Market Update: Friday, April 28, 2017

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  • U.S. equities flat following GDP report, geopolitics temper overseas markets. (10:40 am) U.S. stocks are largely unchanged in early trading as traders digest Q1 gross domestic product (GDP) data that came in below consensus expectations; this following Thursday’s session in which the Nasdaq (+0.4%) hit another record high on technology company earnings, while the Dow (+0.3%) and S&P 500 (+0.1%) notched slight gains. Tech (+0.6%) and consumer discretionary (+0.5%) led the S&P, while energy (-1.1%) and telecom (-1.3%) lagged. Overnight, the Shanghai Composite (+0.1%) eked out a slight gain despite trading lower for most of the session, while the Hang Seng (-0.3%) and Nikkei (-0.3%) set the overall tone for Asia amid uncertainty regarding the North Korean conflict. In Europe, equities are mixed, as the STOXX 600 (-0.1%) slipped off recent record highs. Elsewhere, WTI crude oil ($49.44/barrel) is recovering after its recent tumble, COMEX gold ($1,268/oz.) is tracking to its fourth monthly gain, and the yield on 10-year Treasuries is little changed at 2.30%.

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  • First quarter GDP disappoints. The U.S. economy grew at a real annualized rate of 0.7% in the first quarter of 2017, after growing at a 2.1% in the fourth quarter of 2016, according to the initial estimate released this morning. Consensus expectations had been lowered over the past month following some soft readings on economic data, but the report is a small disappointment compared to consensus expectations. Weakness in consumer spending was noteworthy, but the biggest drag was from inventories after unusual strength the prior quarter. Fixed investment, which includes business investment and housing, was a bright spot, making its largest contribution to GDP growth since the first quarter of 2012. Distortions in seasonality calculations may have also played a role in the weak data: since the end of the Great Recession, first quarter GDP growth has averaged near 1% while growth over the rest of the year has averaged near 2.5%. We expect business spending to continue to be a strength in 2017 as businesses anticipate better economic growth and policy support, while consumer spending may rebound with continued support from a largely healthy job market.
  • Government shutdown likely to be avoided over the weekend. Republicans and Democrats are reportedly very close to a deal to fund the government and avoid a shutdown ahead of the midnight deadline tonight. The Republicans, who do not want to be blamed for an impasse, have already expressed willingness to compromise on some of the most contentious issues like border wall funding, making a deal more likely. Even if a comprehensive deal cannot be reached today, they may file a short extension and finalize an agreement next week. As we noted in a recent blog, government shutdowns that have occurred in recent decades have generally been short-lived and not very disruptive to markets.
  • Wages and benefits accelerate. The Labor Department’s Employment Cost Index, which includes both wages and benefits, rose 0.8% in the first quarter of 2016, ahead of expectations and the best quarterly rate of growth since before the Great Recession. Stronger wage growth points to a tightening labor market, although spare capacity and a low participation rate will likely keep any possibility for outsized wage acceleration in check. Despite somewhat soft economic data, wage pressures will keep the Federal Reserve (Fed) on track to raise rates 1-2 more times in 2017.
  • Sell in May? Today is the last trading day of April, which will bring with it the popular trading axiom of “sell in May and go away,” but how much truth is behind it, and does that truth still hold? Today on the LPL Research blog we will take a closer look at this popular phenomena.

 

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Friday

Saturday

  • EU Leaders Summit
  • China: Mfg. & Non-Mfg. PMI (Apr)

 

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