to foster hawkish takeaways, the U.S. dollar extended a weekly gain and Treasury yields surged. The yield on the 2-year note hit highs not seen since 2008, the 10-year note reached levels not seen since 2011, and the 30-year bond posted a rate last touched in 2014. The surge in rates carried over to Asia and Europe and pressured stock markets, joining lingering trade concerns, festering Italian fiscal uneasiness and enduring U.K. Brexit ambiguity. Consumer discretionary, real estate, communications services and technology sectors were the worst performers as the rally in rates hamstrung conviction, but financials posted a strong advance. Energy issues also moved nicely higher as oil prices continued to run.

The focus on the Fed and rally in global bond rates will likely not fade next week, with the economic calendar yielding a trifecta of September inflation reports, headlined by the Consumer Price Index (CPI) and the Producer Price Index (PPI). The docket will bring a read on how consumers are feeling as October begins, with the preliminary University of Michigan Consumer Sentiment Index. Adding another wrinkle for the markets to contend with, Q3 earnings season is set to kick off with some major banking sector results on display on Friday. Expectations for profit growth this quarter remain high, which could foster some choppiness, but the Street will likely pay close attention to guidance and commentary regarding the current skittishly-optimistic global market environment.

Note: that the bond market in the U.S. will be closed on Monday in honor of Columbus Day.

Market Insights 10/4/2018

U.S. equities were solidly lower after hitting a string of record highs earlier in the week, with the recent surge in Treasury yield sparking today’s sell-off.

Treasury yields extended a run and the U.S. dollar was nearly unchanged, amid reports that jobless claims unexpectedly declined and factory orders data was mixed.

Crude oil prices fell sharply and gold was higher.

The Markets…

The Dow Jones Industrial Average fell 201 points (0.8%) to 26,627

The S&P 500 Index was 24 points (0.8%) lower at 2,902

The Nasdaq Composite plunged 146 points (1.8%) to 7,880

In moderately-heavy volume, 796 million shares were traded on the NYSE and 3.2 billion shares changed hands on the Nasdaq

WTI crude oil tumbled $2.08 to $74.33 per barrel and wholesale gasoline was down $0.04 at $2.10 per gallon

The Bloomberg gold spot price rose $2.46 to $1,199.81 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 95.75

Jobless claims surprisingly decline, factory orders report mixed

Weekly initial jobless claims declined by 8,000 to 207,000, versus the Bloomberg estimate calling for a match of the prior week’s upwardly-revised 215,000 figure. The four-week moving average nudged higher by 500 to 207,000, while continuing claims fell by 13,000 to 1,650,000, south of estimates of 1,665,000.

Factory orders (chart) grew 2.3% month-over-month in August, versus expectations of a 2.1% gain, and compared to July’s favorably-revised 0.5% decrease. Stripping out the volatile transportation component, orders ticked 0.1% higher, matching July’s downwardly-revised gain. August durable goods orders reported last week—were adjusted lower to a 4.4% increase. Finally, non-defense capital goods orders excluding aircraft, a gauge of business spending, were revised to a 0.9% decline from a previously-reported 0.5% decrease.

Treasuries were slightly lower, with the yield on the 2-year note up 2 basis points to 2.87%, while the yields on the 10-year note and the 30-year bond gained 3 bps to 3.19% and 3.34%, respectively.

The U.S. dollar was little changed, with global trade concerns remaining relatively calm, though relations between the U.S. and China remain a major source of uncertainty. Treasury yields have jumped as of late—the 10-year note rate sits at levels not seen since 2011—and stocks have moved back to record highs, bolstered by some upbeat economic commentary from Federal Reserve Chairman Jerome Powell in multiple appearances over the past week, including a reiteration of the outlook for continued gradual rate increases. Also, ahead of tomorrow’s September non-farm payroll report, the ISM non-Manufacturing Index showed growth in the key services sector unexpectedly rose to the second-highest pace of all-time and the ADP private sector employment report easily topped forecasts.

Recent records in the U.S. stock market do not, in our view, mean that investors should get more aggressive in their investment objectives or play with their long-term risk tolerances. High expectations, elevated investor sentiment, trade disputes, and the possibility of a monetary mistake lead us to take a more moderate stance, while we are watching the recent surge in oil prices for its impact on the U.S. economic momentum and the global markets along with today’s spike in interests rates and the subsequent sell-off

Europe and Asia lower as rising bond yields appeared to foster caution

European equities finished lower, with the euro and British pound rising versus the U.S. dollar, while bond yields in the region posted widespread gains. Bond yields followed the U.S. markets’ surge that has come from stronger-than-expected economic data and what seemed to be hawkish takeaways from a series of appearances from Fed Chairman Jerome Powell as of late.

The global markets appeared to get a bit more cautious amid the jump in bond yields but financials gained ground, helping limit losses for the German markets in their return to action following yesterday’s holiday. Italian fiscal uncertainty lingered even after the nation’s pledge to reduce its budget deficit target in the next three years, U.K. Brexit concerns festered, and Greek banking worries looked to be flaring up.

Stocks in Asia finished mostly lower, as Indian markets continued to slide and some uneasiness appeared to ramp-up regarding the recent rally in interest rates in the U.S. that has come from stronger-than-expected economic data and commentary from Fed Chairman Jerome Powell.

Japanese securities gave up early gain and declined, even as the yen lost some ground. Stocks in India dropped sharply ahead of tomorrow’s expected rate increases by the Reserve Bank of India, while the nation remains hampered by festering banking system uneasiness, concerns about the impact of the surge in crude oil prices, and the aforementioned bond yield moves out of the U.S. Also, the lingering uneasiness toward the emerging markets has contributed to the pullback in the nation’s stock markets, along with this year’s drop in the rupee.

Markets in both South Korea and Hong Kong fell, with the former returning from after yesterday’s holiday break, but Australian equities advanced, with energy and materials issues leading to the upside, while financials recovered from recent regulator-scrutiny of the banking sector, while a report showed the country’s trade surplus unexpectedly widened in August.

Markets in mainland China remained closed for a holiday.

Random Thoughts

Consumers and businesses are feeling pretty good these days, maybe even too good, as indicated by the stronger-than-expected ISM services report and the surge in ADP employment data.

What’s more, consumer confidence recently rose to an 18-year high, while the Michigan sentiment survey topped the 100 level, nearing March’s 14-year peak of 101.4.

This Friday’s employment report should impact forecasts for industrial production, personal income and construction spending, which Action Economics currently sees indicating gains of 0.2%, 0.4% and 0.6%, respectively.

They also see September non-farm payrolls rising by 195k and the unemployment rate slipping to 3.8%. Should future reports point to an economy that is indeed on fire, investors will likely begin to worry that the Fed will be forced to swap the punch bowl for a fire hose, thereby dousing enthusiasm.