A 5%+ Decline is Overdue, but a New Bear Market Does Not Appear Likely

Just as the S&P 500 was preparing to vault the 2500 level, it was sideswiped by geopolitical tensions that caused many investors to wonder if this previously unstoppable advance finally hit the wall and is now vulnerable to a digestion (which would be refreshing), a pullback (which would be healthy), or a correction (which would be scary, but would reset the clock quite nicely). Still others warn of an impending bear market, either because they see signs of an emerging near-term top or they are just seeking attention.

Since WWII, there have been 56 pullbacks (-5% to -9.9%), 21 corrections (-10% to -19.9%), and 12 bear markets (-20%+), not to mention countless “digestions” of below 5%. On average, only six months have separated the end of one decline of 5% or more until the start of the next one. Yet more than 85% of all declines in excess of 5% turned around before eclipsing the -20% decline threshold that would have classified them as bear markets and then recovered all that was lost in an average of only four months.

Therefore, calling for a bear market and recommending that investors lighten up their exposure to equities may end up doing more harm than good to their portfolios and psyche. Still, the question has frequently been raised whether one can spot an impending bear by monitoring economic, fundamental, and sentiment data by comparing current levels with prior market tops. The phrase “easier said than done” comes to mind, however, as these readings have usually been mixed at market tops, offering little guidance on sidestepping the onrush of a new bear market.

Many indicators currently show an economy that is far from overheating, is supported by low interest rates, and is encouraged by a steep yield curve. However, the number of months since the last decline of 5% or more, combined with elevated valuations (despite low inflation), imply that the market needs to rest, but may not necessarily R.I.P.

No one knows for sure when the next bear market will strike. Yet based on comparisons with prior market tops, the decline will probably be the kind that is refreshing, healthy, or even a bit scary, but not overly damaging to one’s portfolio in either time or magnitude. So while a digestion, pullback or correction may be a near-term possibility, we think a new bear market is most likely not lurking around the corner.

U.S. Market Weekly Summary – Week Ending 08/11/2017

S&P 500 Posts 1.4% Weekly Drop in Broad Decline Led by Energy, Financials; Consumer Staples Only Gainer

The Standard & Poor’s 500 index fell 1.4% this week, with the energy and financial sectors leading a broad decline amid concerns about tensions between the US and North Korea.

The market benchmark ended the week at 2,441.32, down from last Friday’s closing level of 2,476.83. The energy sector had the largest percentage decline of the week, down 2.9%, while the financial sector wasn’t far behind with a 2.7% drop. The materials sector was also down more than 2% while another six sectors were down by at least 1% each. Just one managed to eke out a gain this week: Consumer staples added a mere 0.1%.

The week’s broad decline came as threats were exchanged between the US and North Korea, with US President Donald Trump’s “fire and fury” remark drawing particular attention.

The energy sector’s drop also came as the Organization of the Petroleum Exporting Countries released data showing its oil output increased in July even as OPEC has been trying to cut down on oversupply. Among the week’s decliners, Chesapeake Energy (CHK) tumbled 8.6%, Apache (APA) shed 6.3% and Concho Resources (CXO) lost 2.8%.

Financial stocks were among the hardest-hit by investors’ move away from riskier assets amid the concerns about tensions between the US and North Korea. Among the decliners, MetLife (MET) shares fell 13% this week after the insurance company completed its spin-off of Brighthouse Financial (BHF) and said it is seeking consent from holders of four outstanding series of junior subordinated debt and MetLife Capital Trust IV’s trust securities to amend supplemental indentures.

Market Insights 8/11/2017

Equities Rally Back

U.S. equities finished the week on a high note following a three-day slide that has come courtesy of escalating tensions between North Korea and the U.S.

Treasury yields were mixed and the U.S. dollar was nearly flat, as another lackluster inflation report appeared to have dampened expectations of another Fed rate hike this year.

Crude oil inched higher gold extended a recent rally.

The Markets…

The Dow Jones Industrial Average advanced 14 points (0.1%) to 21,858

The S&P 500 Index was 3 points (0.1%) higher at 2,441

The Nasdaq Composite rose 40 points (0.6%) to 6,257

In moderate volume, 790 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.23 higher to $48.82 per barrel and wholesale gasoline was up $0.01 at $1.61 per gallon

The Bloomberg gold spot price gained $4.45 to $1,290.98 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.06

Markets were lower for the week, as the DJIA decreased 1.1%, the S&P 500 Index fell 1.4% and the Nasdaq Composite was 1.5% lower.


Consumer price inflation misses forecasts

The Consumer Price Index (CPI) ticked 0.1% higher month-over-month in July, versus the Bloomberg estimate calling for a 0.2% gain, while June’s flat reading was unrevised. The core rate, which strips out food and energy, also nudged 0.1% to the upside m/m, compared to expectations of a 0.2% increase and matching June’s unrevised rise. Y/Y, prices were 1.7% higher for the headline rate, below forecasts of a 1.8% rise, while the core rate was up 1.7%, in line with projections. June y/y figures showed an unrevised 1.6% rise and an unadjusted 1.7% increase for the headline and core rates respectively.

Prices for shelter, medical care, recreation and apparel all rose, slightly more than offsetting declines for autos, communication and household furnishing. The core rate remained below the Fed’s 2.0% target for the third-straight month, causing uncertainty regarding if the Central Bank has one more rate hike in it this year as it also aims to start to shrink its behemoth $4.5 trillion balance sheet.

The period of weak inflation continues, which Fed chair Janet Yellen has suggested is somewhat due to temporary factors. However, to date, the Fed has raised rates four times; yet over that same period, financial conditions have actually loosened. This is why the Fed feels it can continue to tighten policy in the face of lower inflation. Liz Ann adds that the Fed has signaled that September is likely the start point to balance sheet shrinkage, but eyes will be on the Jackson Hole annual conference and a potential debt ceiling stand-off for opportunities to further steer consensus around that timing.

Treasuries finished mixed, as the yield on the 2-year note declined 3 basis points (bps) to 1.29%, while the yield on the 10-year note dipped 1 bp to 2.19% and the 30-year bond rate ticked 1 bp higher to 2.79%.

Europe and Asia continue to see pressure

Most European equities extended a weekly slide, with all major market sectors seeing pressure. Global sentiment remained hampered by escalating tensions between North Korea and the U.S., which continued to foster risk aversion. The euro rose and British pound was little changed versus the U.S. dollar, while bond yields in the region lost ground. In economic news, inflation data out of Germany and France matched expectation for July.

What are fund flows telling us about trends and risks in the global stock market?, that the money coming into ETFs is flowing into a broad range of stock markets featuring a preference for international stocks and revealing a surprising disconnect with the performance and geopolitical risk of the underlying markets. However, healthcare issues gained solid ground to help German markets stabilize.

The U.K. FTSE 100 Index and France’s CAC-40 Index were down 1.1%, Italy’s FTSE MIB Index fell 1.5%, Switzerland’s Swiss Market Index traded 0.7% lower, and Spain’s IBEX 35 Index dropped 1.6%, while Germany’s DAX Index was little changed.

Stocks in Asia fell broadly after yesterday’s solid drops in the U.S. and Europe as the global markets continue to rein in risk appetites amid ramped-up tensions between the U.S. and North Korea as rhetoric from both sides escalate. The Japanese yen rallied but markets in Japan were closed for a holiday. Schwab’s Jeffrey Kleintop, CFA, notes in his article, Missiles and Markets: An investor guide to geopolitical risks investors are best served when grim headlines are in the news by remembering that geopolitical risks are a regular part of investing and that a long history of geopolitical developments shows us that holding a well-diversified portfolio may buffer the short-term market moves that are most often the result. Investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. Read more on the International Investing page at www.schwab.com.

Stocks in South Korea fell sharply, as did those traded in mainland China and Hong Kong, with the global uneasiness being met with reports that Chinese regulators are investigating the nation’s internet companies for cyber-security violations. After the closing bell, Hong Kong reported stronger-than-expected Q2 GDP growth. Australian securities traded noticeably to the downside and India’s markets were lower. After the markets closed, India reported an unexpected dip in industrial production for June.

Stocks Fall as volatility sparks up

U.S. stocks fell on the week as volatility showed signs of life on increased geopolitical concerns, with the U.S. and North Korea lobbing threats and warnings at each other. The earnings and economic fronts delivered mixed results to further dampen conviction. The Street cheered Michael Kors Holdings Ltd’s and Ralph Lauren Corp’s better-than-expected earnings despite declining sales but jeered similar results from Macy’s Inc. (M $21) and Kohl’s Corp. Dow member Walt Disney Co. came under pressure after its top-line and bottom-line results diverged and analysts’ scrutinized its new streaming service deal and plans. Of the 454 companies in the S&P 500 that have reported earnings so far, about 68% have topped revenue forecasts and roughly 78% have exceeded earnings projections, per data compiled by Bloomberg.

While inflation figures were cooler than expected, the Labor Department’s Job Openings jumped to a record high and small business optimism improved to the highest since February. The U.S. dollar, Treasury yields and crude oil prices all finished lower on the week, along with most major market sectors, though consumer staples issues eked out a weekly advance.

Next week, the retail sector will remain in focus as Dow members Wal-Mart Stores Inc. and Home Depot Inc. along with Target Corp. will put the finishing touches on earnings season, while we will get the release of July retail sales. The housing market will also garner attention amid the releases of the NAHB Housing Market Index, as well as housing starts and building permits (economic calendar). Rounding out the busy week, the Fed will deliver its industrial production and capacity utilization report and the minutes from its July meeting, while we will get our first look at the consumer for August, in the form of the preliminary University of Michigan Consumer Sentiment Index.

International reports due out next week that deserve a mention include: Australia—employment change. China—lending statistics, retail sales, industrial production and property prices. India—trade balance and inflation statistics. Japan—Q2 GDP and trade balance. Eurozone—industrial production, Q2 GDP, trade balance, CPI, and the minutes from its July monetary policy meeting. U.K.—inflation statistics, employment change and retail sales.

Company and Earnings News

J.C. Penney Co. Inc. reported a Q2 loss of $0.20 per share, or $0.09 ex-items, versus the FactSet estimate of a $0.04 per share shortfall, as revenues increased 1.5% year-over-year to $3.0 billion, topping the projected $2.8 billion. Q2 same-store sales declined 1.3% y/y, versus the expected 1.2% decrease. JCP said it liquidated inventory in 127 off its closing stores which had a negative impact on gross margin and earnings-per-share (EPS). The company added that while broader retail remains challenged, nearly all categories delivered improved sales results, and it is encouraged by the improved performance in its total apparel business. JCP reaffirmed its full-year guidance.

NVIDIA Corp. posted Q2 EPS of $0.92, or $1.01 ex-items, versus the projected $0.70, as revenues rose 56.0% y/y, or up 15.0% quarter-over-quarter, to $2.2 billion, north of the expected $2.0 billion. The graphics chipmaker’s gaming revenue topped expectations, but its data center sales missed forecasts and its gross margin came in a bit shy of estimates. NVDA issued Q3 revenue guidance with a midpoint above forecasts.

Snap Inc. announced a Q2 loss of $0.36 per share, wider than the forecasted $0.30 shortfall, as revenues rose 153.0% y/y to $182 million, south of the estimated $186 million. The social media company’s daily active users missed expectations.

Market Insights 8/10/2017

A Wave of Global Equity Declines

U.S. stocks fell, joining a broad-based global equity decline as the global markets dialed back risk appetites on the increased tension between the U.S. and North Korea.

Technology and financial issues led the drop, followed closely by consumer discretionary stocks as uneasiness toward the retail sector remains despite better-than-expected earnings results from Kohl’s and Macy’s.

In economic news, wholesale price inflation came in cooler than estimated, gold was higher and Treasury yields, crude oil prices and the U.S. dollar were lower.

The Markets…

The Dow Jones Industrial Average declined 205 points (0.9%) to 21,844

The S&P 500 Index lost 36 points (1.4%) to 2,438

The Nasdaq Composite tumbled 135 points (2.1%) to 6,217

In moderate to heavy volume, 859 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil decreased by $0.97 to $48.59 per barrel and wholesale gasoline was unchanged at $1.62 per gallon

The Bloomberg gold spot price was $8.25 higher at $1,285.55 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.2% lower at 93.40

Wholesale price inflation cooler than expected, jobless claims rise

The Producer Price Index (PPI) showed prices at the wholesale level in July were down 0.1% month-over-month, versus the Bloomberg expectation to match June’s 0.1% increase. The core rate, which excludes food and energy, also dipped 0.1%, compared to forecasts of a 0.2% advance and June’s unrevised 0.1% increase. Y/Y, the headline rate was 1.9% higher, below projections of a 2.2% increase, and the core PPI rose 1.8% last month, missing estimates of a 2.1% gain. In June, producer prices were 2.0% higher and up 1.9% for the headline and core rates, respectively.

Tomorrow, the economic calendar will culminate with the highly-anticipated release of the Consumer Price Index, projected to show a 0.2% m/m increase in prices at the headline level for July, after being flat in June, while the core rate is also expected to increase 0.2% after the prior month’s 0.1% gain. Compared to last year, prices are forecasted to be 1.8% higher, up from June’s 1.6% rise, and core inflation is estimated to remain at the prior month’s 1.7% pace. Core prices are anticipated to post the third-straight month below the Fed’s 2.0% target, but the markets continue to expect the Central Bank to raise rates one more time this year and begin the process of shrinking its behemoth $4.5 billion balance sheet.

Weekly initial jobless claims rose by 3,000 to 244,000 last week, above forecasts of 240,000, with the prior week’s figure being revised higher by 1,000 to 241,000. The four-week moving average declined by 1,000 to 241,000, while continuing claims decreased 16,000 to 1,951,000, south of estimates of 1,960,000.

Treasuries traded higher, with the yield on the 2-year note slipping 1 basis point (bp) to 1.33% and the yields on the 10-year note and the 30-year bond dipping 4 bps to 2.20% and 2.78%, respectively.

Treasury yields extended yesterday’s dip but the U.S. Dollar Index paused from a slight rebound as the inflation data met skittish global markets amid the flared-up geopolitical tensions.

Europe extends yesterday’s drop, Asia declines as N Korean uneasiness lingers

European equities added to yesterday’s drop, leading a global market slide with festering concerns about escalated tensions between North Korea and the U.S. continuing to dampen sentiment. All major sectors traded lower, with some economic data in the region also disappointing. French industrial production fell more than expected in June and manufacturing output in the U.K. came in flat for June. Moreover, the U.K. trade deficit widened unexpectedly in June. The euro was flat and the British pound dipped versus the U.S. dollar, while bond yields in the region finished mixed.

The U.K. FTSE 100 Index and Spain’s IBEX 35 Index fell 1.4%, Germany’s DAX Index dropped 1.2%, France’s CAC-40 Index declined 0.6%, Switzerland’s Swiss Market Index traded 0.9% lower, and Italy’s FTSE MIB Index decreased 0.8%.

Stocks in Asia finished lower for a second day as the global markets remain uneasy regarding recently flared-up geopolitical tensions. The escalation came amid reports that North Korea said it was examining a plan to strike the U.S. territory of Guam with missiles on the heels of a warning from U.S. President Donald Trump and the recent increased U.N. sanctions against North Korea.

Japanese equities dipped ahead of tomorrow’s holiday, with the yen stabilizing from yesterday’s jump to help the markets but a read on the nation’s key machine orders—a gauge of capital investment—unexpectedly fell in June. Stocks trading in both South Korea and India declined. Australian securities nudged lower. Mainland China and Hong Kong saw shares fall, with the North Korean tensions joining this week’s disappointing trade data and softer-than-expected inflation figures.

Market Thoughts from the CIO

Investors may be taking comfort in the muted degree by which stocks, gold and the dollar have responded to the increase in threatening rhetoric between the U.S. and North Korea, implying that a Cuban Missile Crisis-type showdown might not be the most likely outcome.

Despite the market’s vulnerability to a near-term decline, its heretofore performance conjures up some historically favorable factoids. Since WWII, an above-average number of new highs year to date through July typically increased the S&P 500’s frequency and magnitude of price gains in the final five months of the year.

What’s more, history suggests, but does not guarantee, that worries over 1999-like narrow leadership are unfounded. In the past 12 months, not only have there been nearly twice as many companies in the S&P 500 hitting daily 52-week highs than in 1999 (and 25% more than the average since 1984), but new lows have also been nearly two-thirds lower than that for the final year of the tech bubble and 50% less than the long-term average.

Market Insights 8/9/2017

Rising Tension with North Korea

After what many thought would be an digressive sell-off U.S. stocks traded lower as global sentiment struck a nervous chord amid a flare-up in tension between North Korea and the U.S.

Treasury yields and the U.S. dollar were lower, while gold and crude oil prices were higher. In economic developments, Q2 productivity and June wholesale inventories topped forecasts.

The Markets…

The Dow Jones Industrial Average declined 37 points (0.2%) to 22,049

The S&P 500 Index lost 1 point to 2,474

The Nasdaq Composite decreased 18 points (0.3%) to 6,352

In moderate volume, 805 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil increased by $0.39 to $49.56 per barrel and wholesale gasoline was unchanged at $1.62 per gallon

The Bloomberg gold spot price was $18.92 higher at $1,257.69 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.1% lower at 93.54

Q2 productivity tops forecast, labor costs miss and mortgage applications rise

Preliminary Q2 non-farm productivity rose 0.9% on an annualized basis, versus the Bloomberg expectation of a 0.7% gain, following the upwardly revised 0.1% increase seen in Q1. Unit labor costs advanced 0.6%, below the forecast calling for a 1.1% gain. Unit labor costs were revised solidly higher to a rise of 5.4% in Q1.

The MBA Mortgage Application Index rose 3.0% last week, following the previous week’s 2.8% drop. The increase came as a 5.3% jump in the Refinance Index was met with a 0.8% gain for the Purchase Index. The average 30-year mortgage rate declined 3 basis points to 4.14%.

Wholesale inventories were revised higher to a 0.7% month-over-month gain for June, versus forecasts of an unrevised preliminary 0.6% increase, and following May’s favorably adjusted 0.6% rise. Sales were 0.7% higher m/m, after May’s favorably revised 0.1% decline. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at May’s 1.29 months pace.

Treasuries were higher, with the yields on the 2-year and 10-year notes declining 1 bp to 1.34% and 2.25%, respectively, while the yield on the 30-year bond decreased 2 bps to 2.83%. The yield curve had steepened somewhat and the U.S. Dollar Index attempted to continue a bit of a rebound from lows not seen since May 2016, which was bolstered by recent stronger-than-expected employment data, headlined by Friday’s July labor report.

Tomorrow, the U.S. economic calendar will yield the Producer Price Index (PPI) for July, with prices at the producer level expected to have ticked 0.1% higher m/m, while the core rate, which excludes food and energy, is anticipated to have increased 0.2% m/m. We’ll also receive the latest report on weekly initial jobless claims, forecasted to remain at the prior week’s 240,000 level.

Europe sees pressure as geopolitical tensions rise, Asia mostly lower on China data

European equity markets moved broadly lower, with risk aversion ramping up in the wake of heightened geopolitical tensions between North Korea and the U.S. in the wake of continued warnings from the latter and a reported threat from the former overnight. The euro dipped and the British pound ticked higher versus the U.S. dollar, while bond yields in the region finished mostly lower. In economic news, French industrial sentiment unexpectedly rose in July, while Italian industrial production rose more than expected.

Stocks in Asia finished mostly to the downside with sentiment a bit weary on increased geopolitical tensions. North Korea reportedly said it was carefully examining a plan to strike the U.S. Pacific territory of Guam with missiles following a warning from U.S. President Donald Trump and the recent increased U.N. sanctions against North Korea.

Japanese equities fell, with the yen gaining ground on the heightened geopolitical concerns, while South Korean shares dropped. Chinese July inflation data came in cooler than expected to further dampen conviction, with mainland stocks declining and Hong Kong equities decreasing. Indian securities traded lower, though a rebound in the recently pressured financial sector, along with strength in technology stocks helped push Australian issues higher.

The international economic docket for tomorrow will lead with machine orders, PPI and the Tertiary Industry Index from Japan and a read on consumer inflation expectations from Australia. Reports from across the pond will include industrial and manufacturing production from France and the U.K. and the trade balance from the U.K. and Italy.

Market Insights 8/8/2017

North Korean Threat Upgrade

U.S. stocks gave up gains in the final hour of trading to finish the regular trading session lower after President Trump commented on threats from North Korea.

Earlier in the trading day, the Dow and S&P 500 both rose to record-highs on the heels of reports that showed domestic job openings jumped and small business optimism surprisingly improved.

The U.S. dollar and gold advanced, while Treasuries and crude oil prices declined.

The Markets…

The Dow Jones Industrial Average declined 33 points (0.2%) to 22,085

The S&P 500 Index lost 6 points (0.2%) to 2,475

The Nasdaq Composite decreased 13 points (0.2%) to 6,370

In moderate volume, 772 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil declined by $0.22 to $49.17 per barrel and wholesale gasoline was $0.01 lower at $1.62 per gallon

The Bloomberg gold spot price was $2.92 higher at $1,257.69 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.2% higher at 93.62

Job openings jump to record high, small business optimism unexpectedly improves

The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, jumped to a level of 6.16 million jobs available to be filled in June—a record high—from May’s upwardly revised 5.70 million level. The Bloomberg forecast called for an increase to 5.75 million. The hiring and separation rates remained at May’s levels of 3.7% from 3.6% respectively.

The National Federation of Independent Business (NFIB) Small Business Optimism Index for July rose to 105.2—the highest since February—from June’s unrevised 103.6 level, versus expectations of a dip to 103.5.

Treasuries were lower, with the yield on the 2-year note mostly flat at 1.36%, while the yield on the 10-year note added 1 basis point (bp) to 2.27% and the 30-year bond rate rose 2 bps to 2.85%.

The U.S. Dollar Index has regained some support on the economic data. The greenback slipped yesterday from Friday’s jump from lows not seen since May 2016 that came courtesy of a stronger-than-expected July non-farm payroll report.

Tomorrow, the U.S. economic calendar will yield the weekly MBA mortgage applications report, which will be followed by a preliminary read on Q2 non-farm productivity and unit labor costs with productivity forecasted to have improved 0.7% and costs estimated to have increased 1.1%. Rounding out the day, we’ll receive wholesale inventories for June, expected to have increased 0.6% m/m, matching the rise seen in May.

Europe turns higher as euro drops on U.S. data, Asia mostly lower

European equities overcame early pressure and finished higher, with the euro and British pound losing ground on the dollar following a dose of upbeat U.S. employment and small business optimism data. Early pressure came amid disappointing trade reports out of China and Germany. Earnings results in the region diverged. Bond yields in the region finished mostly higher.

Stocks in Asia finished mostly lower in the wake of China’s release of its July trade activity, which showed export and import growth both came in below expectations. Japanese equities declined with the yen showing some strength late in the session. Australian securities traded lower, South Korean shares dipped and Indian listings fell. South Korean and Indian markets continued retreats from recent all-time highs.

Stocks trading in mainland China and Hong Kong gained ground as the trade data was met with optimism regarding corporate earnings in the region.

Market Insights 8/7/2017

Stocks End with Slight Gains

U.S. equities were marginally higher to start the week, as data was on the lighter side, as continued upward momentum in tech stocks was tempered by energy issues amid a decline in crude oil prices ahead of OPEC’s looming production cut compliance meeting.

Treasury yields were nearly unchanged, showing little reaction to an afternoon release of consumer credit, while gold and the U.S. dollar were lower.

The Markets…

The Dow Jones Industrial Average gained 26 points (0.1%) to 22,118

The S&P 500 Index added 4 points (0.2%) to 2,481

The Nasdaq Composite rose 32 points (0.5%) to 6,384

In moderate volume, 743 million lost $0.19 to $49.39 per barrel and wholesale gasoline was $0.02 lower at $1.63 per gallon

The Bloomberg gold spot price was $1.19 lower at $1,257.69 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.1% lower at 93.43

Consumer credit kicks off economic week that will have an inflation focus

Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $12.4 billion during June, below the $15.8 billion forecast of economists polled by Bloomberg, while May’s figure was adjusted slightly downward to an increase of $18.3 billion from the originally reported $18.4 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $8.3 billion, its slowest pace in a year, while revolving debt, which includes credit cards, increased by $4.1 billion.

Treasuries were slightly higher, with the yield on the 2-year note little changed at 1.35%, while the yields on the 10-year note and the 30-year bond dipped 1 basis point to 2.26% and 2.84%, respectively.

Treasury yields showed some signs of life and the U.S. Dollar Index bounced off of lows not seen since 2016 on Friday in the wake of the July nonfarm payroll report. The employment data, which showed job growth topped forecasts, the unemployment rate matched a 16-year low, and wage growth, appeared to preserve expectations for one more Fed rate hike and the beginning of the reduction of its bloated balance sheet this year.

This week, the economic docket likely begin to regain some of the markets’ attention as earnings season winds down, headlined by the releases of the Producer Price Index (PPI) and Consumer Price Index (CPI). Inflation is the other side of the Fed’s dual mandate and has remained subdued to foster some uncertainty regarding if the Central Bank has one more rate hike in it this year. The PPI and CPI will follow tomorrow’s releases of the NFIB Small Business Optimism Index, with economists expecting a slight downtick to a level of 103.5 for July from the 103.6 posted in June, as well as the JOLTS Job Openings report, with forecasts calling for the measure of unmet demand for level to show 5.70 million jobs were available to be filled in June, up marginally from the 5.67 million registered in May. Later in the week, the economic calendar will offer the preliminary Q2 nonfarm productivity and unit labor costs.

Earnings season has been solid and equity indexes continue to set record highs. The bull market should continue but the risk of a “melt-up” appears to be rising. The U.S. economy is growing modestly and the Federal Reserve is maintaining its slow pace of policy normalization—both supports for further equity market gains, but geopolitical risk remains elevated. While the weaker U.S. dollar is a benefit for U.S. companies, there is a downside internationally … but it may not be where you think.

Europe mixed on data and geopolitics, Asia higher following U.S. employment report

European equities finished mixed, as optimism following Friday’s upbeat U.S. employment report gave some way to an unexpected drop in German industrial production and lingering geopolitical concerns as the U.N. imposed new sanctions on North Korea. The euro ticked higher, though the British pound dipped versus the U.S. dollar, while bond yields in the region were mostly lower. Energy issues showed some resiliency in the face of softness in crude oil prices as the markets await this week’s OPEC gathering on production cut compliance.

The U.K. FTSE 100 Index was up 0.3%, France’s CAC-40 Index ticked 0.1% higher, Italy’s FTSE MIB Index rose 0.4%, and Spain’s IBEX 35 Index gained 0.2%, while Germany’s DAX Index declined 0.3% and Switzerland’s Swiss Market Index decreased 0.2%.

Stocks in Asia finished mostly higher amid optimism on the heels of Friday’s stronger-than-expected U.S. employment report, which helped overshadow exacerbated geopolitical concerns as the United Nations Security Council imposed new sanctions on North Korea and China/U.S. trade uncertainty lingered. Japanese equities advanced, with the yen holding onto losses that stemmed from the U.S. jobs report, while stocks in mainland China and Hong Kong rose on the U.S. data and as steel companies rallied. Markets in Australia increased 0.9% and shares traded in South Korea ticked slightly higher, but stocks in India declined amid some weakness in the technology sector. South Korean and Indian markets remain near all-time highs.

U.S. Market Weekly Summary – Week Ending 08/04/2017

Weekly Commodities ETF Report: Gold ETFs End the Week in a Slump on Strong July Jobs Data; Oil Rig Count Fails to Lift Energy ETFs from Weekly Decline

It’s a mixed bag for commodities and commodity-related funds at the end of the week, following the stronger-than-expected July payrolls report. The government said the U.S. labor market added 209,000 new jobs in July, above expectations for an increase by 183,000 jobs. The unemployment rate edged down to 4.3% in July from 4.4% in June.

The data, which rallied equities and the dollar index, weighed heavily on gold, setting it on track for a lower close to the week. Oil and energy commodities, meanwhile, traded mostly higher following Baker Hughes’ oil rig report but are set to end the week in the red. And, soft commodities were largely unruffled by the jobs data and ended the week mixed.

Gold’s decline on Friday was the steepest in a month, closing the session down 0.8% at $1,264.30; the weekly drop was a more modest decline of 0.9%. Copper slipped earlier as the jobs data lifted the dollar, but was largely unfazed, ending Friday’s session up 0.4% at $2.88 and the week up 0.3%.

SPDR Gold Trust was down some 1% during the week, ending the day’s session at $119.69 while United States Copper Index Fund (CPER) rose 0.2% in the last five days, ending Friday at $18.62.

Oil and energy commodities turned positive during the latter half of Friday’s session, but closed the week in the red, following the Baker Hughes report that overall U.S. rig counts declined for the week, with the number of active rigs drilling for oil down by 1 to 765 rigs, while those drilling for gas fell by 3 to 189. This means that, overall, oil and gas rigs were 954 for the week.

The decline in rig counts could help diminish the concerns of overproduction that have driven down oil prices. Traders are also looking ahead to the Organization of the Petroleum Exporting Countries’ two-day meeting in Abu Dhabi next week, with members and non-members pledging to get “cheaters” who had promised production cuts but did not comply to honor the group’s targets.

Over the last five days, light, sweet crude oil for September delivery was down 0.6% and closed at $49.51 per barrel. In other energy futures, heating oil inched up 0.1% during the week, and settled at $1.65 per gallon at the close of Friday’s session. Meanwhile, natural gas was down 4.9% during the week, and closed Friday’s session at $2.78 per British thermal unit.

The United States Oil Fund (USO) was down 0.4% during the week and closed the session at $10.13 while the United States Natural Gas ETF (UNG) was had a weekly drop of 5.5%, at $6.24 as the regular session ended. United States Gasoline Fund LP (UGA) was at $26.82, dropping 0.2% during the week, and United States Diesel-Heating Oil Fund LP (UHN) closed at $15.50, having risen 0.8% in the last five days.

And, soft commodities ended the week mixed. The standout was December 2017 ICE cocoa, which saw a weekly slide of 2.4% and settled at $2,037 a tonne as the session closed. Ghana had reported that it expects the biggest cocoa crop in six years due to favorable climate conditions, according to Africatime.com. Ghana is the second largest cocoa exporter in the world.

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Market Insights 8/4/2017

Jobs Report Helps Stocks Higher

U.S. stocks advanced on the heels of the release of the July non-farm payroll report that showed strong job growth, a dip in the unemployment rate and a rise in hourly wages.

Financials led the ascent as Treasury yields also gained ground, while gold was lower and the U.S. dollar and crude oil prices advanced.

The Markets…

The Dow Jones Industrial Average (DJIA) gained 67 points (0.3%) to 22,093

The S&P 500 Index added 5 points (0.2%) to 2,477

The Nasdaq Composite ticked 11 points (0.2%) higher at 6,352

In moderate volume, 785 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.55 to $49.58 per barrel and wholesale gasoline was $0.02 higher at $1.65 per gallon

The Bloomberg gold spot price was $9.45 lower at $1,259.16 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.7% higher at 93.47

July non-farm jobs report tops forecasts, trade deficit narrows

Non-farm payrolls rose by 209,000 jobs month-over-month in July, compared to the Bloomberg forecast of a 180,000 increase. The rise of 222,000 seen in June was revised to a gain of 231,000 jobs. The total upward revision to the job gains in June and May was 2,000. Excluding government hiring and firing, private sector payrolls increased by 205,000, versus the forecasted gain of 180,000, after increasing by 194,000 in June, revised from the 187,000 rise that was initially reported.

The unemployment rate dipped to 4.3% from 4.4%, matching forecasts, while average hourly earnings rose 0.3% m/m, in line with projections and versus June’s unrevised 0.2% increase. Y/Y, wage gains were 2.5%, matching June’s pace and versus estimates of a 2.4% rise. Finally, average weekly hours remained at June’s unrevised 34.5 rate, matching expectations.

Job gains were broad-based, led by gains in food services and drinking places, professional and business services, and health care. The unemployment rate dipped back to May’s 16-year low and the labor force participation rate ticked higher to 62.9% from 62.8%. The wage growth rounded out the trifecta, likely preserving expectations of one more Fed rate hike this year, even as the Central Bank begins the process of reducing its gargantuan balance sheet.

The trade balance showed that the deficit came in at $43.6 billion in June, compared to estimates of $44.5 billion. May’s deficit was downwardly revised at $46.4 billion. Exports rose 1.2% m/m to $194.4 billion, while imports ticked 0.2% higher to $238.0 billion.

Treasuries fell, with the yield on the 2-year note rising 1 basis point (bp) to 1.35% and the yields on the 10-year note and the 30-year bond gaining 4 bps to 2.26% and 2.84%, respectively.

Europe higher on data, Asia finished mixed ahead of U.S. jobs report release

European equities moved to the upside, with the euro and British pound dropping versus the U.S. dollar in the wake of the upbeat U.S. July non-farm payroll report, which helped offset exacerbated political concerns in the world’s largest economy. Also, the markets digested a plethora of mixed earnings reports which hamstrung insurance companies. In economic news, German factory orders rose more than expected in June, while U.K. new car registrations fell in July. Bond yields in the region finished mostly higher.

The U.K. FTSE 100 Index was up 0.5%, Germany’s DAX Index gained 1.2%, France’s CAC-40 Index rallied 1.4%, Spain’s IBEX 35 Index advanced 1.0%, Italy’s FTSE MIB Index rose 0.7%, and Switzerland’s Swiss Market Index traded 0.4% higher.

Stocks in Asia finished mixed amid a flood of earnings reports and some apparent caution toward the U.S. ahead of today’s July employment report and as political uneasiness was exacerbated by reports that the Russia investigation was intensifying. Japanese equities declined as the yen gained ground and a report showed the nation’s wages unexpectedly fell.

Mainland Chinese shares declined, while stocks in Hong Kong ticked higher in choppy action as some earnings results in the region came in mixed. Australian securities decreased with financial shares finding pressure after regulators sued a lender they allege failed to report potential money laundering transactions properly. Traders also digested the Reserve Bank of Australia’s monetary policy statement, which showed the central bank was a bit more optimistic about economic growth.

Company and Earnings News

Kraft Heinz Co. reported Q2 earnings-per-share (EPS) of $0.94, or $0.98 ex-items, compared to the $0.95 FactSet estimate, with revenues declining 1.7% year-over-year (y/y) to $6.7 billion, roughly in line with expectations. Separately, the company raised its quarterly dividend by 4.2% to $0.625 per share.

Viacom Inc. posted fiscal Q3 EPS of $1.69, or $1.17 ex-items, versus the projected $1.05, as revenues rose 8.0% y/y to $3.4 billion, above the expected $3.3 billion. Shares fell despite the results as the company offered a disappointing Q4 outlook for cable-TV networks subscribers and domestic advertising revenue.

Cigna Corp. announced Q2 profits of $3.15 per share, or $2.91 ex-items, compared to the expected $2.48, with revenues rising 4.0% y/y to $10.3 billion, roughly in line with forecasts. CI raised its full-year EPS outlook and reaffirmed its revenue guidance. Shares have turned lower as the insurer was the last of the big companies in the industry to post results, which have been upbeat to bolster the group’s sharp rally that began in Q4 of 2016.

Activision Blizzard Inc. reported Q2 EPS of $0.32, or $0.43 ex-items, versus the projected $0.30, on revenues of $1.4 billion, above the estimated $1.2 billion. ATVI issued Q3 EPS guidance that was below forecasts, and raised its full-year earnings outlook though it remained south of expectations.

Automatic Data Processing Inc. announced that activist investor Bill Ackman’s Pershing Square Capital Management is seeking control of the company through five Board seats as well as a CEO change. Pershing is seeking this as it requested an extension of ADP’s August 10 deadline for the nomination of directors. The company said that its Board has determined that it is not in the best interests of ADP or its other shareholders to accede to Pershing Square’s last-minute request for an extension. ADP is modestly higher after last week’s pop on reports that Ackman built a stake in the company, while CNBC said today that Bill Ackman told the news outlet that he does not want to have a proxy fight and plans to propose a minority slate for the Board.

Yelp Inc. is surging after announcing a long-term partnership with Grubhub Inc. , including the sale of its Eat24 business to GRUB for about $288 million in cash and the integration of online ordering from all Grubhub restaurants onto its local goods and services platform. YELP is also getting a boost from its stronger-than-expected Q2 earnings report, which included an increased full-year outlook and a share repurchase program.