Market Insights 6/20/2017

Markets Trim Monday Gains

U.S. equities erased some of the gains seen yesterday, with tech issues applying pressure, along with energy stocks following a sharp decline in crude oil prices on oversupply concerns amid a flood of output coming from Libya and Nigeria.

Treasuries were higher with the economic calendar again empty, while gold was little changed and the U.S. dollar gained ground.

The Markets…

The Dow Jones Industrial Average (DJIA) fell 62 points (0.3%) to 21,467

The S&P 500 Index declined 16 points (0.7%) to 2,437, the energy sector was the largest loser on the day giving back 1.46% while healthcare was the biggest winner posting a .69% gain.

The Nasdaq Composite decreased 51 points (0.8%) to 6,188

In moderately-heavy volume, 811 million shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.92 to $43.51 per barrel and wholesale gasoline lost $0.03 to $1.42 per gallon

The Bloomberg gold spot price decreased $1.37 to $1,242.47 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 97.76

Economic calendar remains quiet, gets in motion tomorrow

Treasuries were higher, as the economic calendar was again void of any major releases today. The yield on the 2-year note was 1 basis point lower at 1.35%, the yield on the 10-year note was down 3 basis points (bps) at 2.16%, and the 30-year bond rate declined 5 bps to 2.74%.

Treasury yields have been in a trading range amid a host of domestic and European political uncertainty, mixed economic data, and last week’s highly-expected rate hike by the Fed and details of the process in beginning to shrink its balance sheet sometime this year.

The economic calendar is scant this week, and won’t get moving until tomorrow, where housing will take center stage with the release of existing home sales, with economists forecasting a slight “downtick” during May to an annual rate of 5.55 million units, as well as weekly MBA Mortgage Applications. More housing data will come later in the week via the new home sales report. Manufacturing and business activity will also likely be on tap, with data from Markit’s preliminary Manufacturing and Services PMIs and the Kansas City Fed Manufacturing Index. Other reports of note include weekly initial jobless claims and the Index of Leading Economic Indicators.

A couple of Federal Reserve officials spoke yesterday, with some hawkish comments coming from Federal Reserve Bank of New York President William Dudley, with a host of other speeches at various engagements slated for today and throughout the remainder of the week. We believe the market will likely largely look past the expected FOMC rate hike, and focus more on any information with regard to the Fed’s balance sheet.

It is now expected that the Fed will begin the process of slowly reducing its bloated balance sheet by the end of this year, but that process (and commentary surrounding it) could be a source of elevated volatility in the months to come.

European equities lower on oil, politics and Brexit worries; Asia mixed

European equities finished lower, with pressure coming from energy stocks amid the tumble in crude oil prices, and as Brexit talks were in focus after negotiations officially began yesterday in Brussels. According to Reuters, chief negotiators from the European Union (EU) and the U.K. agreed that dialogue up through October should focus on expatriate citizens’ rights and the settling of financial accounts.

The British pound added to its recent slide versus the U.S. dollar amid the uncertainty, as well as Bank of England Governor Mark Carney’s comments on his continued worries of the impact of Brexit on the U.K. economy, and after signaling that as a result he isn’t in any rush to begin adjusting interest rates. Adding to the mix, investors continue to struggle with the recent U.K. election that surprisingly resulted in a hung parliament and fostered uncertainty surrounding Brexit negotiations and whether they will yield hard or softer exit terms.

The euro is also modestly lower versus the greenback and bond yields in the region are mixed.

The U.K. FTSE 100 Index was down 0.7%, France’s CAC-40 Index was 0.3% lower, Germany’s DAX Index fell 0.6%, Spain’s IBEX 35 Index and Italy’s FTSE MIB Index declined 1.0%, while Switzerland’s Swiss Market Index traded 0.1% to the downside.

Stocks in Asia finished mixed, as yesterday’s optimism over the MSCI’s decision on China cooled a bit. Investors are waiting to see if MSCI will include the Asian nation’s A-shares in its emerging markets indexes when it announces its decision later this week. This will be the fourth shot at MSCI inclusion for China after being passed over the prior three attempts. Whispers on the Street currently put the odds of inclusion at 50/50. Japanese equities rose, with the yen losing ground, and following a report that showed noted improvement in the nation’s business sentiment, hitting its highest level in nearly a decade.

Mainland Chinese stocks and those traded in Hong Kong fell on tempered hopes of MSCI’s upcoming decision, while investors also begin to look toward high-level talks between the U.S. and China that begin tomorrow, with U.S. officials not hiding its intent to continue to pressure China on help with the North Korea issue. South Korean securities ticked lower and Indian listings were flat.

Australian markets fell on the heels of Moody’s downgrade of twelve of the nation’s lenders, including its four largest banks, and after the Reserve Bank of Australia released the minutes from its last monetary policy meeting which showed the central bank was concerned about household debt and wage growth, despite being positive about economic progress going forward.

Market Insights 6/19/2017

Strong Start

U.S. stocks began the week with solid gains as technology issues led a broad based advance that pushed the Dow and S&P to fresh record highs, while the Nasdaq saw the largest percentage gain for the day.

The advance for equities lacked a clear catalyst as the domestic docket was devoid of any major releases today and will remain blank again tomorrow.

Treasuries, gold and crude oil prices were lower and the U.S. dollar was nicely higher.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 145 points (0.7%) to 21,529

The S&P 500 Index advanced 20 points (0.8%) to 2,453

The Nasdaq Composite rallied 87 points (1.4%) to 6,239

In moderate volume, 801 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.54 to $44.39 per barrel and wholesale gasoline was unchanged at $1.45 per gallon

The Bloomberg gold spot price decreased $9.17 to $1,244.56 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 97.56

Slow start to week’s economic calendar

Treasuries finished lower with the economic calendar void of any major releases today. The yields on the 2-year and 10-year notes were 4 basis points (bps) higher at 1.36% and 2.19%, and the 30-year bond rate was up 1 bp at 2.79%. Treasury yields have been in a trading range lately amid a host of domestic and European political uncertainty, mixed economic data, and last week’s highly-expected rate hike by the Fed and details of the process in beginning to shrink its inflated balance sheet sometime this year.

The economic calendar is sparse this week, with tomorrow’s ledger also bare, while later in the week investors will get some housing data with the releases of new and existing home sales, as well as weekly MBA Mortgage Applications. Manufacturing and business activity will also be on tap, with data from Markit’s preliminary Manufacturing and Services PMIs and the Kansas City Fed Manufacturing Index. Other reports of note include weekly initial jobless claims and the Index of Leading Economic Indicators.

As well, a number of Federal Reserve officials are slated to speak at various engagements throughout the week. We believe the market will likely largely look past the expected FOMC rate hike, and focus more on any information with regard to the Fed’s balance sheet. It is now expected that the Fed will begin the process of slowly reducing its bloated balance sheet by the end of this year, but that process (and commentary surrounding it) could be a source of elevated volatility in the months to come. This coincides with our continued belief that the bull market has legs, but why investors should be aware that risks are elevated.

Equities in Europe and Asia end higher

European equities finished broadly higher, with politics taking center stage, while also getting a tailwind from last week’s extension of loan agreements to Greece by its creditors that ended speculation over whether the country would be able to meet large bond payments coming due in July. The second round of parliamentary elections in France over the weekend ushered in a solid win for newly-elected President Macron, with his Republic on the Move party, along with an ally in the Modem centrist party, producing an absolute majority, paving the way for easy passage of Macron’s reform program.

The British pound was modestly lower versus the U.S. dollar, as Brexit negotiations began in Brussels today, and amid a cloud of uncertainty in the U.K. following reports over the weekend that the nation’s senior conservative leaders are preparing to initiate a challenge to Prime Minister May’s leadership if she softens her stance on Brexit. The euro also lost modest ground versus the greenback and bond yields in the region were lower. Economic news was sparse, with April industrial output in Italy declining and housing prices in the U.K. ticked lower for June.

Stocks in Asia began the trading week higher across the board on the heels of Friday’s fresh high for the Dow in the U.S., as well as optimism in China with regard to an upcoming MSCI decision. Japanese equities increased, with the yen gliding lower during the session and following a report that showed an unexpected trade deficit, as the nation’s imports exhibited surprising strength, while exports fell short of expectations.

Mainland Chinese stocks rose and shares trading in Hong Kong jumped amid increased hopes that MSCI will include the Asian nation’s A-shares in its emerging markets indexes when it announces its decision later this week, while showing little reaction to data that showed housing prices continue to steadily rise. Australian securities returned from a long holiday weekend to finish higher, despite Moody’s downgrade of twelve of the nation’s lenders, including its four largest banks, while Indian listings traded higher and South Korean equities gained ground.

The international docket for tomorrow will include department store sales from Japan, leading indicators from China, house price data from Australia, PPI from Germany and the current account for the Eurozone.

U.S. Market Weekly Summary – Week Ending 06/16/2017

S&P 500 Edges Up 0.1% on Week as Industrials Lead to Upside While Tech, Materials Stocks Fall

The Standard & Poor’s 500 index edged up 0.1% this week, as industrial stocks led to the upside but the advance was limited by declines in technology, materials and consumer stocks.

The market benchmark ended the week at 2,433.15, up slightly from last Friday’s closing level of 2,431.77. The industrial sector added 1.6% this week, followed by gains across a number of other sectors including utilities, real estate and energy. On the downside, the technology sector fell 1.2%, materials stocks shed 0.8%, and the consumer-discretionary and consumer-staples sectors both edged lower.

Among the industrial sector’s advancers, shares of PACCAR (PCAR), a technology company focusing on trucks, parts and related financial services, climbed 1.9% this week as Goldman Sachs upgraded its investment rating on the shares to buy from neutral. Caterpillar’s (CAT) shares added 1.6% this week as the manufacturer of construction and mining equipment said its board increased its quarterly cash dividend by a penny per share. Caterpillar’s new quarterly dividend rate is $0.78 per share.

The real-estate sector’s gainers included HCP (HCP), a real-estate investment trust that focuses on senior housing, life-science and medical-office properties. The shares rose 4.3% this week amid an upgrade by Raymond James to an outperform investment rating from underperform.

The technology sector’s decliners included Micron Technology (MU), which ended the week 2.4% lower than last week amid a report from DigiTimes saying Nanya Technology sold part of its stake in Micron to increase the company’s working capital and repay loans

The materials sector’s drop came as gold prices sank to a three-week low amid gains in the US dollar after the Federal Reserve’s Federal Open Market Committee decided to raise interest rates.

Among the materials shares that fell, Nucor’s (NUE) stock dropped 8.1% this week after the steel maker forecast Q2 earnings below analysts’ mean estimate. Freeport-McMoran (FCX) shed 7.6% this week, hurt not only by a drop in gold prices but also by activist investor Carl Icahn’s reduced stake in the company to 6.3% from 7.2% in late November. Also, a Reuters report said Freeport-McMoran agreed to end discussions for the potential sale of its cobalt assets to China Molybdenum.

Market Insights 6/16/2017

Markets Mixed to Finish the Week

U.S. equities finished a choppy session and week mixed amid some disappointing economic data and continued pressure from technology stocks.

Treasuries were higher following an economic calendar that showed housing starts and building permits surprisingly fell and a preliminary read on consumer sentiment cooled.

Meanwhile, crude oil prices were modestly higher, as was gold and the U.S. dollar lost ground. In equity news, Amazon.com inked a deal to acquire Whole Foods Market for roughly $13.7 billion.

The Markets…

The Dow Jones Industrial Average rose 24 points (0.1%) to 21,384

The S&P 500 Index inched nearly a point higher to 2,433

The Nasdaq Composite lost 14 points (0.2%) to 6,152

In very heavy volume due to quadruple-witching, the simultaneous expiration of the futures and options contracts for stocks and indexes, 2.2 billion shares were traded on the NYSE and 3.0 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.28 to $44.74 per barrel and wholesale gasoline was $0.01 higher at $1.45 per gallon

The Bloomberg gold spot price increased $0.77 to $1,254.75 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 97.12

Markets were mixed for the week, as the DJIA advanced 0.5%, the S&P 500 Index ticked 0.1% higher, and the Nasdaq Composite fell 0.9%

Housing starts and building permits surprisingly miss expectations

Housing starts for May dropped 5.5% month-over-month (m/m) to an annual pace of 1,092,000 units, below the Bloomberg forecast of a 1,220,000 unit rate. April starts were downwardly revised to an annual pace of 1,156,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, decreased 4.9% m/m in May to an annual rate of 1,168,000, after April’s downwardly revised 1,228,000 rate, and south of the expected annual pace of 1,249,000 units.

The preliminary University of Michigan Consumer Sentiment Index declined more than forecasted, dropping to 94.5 from the prior month’s 97.1 level, and compared to expectations for it to dip to 97.0. The current economic conditions component unexpectedly declined m/m, while the expectations measure decreased to its lowest level since October. The 1-year inflation forecast remained at 2.6%, while the 5-10 year inflation outlook increased to 2.6% from 2.4%.

Treasuries were higher following the data, as the yield on the 2-year note decreased 4 basis points to 1.31%, while the yields on the 10-year note and the 30-year bond declined 1 bp at 2.15% and 2.78%, respectively.

European equities traded nicely higher, Asia mixed following BoJ decision

European equities traded higher as the markets took the latest of a string of central bank decisions in stride, as the Bank of Japan announced no changes to its current monetary policy. New loan agreements were extended to Greece by its creditors, ending speculation over whether the country would be able to meet large bond payments coming due in July. The International Monetary Fund has also joined the bailout program with a standby agreement that will likely not allow for the dispersion of funds until next year when the Eurozone details debt relief measures.

The latest developments in the Brexit situation seem to detail a change in the U.K.’s strategy as it is reportedly meeting European demands that the initial stage of talks be focused on settling elements of the split prior to arranging any future trade relationships, with the negotiations expected to begin in Brussels on Monday, per Bloomberg. In economic news in the region, European car sales bounced back in the month of May, jumping 7.7% after falling 6.8% the month prior, Eurozone consumer price inflation matched forecasts of a 1.4% rise and Italy’s trade balance narrowed in April.

The euro and British pound moved higher versus the U.S. dollar. Bond yields in the region were mostly higher, though sovereign yields in Greece plummeted.

Stocks in Asia finished mixed following the declines in the U.S. yesterday and as the Bank of Japan (BoJ) concluded its two-day monetary policy meeting. Japanese equities traded higher with banks and electronic makers leading the advance as the yen lost ground versus its main counterparts following the BoJ’s decision to keep its current monetary stance unchanged. Mainland Chinese stocks were lower, and markets in Hong Kong ticked slightly higher, the Hang Seng was lower on the week after registering gains for the previous five straight. Additionally, the People’s Bank of China has injected approximately 160 billion yuan through open market operations and a net 410 billion yuan through reverse-repurchase agreements this week, per Bloomberg. Meanwhile, Australian securities gained modest ground, South Korean stocks finished flat and those traded in India ticked lower.

Equities mixed for the week after tech troubles

U.S. equity markets closed out the week in mixed fashion with the Nasdaq under-performing its peers courtesy of extended pressure on the technology sector. A string of central bank decisions throughout the week created a leery landscape loaded with mostly lackluster economic reports. Of course, a few bright spots appeared in the form of some upbeat regional manufacturing activity and a decline in weekly jobless claims.

Goldilocks…or the Three Bears?, modest growth, low inflation and a cautious Fed are combining to make things “just right” for investors. But, as always, there are clouds on the horizon and pullbacks are possible at any time so it’s important for investors to remain vigilant in keeping a diversified portfolio with appropriate risk exposure. Our experts point out three potential pitfalls, or bears, worth watching.

Next week, the U.S. economic calendar will lighten up considerably, but will bring us more housing data with the releases of new and existing home sales. Manufacturing and business activity will also likely see discussion with the release of Markit’s preliminary Manufacturing and Services PMIs.

International reports due out next week include: Australia—new vehicle sales, housing prices and the minutes from the Reserve Bank of Australia’s June meeting. China—property prices and leading indicators. Japan—All Industry Activity Index, machine tool orders, house prices, trade balance and department store sales. Eurozone—construction output, current account, consumer confidence, preliminary Markit Manufacturing and Services PMIs, German import prices and PPI, French GDP and business confidence and Italian industrial orders. U.K.—house prices and public finances.

Market Insights 6/15/2017

Stocks Lower Amid Economic & Geo-Political News

While off the worst levels of the day, U.S. equities finished lower after the domestic economic calendar offered a host of mixed reports.

Homebuilder sentiment cooled, industrial production and capacity utilization came in just shy of estimates, while weekly jobless claims fell and regional manufacturing activity continued to be upbeat.

Treasuries were lower, as was gold, while the U.S. dollar was nearly flat.

The Markets…

The Dow Jones Industrial Average fell 15 points (0.1%) to 21,356

The S&P 500 Index declined 5 points (0.2%) to 2,433

The Nasdaq Composite lost 29 points (0.5%) to 6,166

In moderate volume, 881 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.27 to $44.46 per barrel and wholesale gasoline was $0.01 higher at $1.44 per gallon

The Bloomberg gold spot price decreased $6.53 to $1,254.33 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 97.47

Heavy dose of economic data points

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month declined to 67 from May’s downwardly revised level of 69 and while it may be at a four-month low in June, remains near the highest levels in approximately 12 years. The 50 mark is the point of separation for good versus poor conditions. The NAHB said that although still quite strong, the figures might be hinting at an easing of optimism in an industry where more workers are desperately needed to break ground on new projects. And businesses might also be less confident since post-election buoyancy has given way to legislative gridlock.

Industrial production was unchanged month-over-month in May, falling shy of estimates calling for a 0.2% increase, and following April’s upwardly revised 1.1% rise, which was the strongest surge in nearly seven years. Manufacturing production declined, while mining and utilities output ticked higher. Capacity utilization ticked lower to 76.6%, compared to April’s unrevised 76.7%, and shy of forecasts expecting a tick higher to 76.8%.

Weekly initial jobless claims declined by 8,000 to 237,000 last week, below the Bloomberg forecast of 241,000, with the prior week’s figure unrevised at 245,000. The four-week moving average decreased by 1,000 to 243,000, while continuing claims increased by 18,000 to 1,935,000, north of estimates of 1,920,000.

The Empire Manufacturing Index showed output from the New York region jumped further-than-expected into expansion territory (a reading above zero) for June. The index leaped to 19.8 from May’s unrevised -1.0 level, with forecasts calling for a reading of 5.0.

The Philly Fed Manufacturing Index in June declined to 27.6 after rising to 38.8 in May, though a reading above zero indicates expansionary activity, and compared to estimates of a decline to 24.9.

The Import Price Index declined 0.3% month-over-month for May, below the Bloomberg projection of a 0.1% decline, and compared to April’s downwardly revised 0.2% increase. Compared to last year, prices were up by 2.1%, short of forecasts calling for 2.9% and following April’s downwardly revised 3.6% increase.

Treasuries were lower, as the yields on the 2-year note and the 30-year bond increased 2 bps to 1.35% and 2.79%, respectively, while the yield on the 10-year note gained 3 bps to 2.16%. Yesterday, the U.S. Federal Reserve raised the target range for the federal funds rate by 25 bps.

More housing data is in store on tomorrow’s economic calendar, with housing starts and building permits scheduled for release, with starts forecasted to have increased 0.4% m/m during May to an annual rate of 1,223,000 units and permits to have risen 0.2% m/m to an annual rate of 1,249,000 units, followed by the preliminary University of Michigan Consumer Sentiment Index, expected to remain at the prior month’s 97.1 level.

European and Asian shares saw pressure

European equities traded broadly lower with retailers and commodity producers leading the decent. The decline developed on the heels of yesterday’s Fed decision and in the wake of the Bank of England (BoE) keeping its monetary policy unchanged as expected, though the number of officials at the BoE calling for a rate hike has now increased to three versus the five officials who voted to stay the current policy path. In other central bank action, the Swiss National Bank kept both its target range and the rate charged on sight deposits unchanged, as expected. In economic developments in the region, consumer price inflation reports out of France and Italy were mostly in line with projections, retail sales figures in the U.K. were well short of expectations and the trade balance for the Eurozone was narrower than anticipated.

The euro moved lower versus the U.S. dollar, while the British pound erased an early decline that ensued following the BoE decision and traded higher against the greenback. Bond yields in the region were mostly higher.

Stocks in Asia traded mostly lower with energy issues leading the decline on the heels of yesterday’s Fed decision to increase the target range for the federal funds rate by 25 basis points and as crude oil prices continued to slide. Mainland Chinese stocks ticked to the upside, as the People’s Bank of China (PBoC) appears to be holding off on any immediate increases to borrowing costs. The PBoC raised money-market costs shortly following its U.S. counterpart tightening in March. However, securities in Hong Kong fell sharply, with property firms under heavy pressure after the city’s monetary authority raised borrowing costs shortly following the U.S. Fed’s monetary policy decision yesterday.

Japanese equities slipped, with exporters under-performing as the yen advanced versus the U.S. dollar and held gains, while traders in the island nation await Friday’s decision from the Bank of Japan when it concludes its latest monetary policy meeting. Markets in Australia also fell, despite a report showing the country’s jobless rate declined to its lowest level in over four years with the strong jobs report also sending the Australian dollar higher versus all of its major peers. Finally, stocks in India declined.

In addition to the conclusion of the aforementioned Bank of Japan monetary policy meeting, tomorrow’s international economic calendar will hold Italy’s trade balance and CPI from the Eurozone.

Market Insights 6/14/2017

Markets Mixed w/Rate Hike

U.S. equities finished mixed and near the unchanged mark, with the Nasdaq taking a hit on pressure from tech stocks, after the Federal Reserve’s decision to increase the target for its fed funds rate, as the move was widely expected.

Treasuries pared gains in the wake of the Fed decision, after rallying on the heels of early morning reads on retail sales and consumer price inflation that missed expectations.

Gold reversed course to finish lower, while the U.S. dollar trimmed its losses to end nearly unchanged, and crude oil prices tumbled following a bearish government inventory report.

The Markets…

The Dow Jones Industrial Average (DJIA) increased 46 points (0.2%) to 21,375

The S&P 500 Index declined 2 points (0.1%) to 2,438

The Nasdaq Composite lost 25 points (0.4) to 6,195

In moderate volume, 881 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil declined $1.73 to $44.73 per barrel and wholesale gasoline was $0.07 lower at $1.43 per gallon

The Bloomberg gold spot price decreased $7.31 to $1,259.24 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 96.97

Fed hikes rates, retail sales and consumer price inflation miss estimates

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, agreeing to raise the target for its fed funds rate by 25 bps to a range of 1.00%-1.25%, a move that was widely expected. The FOMC also kept its rate outlook intact, indicating that most Committee members projected one additional rate increase for 2017, while continuing to forecast three hikes in 2018. In its statement, the FOMC said that near-term risks to the economy are “roughly balanced,” but that the Committee “is monitoring inflation developments closely.” However, the Fed indicated that, “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the committee’s 2 percent objective over the medium term.” In a separate statement, the Fed also provided details of its plan to wind down its bloated balance sheet, by gradually shedding a fixed amount of assets on a monthly basis, but without providing a starting point for the program. The Committee said it anticipates the initial cap to be $10 billion per month–$ 6 billion from Treasuries and $4 billion from mortgage-backed securities—to increase every three months in those amounts to reach $30 billion and $20 billion, respectively.

As well, the Fed provided updated economic projections, showing only a slight upward change to gross domestic product for this year, while lowering its forecasts for inflation and the unemployment rate. In her press conference following the decision, Fed Chairwoman Janet Yellen said the upcoming rate of economic growth warrants further gradual rate hikes, while also noting that “one-off” price declines is what is behind recent softer-than-expected inflation readings. Regarding the program of trimming the balance sheet, she didn’t indicate a firm time-frame, only saying she expects it to be initiated this year and that it could take a few years to complete.

Advance retail sales for May declined 0.3% month-over-month (m/m), below the Bloomberg forecast of a flat read and compared to April’s unrevised 0.4% gain. Last month’s sales ex-autos were also down by 0.3% m/m, missing of expectations of a 0.1% gain, and following the positive revision to a 0.4% rise from the 0.3% reading seen in the previous month. Sales ex-autos and gas were flat m/m, missing estimates of a 0.3% rise, and versus April’s favorably revised 0.5% gain. The retail sales control group, a figure used to help calculate GDP, was unchanged, compared to the projected 0.3% rise, and the prior month’s figure was revised higher to a 0.6% increase from the previously reported 0.2% increase.

The Consumer Price Index (CPI) was down 0.1% m/m in May, below estimates calling for no change, while April’s 0.2% increase was unrevised. The core rate, which strips out food and energy, rose 0.1% m/m, below expectations of a 0.2% increase and compared to April’s unrevised 0.1% rise. Y/Y, prices were 1.9% higher for the headline rate, just shy of forecasts of a 2.0% rise, while the core rate was up 1.7%, below projections of a 1.9% gain. April y/y figures showed an unrevised 2.2% rise and an unadjusted 1.9% increase for the headline and core rates respectively.

The MBA Mortgage Application Index increased 2.8% last week, following the previous week’s 7.1% rise. The advance came as a 9.2% jump in the Refinance Index was met with a 2.8% decline for the Purchase Index. The average 30-year mortgage rate decreased 1 basis point (bp) to 4.13%.

Business inventories declined 0.2% m/m in April, matching forecasts, and versus March’s unrevised 0.2% increase.

Treasuries were higher, as the yield on the 2-year note declined 2 bps at 1.35%, while the yields on the 10-year note and the 30-year bond fell 7 bps to 2.15% and 2.80%, respectively.

Tomorrow’s economic calendar will again be busy, beginning with weekly initial jobless claims, forecasted to decline to 241,000 from the prior week’s 245,000, followed by the Import Price Index, with economists anticipating a 0.1% m/m decline for May, and then the Empire Manufacturing Index and Philly Fed Manufacturing Index will be released. Later in the morning, the Fed’s May industrial production and capacity utilization report will be released, forecasted to show production increased 0.2% m/m and utilization ticked higher to 76.8%, while the NAHB Housing Market Index will round out the day, with a reading of 70 expected for June, matching that seen in May.

Europe erases early gains, Asia markets diverge ahead of Fed decision

European equities erased early tech fueled gains and closed mostly lower following the disappointing economic reads from the U.S., while caution ahead of today’s Fed decision also likely kept gains and conviction in check. German Bundesbank president and European Central Bank (ECB) Governing Council member, Jens Weidmann, made remarks aimed at highlighting the risks of continuing extraordinary stimulative monetary measures for too long just days after the ECB dropped its reference to the possibility of further declines in interest rates.

In other economic news in the region, jobs data reported out of the U.K. showed that fewer payroll additions were made than expected and a miss on wage growth has intensified in the three months through April, imposing the biggest loss of household purchasing power in almost three years, per Bloomberg. The Bank of England (BoE) is expected to make its next policy decision tomorrow and BoE Governor Mark Carney has warned of possible challenging times for the rest of the year as the uncertainty surrounding Brexit is helping to keep pay subdued.

Political uncertainty remains in the U.K. following its recent elections which saw Prime Minister Theresa May’s party losing its majority resulting in a hung parliament, while the U.K.’s Brexit department has seen two of its four ministers depart this week, just days before negotiations with the European Union are set to start. The euro and British pound erased early losses and gained ground against the U.S. dollar and bond yields in the region were lower.

Stocks in Asia finished mixed as market participants eyed some data from China and awaited this afternoon’s Federal Reserve monetary policy decision. Mainland Chinese securities declined 0.7%, while those traded in Hong Kong ticked higher, as a couple of mostly in line reads on retail sales and industrial production showcased some economic resiliency for the world’s second largest economy as regulators continue to pursue a reduction of shadow banking risks.

Japanese reports on industrial production and capacity utilization showed growth that matched the previous month’s increase, but weren’t enough to influence a positive finish as stocks in the island nation dipped, while the Bank of Japan gets sent to begin its two-day monetary policy meeting tomorrow. South Korean equities declined, despite a larger-than-expected decline in the country’s unemployment rate to 3.6%, but the jobless figure for young people is still more than twice the overall level. Meanwhile, markets in Australia rallied, aided by strength in financial listings and despite a report that showed a decline in consumer sentiment.

In addition to the Bank of England meeting, tomorrow’s international economic calendar will include employment data from Australia, India’s trade balance, CPI from France and Italy, retail sales from the U.K., and the Eurozone’s trade balance.

Market Insights 6/13/2017

Stocks Advance

U.S. stocks traded higher as technology issues recovered from a two-session slide to lead the advance, though gains may have been limited ahead of tomorrow’s Fed monetary policy decision, with a rate hike widely anticipated.

Treasuries were mixed but mostly flat despite a hotter-than-expected wholesale price inflation report. The U.S. dollar dipped, gold saw minor gains and crude oil prices were also higher.

The Markets…

The Dow Jones Industrial Average (DJIA) increased 93 points (0.4%) to 21,328

The S&P 500 Index gained 11 points (0.5%) to 2,440

The Nasdaq Composite jumped 45 points (0.7%) to 6,220

In moderately-heavy volume, 825 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.38 to $46.46 per barrel and wholesale gasoline was $0.01 higher at $1.50 per gallon

The Bloomberg gold spot price increased $0.74 to $1,266.92 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 97.00

Producer price inflation mostly tops forecasts, small business optimism holds steady

The Producer Price Index (PPI) showed prices at the wholesale level in May were flat month-over-month, matching the Bloomberg expectation and compared to April’s unrevised 0.5% gain. The core rate, which excludes food and energy, was up 0.3%, versus forecasts of a 0.1% advance and April’s unrevised 0.4% increase. Y/Y, the headline rate was 2.4% higher, above projections of a 2.3% increase, and the core PPI increased 2.1% last month, topping estimates of a 1.9% gain. In April, producer prices were 2.5% higher and up 1.9% for the headline and core rates, respectively.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for May remained at April’s unrevised 104.5 level, matching expectations.

Treasuries were mixed and little changed, with the yield on the 2-year note increasing 1 basis point to 1.36%, while the yields on the 10-year note and the 30-year bond decreased 1 bp to 2.21% and 2.86%, respectively.

Recently, bond yields have rebounded somewhat from a bout of pressure that stemmed from heightened political uncertainty on both sides of the Atlantic, as well as some mixed economic data. Also, the two-day Federal Open Market Committee’s (FOMC) monetary policy meeting, which began today, is expected to yield a 25 bp increase to the target federal funds rate. However, the markets have grappled with the timing and frequency of further rate hikes and the likelihood that the Central Bank will begin the process of shrinking its huge balance sheet later this year. Tomorrow’s statement accompanying the decision, as well as updated economic projections and subsequent press conference by Chairwoman Janet Yellen, are poised to garner heavy scrutiny.

Before the FOMC concludes its meeting tomorrow, we will get some key May economic reports, with the Consumer Price Index expected to show core inflation was just shy of the Fed’s target of 2.0% y/y, along with retail sales, projected to continue to nudge higher m/m. Weekly MBA mortgage applications will also be released, as well as April business inventories.

Europe mostly higher and Asia stabilizes as tech stocks rebound

European equities finished mostly higher, with the technology sector rebounding from yesterday’s drop, while the markets looked ahead to tomorrow’s monetary policy decision in the U.S., as well as decisions out of the U.K., Switzerland and Japan this week. The U.K. remained in focus amid heightened political uncertainty as Prime Minister May deals with the fallout from last week’s surprising election that resulted in a hung parliament. The election fostered uncertainty regarding the timing of Brexit negotiations and whether they will yield hard or softer exit terms.

In other economic news, German investor confidence came in mixed, with the current conditions component unexpectedly improving, while the outlook portion surprisingly declined. The euro was little changed versus the greenback and bond yields in the region were mixed.

Stocks in Asia finished mixed to mostly higher on the heels of yesterday’s decline that came courtesy of the rollover in the U.S. technology sector from a recent rally, while the markets look to monetary policy decisions out of the U.S., Japan and the U.K. this week. Japanese equities dipped with the yen paring some of yesterday’s gains on increased global uncertainties and a disappointing read on the nation’s capital spending.

Indian stocks finished flat, as the markets pause near record highs and digest data showing the nation’s consumer price inflation was cooler than expected, though industrial production topped forecasts. Shares trading in mainland China and Hong Kong advanced, while South Korean listings also moved to the upside, with technology issues showing some signs of stabilization in the region from the flare-up in volatility yesterday. Australian securities returned to action from yesterday’s holiday in positive fashion, rallying amid a recovery in the financial sector.

Tomorrow, the international economic docket will include industrial production and capacity utilization from Japan, retail sales and industrial production from China, wholesale prices from Australia, CPI from Germany, industrial production from the Eurozone and employment data from the U.K.

Market Insights 6/12/2017

Tech Decline Continues

U.S. stocks traded lower, with technology stocks again leading the decline, while market participants appeared cautious ahead of this week’s monetary policy decisions from the Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank.

Treasury yields ticked higher, crude oil prices recovered a bit of ground and the U.S. dollar and gold were little changed.

In equity news, Dow member General Electric announced its CEO Jeff Immelt will retire.

The Markets…

The Dow Jones Industrial Average (DJIA) decreased 36 points (0.2%) to 21,236

The S&P 500 Index lost 2 points (0.1%) to 2,429

The Nasdaq Composite shed 32 points (0.5%) to 6,175

In heavy volume, 951 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.25 to $46.08 per barrel and wholesale gasoline was $0.01 lower at $1.49 per gallon

The Bloomberg gold spot price decreased $1.42 to $1,265.34 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly 0.1% lower at 97.20

Dow member General Electric Co. announced that Chairman and Chief Executive Officer (CEO) Jeff Immelt will retire and John Flannery, current President and CEO of GE Healthcare has been named CEO of the company, effective August 1, 2017. GE noted that Immelt will remain Chairman through his retirement on December 31, 2017 and the leadership change is the result of a succession plan that had been run by the Board since 2011. Flannery will become Chairman and CEO January 1, 2018.

The technology sector remained in focus today, extending Friday’s selloff that gave back some of a decisive rally that has led to a plethora of record highs for the stock markets. The tech run likely won’t go on forever, nothing does, but we don’t see the unabashed enthusiasm for the group that would make us more concerned, and valuations aren’t extended to the point that we believe investors should start to worry. That doesn’t mean investors who have developed too large a position in tech relative to their risk tolerances shouldn’t rebalance and take some profits. But we continue to see positive developments and believe the run in the tech sector still has further to go.

Fed monetary policy headlines heavy weekly economic calendar

Treasuries ticked lower as the economic calendar was void of any major release today. The yield on the 2-year note increased 2 basis points to 1.35%, while the yields on the 10-year note and the 30-year bond added 1 bp to 2.21% 2.87%, respectively.

Treasury yields modestly extended a recent rebound from heightened domestic and European political uncertainty, mixed economic data, the Fed’s highly expected rate hike this week and the likelihood that the Fed could begin the process of shrinking its large balance sheet later this year.

The markets are looking to this week’s fully-loaded economic calendar, highlighted by the Consumer and Producer Price Indexes (CPI & PPI), NFIB Small Business Optimism, retail sales, industrial production and capacity utilization, the NAHB Housing Market Index, housing starts and building permits, and the preliminary University of Michigan Consumer Sentiment Index. However, the headlining event will likely be Wednesday’s Federal Open Market Committee’s (FOMC) monetary policy decision. A 25 bp hike to the target fed funds rate is highly expected, but the accompanying statement, updated economic projections and subsequent press conference by Chairwoman Janet Yellen are poised to garner heavy attention.

As noted previously, we believe the market will likely largely look past the expected FOMC rate hike, and focus more on any information with regard to the Fed’s balance sheet. It is now expected that the Fed will begin the process of slowly reducing its bloated balance sheet by the end of this year, but that process (and commentary surrounding it) could be a source of elevated volatility in the months to come. Our continued belief that the bull market has legs, but why investors should be aware that risks are elevated.

Tomorrow, the U.S. economic calendar will commence with the latest National Federation of Independent Business (NFIB) Small Business Optimism Index, forecasted to remain near historical record highs at a level of 104.5 for May, which will be followed by the Producer Price Index (PPI) for May, expected to have not changed m/m after increasing 0.5% in April, while excluding food and energy, the core rate is anticipated to have increased by 0.1%.

European equities down on politics, Asian stocks also see some pressure

European equities lost ground, with technology issues decisively lower on the heels of Friday’s selloff in the sector in the U.S., while traders appeared cautious amid looming monetary policy decisions this week out of the U.S., U.K. Switzerland and Japan. The British pound extended late last week’s slide versus the U.S. dollar, to lend some relative support to U.K. stocks. The markets grappled with the recent U.K. election that surprisingly resulted in a hung parliament and fostered uncertainty regarding the timing of Brexit negotiations and whether they will yield hard or softer exit terms. Political uncertainty was also supported by local elections in Italy, which faces a national election later this year, showing the populist Five Star Movement suffered a setback. Fallout from France’s recent election remained in focus, with President Macron appearing set to gain a large parliamentary majority following this weekend’s first round vote. Germany is also headed for an election later this year.

In economic news, French business sentiment held steady in May, while Italian industrial production missed expectations for April. The euro ticked higher versus the greenback and bond yields in the region were mostly lower. However, the oil & gas sector was the lone group in the green as crude oil prices rebounded somewhat from a recent tumble in the wake of last month’s disappointing OPEC production cut extension and last week’s noticeably bearish U.S. oil inventory data.

Stocks in Asia finished lower as Friday’s selloff in the technology sector in the U.S. carried over to the region, causing a flare-up in uneasiness toward the group that has led the rally in the stock markets. The global markets are awaiting this week’s key monetary policy decisions, with the Bank of England, Bank of Japan and Swiss National Bank set to deliver statements after Wednesday’s highly-anticipated announcement from the Fed in the U.S., which is expected to deliver a rate hike.

However, political uncertainty remained on the heels of last week’s U.K. election that led to a hung parliament. Japanese equities declined, with the yen gaining some ground and following a report that showed the nation’s machine orders—a gauge of capital spending—unexpectedly fell in April. Stocks trading in mainland China and Hong Kong decreased, Indian securities traded lower and South Korean shares dropped. Australian markets were closed for a holiday.

The international economic docket for tomorrow will deliver the BSI All Industry Index and a manpower survey from Japan, business confidence from Australia, CPI, PPI and housing data from the U.K., the Wholesale Price Index from Germany and non-farm payrolls from France.

Sector Watch: A Focus on Inflation

A Sub-2% Y/Y Rise in Core CPI Should Continue to Support High Valuations

Tech investors experienced a rude awakening during the first week in June, as the S&P 1500 Tech sector fell 2.2% along with 11 of its 14 sub-industries. However, this sell-off was a concentrated collapse, as 70% of all 149 sub-industries in the S&P 1500 rose on Friday and 54% were up for the week. In addition, the percentage of all sub-industries that were trading above their 10-week moving average increased from 68% on June 2 to 76% as of June 9. In the week ahead, investors would be wise to focus on the release of inflation data, which may continue to serve a supporting role in maintaining elevated valuations.

U.S. inflation indicators remain subdued. On Wednesday, the CPI reading for May is expected to show a y/y decline in the headline indicator to 1.9% from 2.2%. Also, the y/y core reading is expected to slip to 1.8% from 1.9%. Inflation and valuations are two sides to the same coin, as low inflation has traditionally served as a support to higher P/E ratios. The U.S. is currently in the second-lowest quintile of Core CPI (between 1.8% and 2.3%) in the past 60 years, in which the trailing 12-month P/E for the S&P 500 using GAAP, or “As Reported” EPS averaged nearly 25X, or 3% above where we are today. What’s more, the S&P 500 rose an average of 10.6% in the following 12-months and gained in price 82% of the time whenever inflation was this low.

The FOMC will likely raise the Fed funds rate by 25 basis points on Wednesday. Today, the difference between the y/y change in Core CPI and the average monthly Fed funds rate is -1.0 percentage points, vs the average of +1.3 points since 1958. Should the Fed raise rates as expected, and Core CPI comes in as predicted, this differential will be -0.80, which is encouraging, since the S&P 500 never slipped into a bear market when the differential was below zero, and only in 1961 and 1968 did a bear market occur when the differential was between zero and +1.0.

So there you have it. History says, but does not guarantee, that today’s low inflation reading supports currently elevated valuations, and even implies that the S&P 500 is undervalued by 3%. That said, even though the negative differential between Fed funds and the y/y change in Core CPI offers encouragement, however, we don’t believe investors should inflate their exposure to equities on these dips as we enter the lower-volume summer trading period.

Any profit taking should be allocated to cash positions until we see some additional data unfold.

Market Insights 6/9/2017

Tech Troubles, Stocks Mixed

U.S. equities finished a volatile session mixed as strength in financial and energy issues was countered by a tumble in technology stocks, which led the Nasdaq sharply lower on heavy volume.

The U.S. dollar gained ground, gold was lower and crude oil prices were slightly to the upside. Treasuries continued a recent move lower with yeilds ticking higher.

The Markets…

The Dow Jones Industrial Average (DJIA) increased 89 points (0.4%) to 21,272

The S&P 500 Index lost 2 points (0.1%) to 2,432

The Nasdaq Composite tumbled 114 points (1.8%) to 6,208

In heavy volume, 984 million shares were traded on the NYSE and 3.1 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.19 to $45.83 per barrel and wholesale gasoline was $0.01 higher at $1.50 per gallon

The Bloomberg gold spot price decreased $7.10 to $1,272.90 per ounce, and

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 97.28.

Markets were mixed for the week, as the DJIA advanced 0.3%, the S&P 500 Index declined 0.3%, and the Nasdaq Composite fell 1.6%.

Wholesale inventories revised lower

Wholesale inventories were revised down to a 0.5% month-over-month (m/m) decline for April, versus the Bloomberg forecast of an unrevised preliminary 0.3% decrease, and following March’s unrevised 0.1% rise. Sales were 0.4% lower m/m, after March’s negatively revised 0.2% decline. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at March’s 1.28 months level.

Treasuries finished lower with the yields on the 2-year and 10-year notes rising 2 basis points (bps) to 1.34% and 2.21%, respectively, while the 30-year bond rate gained 1 bp to 2.86%. Treasury yields continued a rebound from recent pressure that came amid heightened domestic and European political uncertainty, mixed economic data, and the Fed’s highly expected rate hike next week and the likelihood that the Fed could begin the process of shrinking its large balance sheet later this year.

Europe gains as markets react to U.K. election, Asia also ticks higher

European equities finished higher, with the markets digesting yesterday’s U.K. election results that showed Prime Minister Theresa May’s Party lost a majority, resulting in a hung parliament. The British pound dropped sharply versus the U.S. dollar, providing some support to U.K. stocks, as the outcome fostered Brexit uncertainty regarding the timing of negotiations and whether it will result in a hard of softer exit terms.

In economic news, German exports rose more than expected, while industrial and manufacturing production out of France and the U.K. came in softer than expected. Also, the U.K. trade deficit narrowed more than expected. The euro modestly extended yesterday’s decline versus the greenback that stemmed from the European Central Bank’s monetary policy decision that showed the central bank upgraded its economic outlook but lowered its inflation forecast. Bond yields in the region traded mixed.

Stocks in Asia finished mostly to the upside, with the global markets taking yesterday’s vote that led to a hung parliament in the U.K., the ECB’s changed language and outlook, and fired FBI Director Comey’s testimony in the U.S. in stride. Japanese equities gained ground, with the yen giving back some recent gains, while South Korean shares also advanced. Mainland Chinese stocks rose, but those traded in Hong Kong dipped on the heels of a report that showed consumer price inflation rose in line with forecasts, while wholesale price increases slowed more than expected for May. Australian securities finished flat and Indian equities moved higher.

Stocks mixed as technology sees late-week stumble

Stocks finished mixed, with a late-week pullback in technology issues from a decisive rally as of late weighing on the markets. Stocks showed little reaction to some highly-anticipated events such as the relatively surprising U.K. election, the European Central Bank’s mixed outlook and apparent dovish tone by President Mario Draghi and former FBI Director Comey’s testimony on Capitol Hill. Financials led the charge, with Treasury yields and the U.S. dollar rebounding from a recent drop. Energy stocks also showed some resiliency, gaining ground despite pressure on crude oil prices that has persisted since last month’s disappointing extension of OPEC production cuts, exacerbated by this week’s unexpected jump in U.S. oil inventories. Economic data was relatively light, though the ISM non-Manufacturing Index showed growth continued for the all-important services sector and the JOLTS Job Openings report hit a record high.

The markets are looking to next week’s fully-loaded economic calendar, highlighted by the Consumer and Producer Price Indexes (CPI & PPI), NFIB Small Business Optimism, retail sales, industrial production and capacity utilization, the NAHB Housing Market Index, housing starts and building permits, and the preliminary University of Michigan Consumer Sentiment Index. However, the headlining event will likely be the Federal Open Market Committee’s (FOMC) monetary policy decision. A 25 bp hike to the target fed funds rate is highly expected, but the accompanying statement, updated economic projections and subsequent press conference by Chairwoman Janet Yellen are poised to garner heavy attention.

We believe the market will likely largely look past the expected FOMC rate hike, and focus more on any information with regard to the Fed’s balance sheet. It is now expected that the Fed will begin the process of slowly reducing its bloated balance sheet by the end of this year, but that process (and commentary surrounding it) could be a source of elevated volatility in the months to come.

International reports due out next week that deserve a mention include: Australia—consumer confidence and employment change. China—lending statistics, retail sales and industrial production. India—CPI, industrial production and trade balance. Japan—Bank of Japan monetary policy decision, machine orders and industrial production. Eurozone—industrial production, Q1 employment, trade balance and CPI, along with German investor confidence. U.K.—Bank of England monetary policy decision, CPI, retail sales and employment change.