- Oil spike, China data boost stocks. (11:20am ET) Major U.S. indexes are moving higher to start the new year, fueled by a rise in oil as the commodity hit fresh 18-month highs earlier today with a supply cut among major producers coming into effect. Looking back, the S&P 500 closed out 2016 with a 12.0% total return, even as it fell 0.5% on Friday; financials was the only sector to rise on the last trading day of the year, clawing out a 0.2% gain on the heels of strength in the Treasury market. Technology (-1.0%) and consumer discretionary (-0.9%) were Friday’s worst performers. Overnight, upbeat manufacturing data out of China gave both the Shanghai Composite (+1.0%) and the Hang Seng (+0.7%) a boost; Japan’s Nikkei was closed for a holiday. European shares are also broadly higher in afternoon trading, particularly mining and energy stocks, which are benefiting from the news out of China. Meanwhile, COMEX gold ($1155/oz.) is modestly higher, WTI crude oil ($54.12/barrel) is up 0.7%, and the yield on the 10-year Treasury note is at 2.47%.
- A volatile year results in little change for Treasury yields. It was a volatile year for Treasury yields, with the 10-year yield closing as low as 1.36% in July and as high as 2.60% in December, but for all the volatility, yields didn’t move much for the full year. In the final week of 2016, the 10-year yield moved lower to close out the year at 2.45%, just 15 basis points (0.15%) higher than its closing yield of 2.30% on 12/31/15. The 30-year Treasury, which also traded within a wide range during the year closed the year out at 3.08%, an even slimmer 5 basis points (0.05%) above its 12/31/15 closing yield of 3.03%.
- Similar story for yield curve. Yield curve steepness, as measured by the difference between the 10-year and 2-year Treasury yields, also closed near year-end 2015 levels, following a similar trend as the Treasury yields that it is based on. The curve spent much of the first half of the year flattening, before reversing later in the year. Improving economic and inflation expectations post-election helped steepen the curve in November, before it moved slightly lower toward year-end, closing at 1.24%, just 0.03% higher than year-end 2015 levels. A steepening yield curve means that long-term yields are moving higher relative to short-term yields, indicating improving expectations for economic growth and/or higher inflation.
- Inflation expectations higher for year. One thing that did move higher during 2016 was inflation expectations. Implied expectations, as measured by the difference between the 10-year Treasury and 10-year Treasury Inflation-Protected Security (TIPS) yields, closed the year at 1.94%, still below the Federal Reserve Bank’s (Fed) 2% target, but much improved from lows of 1.2% reached in February.
- Outflows continue to be a headwind for municipals. Municipal bonds, as measured by the Bloomberg Barclays Municipal Bond Index, managed a positive return of 0.38% last week, though they saw another week of underperformance versus Treasuries (0.55% for Bloomberg Barclays US Aggregate Government–Treasury Index). Municipal bond fund outflows continued to be a headwind for the sector, with $4.5 billion leaving the asset class for the week ending 12/21/16. January has historically been a time of seasonal strength for the municipal market, as lowered supply and reinvestment demand combine to improve the market’s supply/demand balance, though it remains to be seen if fund outflows will derail the trend this year.
- 2017 gets off to a quick start this week. Data include key December reports on Institute for Supply Management (ISM) (both manufacturing and non-manufacturing) Purchasing Managers Indexes, vehicle sales, ADP employment, layoff announcements, and of course the December employment report, which is due out on Friday, January 6. Four Fed speakers are on the docket this week, including 2017 Federal Open Market Committee (FOMC) voter Charles Evans (Chicago), and the Fed will release the minutes of its December 13-14 FOMC meeting tomorrow, Wednesday, January 4.
- Earnings outlook remains bright. Earnings estimates for the S&P 500 in 2017-up 12% over 2016 based on analysts’ consensus estimates-have inched marginally higher over the past month to near $133 per share, while estimates for soon-to-be-reported fourth quarter 2016 earnings growth, at +6%, have held firm. We believe our forecast for mid-to-high single digit earnings growth in 2017 is achievable based on the potential for higher economic growth, stable corporate profit margins, and rebounding energy profits. Potential policy actions, most notably corporate tax reform (including repatriation of overseas cash), offer the possibility of upside, while risks include trade protectionism and further strength in the U.S. dollar.
- Welcome to January. After the S&P 500 gained 1.8% in December to finish off a nice year of equity gains in 2016, we now turn the page to January. Since 1950, January has been up 1% on average–ranking it right near the middle of all months by performance (sixth out of 12). What is worth noting is January has been weak recently, falling each of the past three years. Be aware though, that going back to 1928, the S&P 500 has never been down in January for four consecutive years. Over the past 10 years, January has been down 1.7% on average, ranking worst of all months.
- European inflation grows. European inflation came in somewhat greater than expected. German inflation rose 1.7%, still below the European Central Bank’s 2% target, but greater than the 1.3% increase expected. Some of the increase in inflation, not just in Germany but globally, results from oil prices being approximately 50% greater than they were one year ago. However, inflation was higher than expected across many sectors of the German economy, not just the energy sector. In contrast, French inflation was up just 0.8%, with an increase in energy-related inflation but a decline in inflation from other sectors of the economy. Should oil prices stay where they are, they will continue to be a major inflation driver across the region.
- Chinese data improve. The Caixin Purchasing Managers Index (PMI) rose to 51.9 in November, better than previous readings and analysts’ forecasts. The Caixin index covers mid cap and small cap companies, and is often seen as a more reliable number as it is less influenced by government spending. Chinese stocks, both on the mainland and in Hong Kong, were up sharply overnight. There has been something of a change in attitude among Chinese traders. For much of the last two years, the markets reacted as though “bad news is good news,” believing that bad news would spur Chinese government policy. After a series of economic policy moves last year, traders appear to be more willing to let “good news be good news.”
- Update on weekly publications. This week’s weekly commentaries, including the Weekly Market Commentary, Weekly Economic Commentary, and Bond Market Perspectives, feature content from our Outlook 2107: Gauging Market Milestones publication.
 Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
- Japan: Nikkei Mfg. PMI (Dec)
- ISM Mfg. (Dec)
- Germany: CPI (Dec)
- China: Caixin PMI Services (Dec)
- Vehicle Sales (Dec)
- Minutes of the December 13-14 FOMC Meeting Released
- Eurozone: CPI (Dec)
- ADP Employment (Dec)
- ISM Non-Mfg. (Dec)
- China: Imports and Exports (Dec)