- Stocks rebound, bonds continue retreat as Treasury yields spike. (10:25am ET) U.S. equities opened higher this morning, reversing yesterday’s slide spurred by the first Federal Reserve Bank (Fed) rate hike in a year and a hawkish outlook from Fed Chair Janet Yellen. Rate-sensitive utilities (-2.0%) and real estate (-1.9%) sold off Wednesday afternoon, and all S&P 500 (-0.8%) sectors closed in the red. The tech sector (-0.2%), however, displayed relative strength for the second day in a row. Overnight, the Nikkei scratched out a 0.1% gain on yen weakness, although most of the region finished lower; the Shanghai Composite fell 0.7%, and the Hang Seng lost 1.7%. European shares are higher in afternoon trading as financials boost indexes; the EuroStoxx 600 has gained 0.7%. Meanwhile, WTI crude oil continues to consolidate below $50/barrel, the dollar has touched a 14-year high, COMEX gold ($1129/oz.) is off sharply, and the yield on the 10-year note (2.58%) is up 10 basis points (0.10%) from Tuesday’s close.
- FOMC raises rates as expected, targets three hikes in 2017. As was expected, the Fed’s policymaking arm, the Federal Open Market Committee (FOMC), decided to raise rates by 0.25% (25 basis points) at the conclusion of its two-day meeting. The move had been fully priced into financial markets for the past month or so. This is the second rate hike in this cycle, following the hike in December 2015. Here is a side by side comparison of the statement released yesterday versus the statement released at the last FOMC meeting on November 2, 2016. The big story from the meeting is that the FOMC now expects to raise rates three times next year; at the September 2016 FOMC meeting, the Fed expected just two hikes in 2017, and the market and the Fed were aligned on that assessment before yesterday.
- Manufacturing turning higher. Aided by a turnaround in oil production, a relatively stable dollar, and better economic performance overseas, manufacturing began to stabilize at midyear 2016, and over the past few months, the data suggest some modest reacceleration. The December readings on the Empire State (+9) and Philadelphia Fed (+22) manufacturing surveys exceeded expectations and accelerated sharply from November. Both readings were the highest in nearly two years. Although manufacturing accounts for less than 20% of economic activity and employment in the U.S., it has a much larger impact on S&P 500 earnings, and therefore, equity markets.
- CPI on path to hit Fed’s 2% target soon. The headline Consumer Price Index (CPI) rose 1.7% year over year in November, accelerating from the 1.6% year-over-year gain in October 2016 and recent lows (2015) of -0.1 to -0.2% year over year. The November reading was the strongest since October 2014. Core CPI rose 2.1% year over year in November, a modest deceleration from the 2.2% increase in October. Beneath the surface, the CPI for services (two-thirds of CPI) posted a 3.0% gain over the past year–the strongest reading in almost eight years–while the CPI for goods (one-third of CPI and largely driven by food and gasoline prices) fell 0.5%, but continues to accelerate rapidly. As we approach the anniversary of the worst of the oil price declines in Q4 2015 and Q1 2016, the goods category should turn positive and drive headline inflation well above 2% in early 2017.
- Will the Grinch come for equities? One potential troubling sign is the amount of optimism we are seeing toward equity markets now that stocks are making new highs. While this by itself is not a reason to sell, too many bulls can be a contrarian warning. Think back to the amount of fear and concern we saw leading up to the election. All that worry helped spark the big rally since the election, as many of the worst fears didn’t materialize. Sentiment polls are showing the most bulls in years, global fund managers are very bullish, small business optimism is soaring, and demand for bullish derivatives is near record levels as well. Today on the LPL Research blog we take a closer look at various sentiment measures and they mean for you.
- Empire State Mfg. Report (Dec)
- Markit Mfg. PMI (Dec)
- CPI (Nov)
- Philadelphia Fed Mfg. Report (Dec)
- Eurozone: Markit Mfg. PMI (Dec)
- European Union: Leader Summit in Brussels
- UK: Bank of England Meeting (No Change Expected)
- Mexico: Central Bank Meeting (Rate Hike Expected)
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