Market Update: Thursday, May 25, 2017

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Yesterday’s Market Activity

  • S&P 500 at new record high, relatively muted bond market reaction following Fed minutes. Dow, Nasdaq rose 0.4%, S&P 500 up 0.25% to new record close of 2404.39.
  • Market shrugged off Moody’s China downgrade. News caught few investors off guard.
  • No clear trend in sector performance. Defensive sectors among top performers, but materials led, telecom was the biggest laggard among S&P sectors. Utilities, real estate outperformance could signal some market participants expect economic growth pause to continue, bond yields to stay low.
  • Oil weaker ahead of OPEC meeting. WTI crude oil ($51.36/bbl.) slipped 0.2%, breaking a five-day win streak. Dollar, COMEX gold slightly lower, 10yr Treasury down 0.01% to 2.27%
  • Existing home sales fell 2.3% month-over-month in April to 5.57 million annualized; Bloomberg forecast 5.65 million, down from March’s downwardly revised 5.70 million rate. The median existing-home price, unsold inventory ticked up. Separate report from Federal Housing Finance Agency showed home prices up month over month and year over year.

Overnight & This Morning

  • U.S. equity markets up slightly with no clear catalyst. S&P 500 +0.3%
  • Mixed session in Europe, though major indexes all near flat late in the session.
  • Asian markets rose overnight, tracking yesterday’s U.S. gains, Hong Kong’s Hang Seng (+0.8%), China’s Shanghai Composite (+1.4%) up notably, evidence China debt downgrade did little to shake confidence in the region.
  • Oil lower despite OPEC news. News of nine month extension to Organization of the Petroleum Exporting Countries (OPEC) production cut agreement was expected, therefore not helping prices (-0.6% below $51/barrel).
  • New claims for unemployment insurance remain near multi-decade lows, indicating continued strength for the job market. Other economic data on the docket include U.S. trade, and U.K and Spain final Q1 gross domestic product (GDP), Japan Consumer Price Index (CPI). Earnings reports continue to straggle in globally.

 

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Key Insights

  • June rate hike still looks like a go. The Federal Open Market Committee (FOMC) minutes yesterday afternoon indicated that the committee views the first quarter economic slowdown as transitory, supporting a hike in June and potentially one more before year end. At the same time, guidance on Federal Reserve (Fed) balance sheet normalization was more gradual than some envisioned, providing something for both the hawks and the doves.
  • Healthcare waiting game. Yesterday’s scoring of the House healthcare plan (the AHCA) by the Congressional Budget Office (CBO) highlights the tough political road ahead for Republican’s “repeal and replace” efforts. Concerns healthcare reform may be pushed aside this summer because it is too politically difficult may be causing some speculation that tax reform comes sooner and is scaled down. Now we wait for a Senate proposal, which will look very different form the House version and will probably not be brought to a vote for several months. Healthcare-and the ongoing 2018 budget process-are both very important for markets because of the implications for tax reform which still is probably not much better than a 50/50 shot at getting done by year end in our view.

Macro Notes

  • Fixed income market reaction to FOMC minutes was restrained, with Treasury yields fairly quiet along the yield curve. The Fed indicated a slightly more gradual approach to balance sheet tapering than some investors envisioned, leading to slight declines in longer-term Treasury yields and a decent day for high-quality fixed income. Solid results for the 5-year Treasury auction also provided strength. The FOMC indicating that they view first quarter economic slowdown as transitory helped confirm the markets’ expectation for a June rate hike. Lower-quality fixed income performed well amid equity market strength.
  • Goods deficit widens. Preliminary estimates indicated the U.S. trade deficit in goods widened an April, missing consensus expectations of a slight improvement. Vehicle and consumer goods exports were the main sources of weakness. The report is a negative for second quarter GDP and may indicate some weakening in global consumer demand, but the impact is likely to be limited.

 

 

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Click Here for our detailed Weekly Economic Calendar

Thursday

Friday

  • GDP (Q1)
  • Personal Consumption (Q1)
  • Durable Goods Orders (Apr)
  • Capital Goods Shipments & Orders (Apr)
  • Italy: Business Confidence in the Mfg. Sector (May)
  • Italy: G7 Leaders Meet in Sicily

Saturday

  • BOJ: Kuroda

 

Past performance is no guarantee of future results.

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

 The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

 Stock investing involves risk including loss of principal.

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Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

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