Market Update: Wednesday, January 4, 2017


  • U.S. markets continue early-year advance. (10:23am ET) Domestic indexes are higher this morning ahead of the release of the minutes from last month’s Fed meeting; this after the first trading day of the year saw 10 out of 11 S&P sectors close higher, led by telecom (+1.9%) and healthcare (+1.4%). Lightly-weighted utilities (-0.3%) was the only sector to lose ground. Overnight, Japanese shares (Nikkei +2.5%) rose on better-than-expected Purchasing Managers Index (PMI) data while the Shanghai Composite also (+0.7%) moved higher. Eurozone PMI data came in largely above expectations, though equities are trading near flat as investors also digest an inflation reading at a three-year high. Elsewhere, WTI crude oil ($52.35/barrel) is flat after taking a tumble yesterday, COMEX gold ($1166/oz.) is higher, and the yield on the 10-year Treasury note is up one basis point (0.01%) to 2.46%.


  • December ISM suggests manufacturing was on the upswing as 2016 ended. At 54.7, the December reading on the manufacturing ISM was better than expected (53.8), better than November 2016’s reading (53.2) and the highest since January 2015. After dipping below 50 at midyear 2016, the ISM index improved dramatically over the second half of the year as oil prices rose driving oil production higher. The key details of the report–new orders, new export orders, employment and production–all accelerated versus November, suggesting that manufacturing has momentum heading into 2017. Although manufacturing is only 15-20% of GDP, it has an outsized influence on the earnings of S&P 500 companies. The prices paid index of the December ISM hit a 5.5 year high, confirming the recent rise in the 10 year Treasury yield.
  • Eurozone inflation up less than expected, PMI slightly better. Regional consumer inflation is running at a 1.1% annual pace, which is still lower than expected given the increase in both food and energy prices. The core rate of inflation (excluding these more volatile sectors) only increased from 0.8% to 0.9%. Final PMI at 54.4 was better than expected  (53.9). All told, the data show a growing economy, albeit well below potential. It seems unlikely that any of the released data will impact current European Central Bank policy.
  • Several data points suggest an upside surprise to holiday sales forecasts. While the final, broadest measures of retail sales will not be available until the end of next week, estimates from trade groups, including Mastercard’s SpendingPulse and the International Council of Shopping Centers, as well as solid (government-reported) November retail sales, suggest the National Retail Federation (NRF) forecast for a 3.6% increase in holiday sales may prove conservative. Strong consumer confidence, late-year stock market gains (the S&P 500 rose 4.3% from 9/30 through 12/15/16), still low gas prices, and booming online sales suggest the industry was able to overcome estimated mid-single-digit year-over-year declines in foot traffic and discounting. We still prefer the business spending and reflation driven sectors (industrials, resources, technology, and even financials) to consumer discretionary, but these are encouraging signs for the overall economy.
  • One more day of Santa. The historically bullish seven-day period known as the Santa Claus Rally (the last five trading days of December and the first two trading days of January) ends today. As of last night, the S&P 500 was down 0.14% during this period. As we discussed last month, these seven days are usually bullish, so if they are higher it doesn’t tell us much. The warning sign comes when these seven days are lower. Sure enough, each of the past two years, the S&P 500 was lower during the Santa Claus Rally and the S&P 500 dropped 3.1% and 5.1% in January. In fact, going back 20 years, the five times the Santa Claus Rally was lower, January was also lower. In other words, if the S&P 500 doesn’t rally today, that could be a warning sign.
  • Big first day of the year. It was a nice first day of the year for equities, as the S&P 500 gained 0.85% for its best day since December 7. It was the best first day of the year since 2013, when the S&P 500 soared 2.5% as the fiscal cliff worries evaporated. Going back 25 years, the S&P 500 has gained more than 0.8% on the first day seven other times and six of those times the rest of the year was positive, with an average 17% gain, while the only negative time was a 1% drop in 2011.




  • Vehicle Sales (Dec)
  • Minutes of the December 13-14 FOMC Meeting Released
  • Eurozone: CPI (Dec)



  • Employment Report (Dec)
  • Evans (Dove)
  • Lacker (Hawk)
  • Eurozone: Economic Confidence (Dec)


  • China: Imports and Exports (Dec)

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Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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