Market Update: Friday, May 26, 2017

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Yesterday’s Market Activity

  • S&P 500, Nasdaq hit new record highs, Dow tied its record close, originally set March 1. It is the 19th record close for the S&P this year, already exceeding 2016 count. Major U.S. equity indexes up six consecutive days, wiping out last Wednesday’s losses.
  • Investors rallying around solid profits, improved economic readings, and still accommodative monetary policy on a global scale
  • Consumer discretionary (+0.9%) led sectors, with electronic retail and streaming video providing underlying strength

Overnight & This Morning

  • Stocks in Asia mostly flat; Japan’s Nikkei and Australia’s ASX fell.  Energy producers led weakness as commodity currencies retreated
  • Japanese yen inched higher vs U.S. dollar as Japan Consumer Price Index (CPI) (+0.4%) rose for a fourth consecutive month in April, yet still well below the Bank of Japan’s (BOJ’s) 2.0% target
  • European shares down fractionally (Euro Stoxx 600 -0.5%)
  • Pound sterling weakened as polls show Tories lead over Labour has narrowed to just five points with two weeks to go before election
  • Most sovereign bonds rose, with 10-year Bund yield down 0.02% to 0.34%
  • Euro up slightly, to $1.22
  • Commodities – WTI crude oil stabilized +0.5% to $49.00/bbl., paring first weekly decline this month; COMEX gold ($1266/oz.) rose, copper (-0.2%) retreated from a three-week high
  • U.S. markets slightly lower in early trading, dollar weakening slightly while Treasuries nudge higher; yield on the 10-year below 2.25%
  • Q1 GDP better than expected, led by consumption, though durable goods orders less than forecast (-0.7%)

 

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Key Insights

  • OPEC and oil prices. The energy sector (-1.8%) pulled back yesterday along with oil prices (WTI -4.8%) on disappointment that the announced Organization of the Petroleum Exporting Countries (OPEC) cuts (March 2018) were not deeper than hoped; clearly, another example of buy the rumor, sell the news. There continue to be concerns about U.S. shale production escalating despite OPEC as the U.S. is the new swing producer. We remain Neutral on the energy sector, and expect oil prices to be $50-55/barrel at best over the next 12 months.
  • FOMC minutes. Minutes from Federal Open Market Committee (FOMC) meeting on Wednesday stated monetary policymakers were comfortable that Q1 gross domestic product (GDP) weakness was transitory. However, the market reacted with the a rallying 10-year Treasury (yields fell) and dollar weakness, suggesting the market does not share the Federal Reserve’s (Fed’s) outlook. It’s conceivable that June will be the last rate hike of 2017.

Macro Notes

  • Durable goods orders decline but see large upward revisions. Durable goods orders fell in April, but there was some good news behind the headline numbers. New orders declined 0.7%, better than expectations of a 1.0% decline, but March saw a sizable upgrade from +0.7% to +2.3%. Orders ex-transport were more disappointing, seeing a 0.4% decline versus expectations of a 0.4% increase, but March also saw a solid upward revision from -0.2% to +0.8%, more than offsetting the miss. Shipments of nondefense capital goods ex-air, which flow directly through to GDP as business spending, fell 0.1%. While the report was negative, it was a smaller reset than expected after four consecutive months of gains.
  • Q1 GDP sees meaningful upward revision. The economy grew 1.2% in the first quarter of 2017, better than the initial estimate of 0.7% and well ahead of consensus expectations of +0.8%. The upgrade was helped by a more positive picture of business investment, which had already posted a strong quarter, and a slightly better picture of consumer spending. The upgrade alleviates some concerns of economic slowing in the first quarter and increases the likelihood of a June rate hike.
  • Day 100 is in the books. The S&P 500 Index traded for the 100th day of 2017 yesterday. For the year it is up 7.9% and has made 19 new all-time highs. That is the most all-time highs as of day 100 since 1999. What does a good start to the year mean? Since 1950[1], there were 23 other years the S&P 500 Index was up 7.5% or more as of day 100 and the rest of the year it was higher 20 of those times with an average return of 9.0% the rest of the year. The full year return those 23 years was 23.4%.

    [1] 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.

 

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Click Here for our detailed Weekly Economic Calendar

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

 

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

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