Market Update: Wednesday, June 14, 2017

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Yesterday’s Market Activity

  • U.S. stocks recovered, major domestic indexes up ~0.5%, led by strength in tech sector
  • Dow, S&P 500 reached new record levels
  • “FANG” stocks +1.0%, semiconductors +0.6%
  • Federal Open Market Committee (FOMC) meeting in focus, U.S. dollar fell slightly, 10-year Treasury strengthened with yield down to 2.20%; market reaction doesn’t suggest caution around an aggressive Federal Reserve (Fed)

Overnight & This Morning

  • Asian equities ended marginally lower, Chinese stocks -0.7% on concerns of a crackdown on the insurance market and International Monetary Fund (IMF) comments (details below), Japan’s Nikkei fell 0.1% on mixed economic data (details below), MSCI Emerging Markets Index +0.2%.
  • European stocks climbed for a second day as tech stocks rallied. Euro Stoxx 600 +0.6% in morning trade as Euro-area industrial production +0.5% in April.
  • Pound erased gains after soft wage data
  • Gilts strengthened as investors focus on Bank of England on Thursday – considering economy, pricing, politics and terror
  • Pressure growing on Prime Minister Theresa May to abandon a hard Brexit
  • German 10-year bund yield fell 0.04% to 0.26%, euro fell slightly, near $1.12
  • Commodities – WTI crude oil traded near $46/bbl. on International Energy Agency (IEA) comments (details below), COMEX gold, copper each climbed +0.1%
  • U.S. stocks up slightly despite lackluster retail sales, inflation data (details below)
  • Bonds rallying, yield curve flattening; 10-year yield 2.14%
  • Fed likely to raise today, but last hike under suspicion

 

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Key Insights

  • Though media outlets have recently characterized the technology sector as “beaten down,” that term is used too often, since the two-day slide in the Nasdaq 100 simply took it down 3.0% from its all-time high. With yesterday’s recovery, the tech-laden measure is now just 2% from record levels, though it is noteworthy that valuations in the sector remain in line with the broader market.

Macro Notes

  • Retail sales disappoint. Retail sales declined 0.3% in May versus expectations of a modest increase, while retail sales ex-auto and gas were flat. Upward revisions to April’s data on core retail sales does offset some of the disappointment in May. Despite low unemployment and strong measures of consumer confidence, consumers remain cautious, potentially limiting the upside to second quarter gross domestic product (GDP) data. The advance estimate for second quarter GDP will be released on July 28.
  • CPI declines. The Consumer Price Index (CPI) fell 0.1% month over month in May versus expectations of flat prices, putting inflation at 1.9% year over year. Core CPI (less food and energy) advanced 0.1%, also falling just short of expectations. The report is not likely to change the outcome of today’s Fed policy meeting, but if inflation numbers continue to disappoint, it will lower expectations of an additional rate hike later in the year.
  • IMF raised growth estimate for China (the second time this year) to +6.7% from +6.6% in its April forecast. The IMF also warned that deep reforms were necessary to break away from China’s debt-fueled expansion. Nonetheless, the worst may be over for Chinese bonds, as one-year interest rate swaps are trading at the biggest discount to the one-year sovereign bond yield since January 2016, suggesting traders expect funding costs to ease.
  • Volatility in Japanese data has increased speculation that the Bank of Japan (BOJ) needs to rethink quantitative easing and plan for an exit strategy. Industrial Production rose 4.0% in April and 5.7% from a year earlier. Capacity utilization, typically a precursor to pricing pressures, rose 4.3% in April after a 1.6% pullback in March. Fears are rising that a bond market dislocation could force the BOJ to react, rather than anticipate a move.
  • The IEA warned that the impact of OPEC cuts need more time to take effect and also stated that non-OPEC producers including the U.S., Brazil and Canada will increase output in 2018 by 1.5 million barrels per day, with one-half coming from U.S. shale. On the other side, demand should accelerate by 1.4 million barrels a day, led by India and China.

 

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Click Here for our detailed Weekly Economic Calendar

Wednesday

Thursday

  • Empire State Mfg. Report (June)
  • Philadelphia Fed Mfg. Report (June)
  • Industrial Production and Capacity Utilization (May)
  • US Treasury International and Capacity Utilization (May)
  • US Foreign Net Transactions (Apr)
  • BOJ: Policy Balance Rate and 10-Yr Yield Target
  • Bank of England: Bank Rate Decision

Friday

  • Housing Starts (May)
  • Building Permits (May)
  • Eurozone: New Car Registration (May)
  • Eurozone: CPI (May)
  • Russia: GDP (Q1)
  • Bank of Russia: Key Rate Decision
  • China: New Loan Growth and Money Supply (May)

 

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.

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