- Markets pause as rate decision looms. U.S. indexes are near flat as investors await the conclusion of the final Federal Open Market Committee (FOMC) meeting of the year; a 25 basis point (0.25%) hike in the fed funds rate is widely anticipated. Bolstered by strength in the technology sector (+1.2%), the Nasdaq (+1.0%) led Tuesday’s advance and set a fresh record high along with the S&P 500 and the Dow, which is now within half a percent of the milestone 20,000 mark. In Asia, the Nikkei and Hang Seng closed flat as investors adopted a wait-and-see approach ahead of the Fed decision. European markets are modestly lower as M&A activity in the healthcare sector weighs; the EuroStoxx 600 has dropped 0.3%. Meanwhile, WTI crude oil ($52.02/barrel) is nearly 2% lower on an increase in domestic stockpiles and concerns over OPEC’s ability to curtail production, while COMEX gold ($1162/oz.) is modestly higher. Treasury strength across the curve has lowered yields; the 10-year note is down to 2.43%.
- Technology summit to provide policy risk insight. The technology sector (as measured by the S&P GICS sector index) has underperformed since the election (+2.8% vs. the S&P 500 +6.4%) partly due to concerns about policy impacts out of Washington. Trade protectionism and access to the global labor force are the two key issues, although the sector also would benefit relatively less from lower corporate tax rates because its effective rates are already so low because of the heavy mix of overseas profits. We continue to like the sector’s growth prospects and valuations, and it benefits most from a potential lower tax rate for repatriation of overseas cash. We hope–and are generally optimistic–that today’s meeting sets a positive tone between Trump and Silicon Valley leaders and supports our view that the market’s assessment of the sector’s policy risk may be overly pessimistic.
- Inflation heats up as retail sales take a breather. The November reading on the producer price index (PPI) was another reminder that inflation, even core inflation, is moving higher as 2016 draws to a close. Core PPI (PPI excluding food and energy) has accelerated from 0.2% year-over-year in late 2015 to 1.8% in November 2016, the highest reading in more than two years. Core retail sales-which feed directly into gross domestic product (GDP) as consumer spending-disappointed in November rising just 0.1% month-over-month, falling short of expectations of a 0.3% gain and decelerating from the 0.6% gain in October. Despite the soft reading in November-traditionally the start of the important holiday shopping season-our view remains that holiday shopping is on track, as discussed in our Weekly Market Commentary from November 21, and that broad consumer spending remains well supported by record-high household net worth, improved consumer sentiment and, accelerating wage gains.
- More new highs, but volatility higher as well. Once again we saw strength across the board, with the Dow, S&P 500, and Nasdaq all closing at fresh new all-time highs. The Dow in fact has now made a new high seven days in a row, while finishing higher 10 out of the last 11 sessions. It made it to seven new highs in a row in July also, but hasn’t hit eight in a row since March 2013. The all-time record is 12 consecutive new all-time highs in January 1987. Even though equity prices were higher, volatility rose as well, with the CBOE Volatility Index (VIX) gaining 2.5%. This was only the third time since 1999 that all three major indexes closed at new highs and the VIX was green. Why did this happen? Much of this can likely be attributed to portfolio protection ahead of today’s Fed decision.
- Retail Sales (Nov)
- FOMC Statement
- FOMC Economic Forecasts and Dot Plots
- Yellen Press Conference
- Japan: Nikkei Mfg. PMI (Dec)
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