Market Update: Thursday, June 15, 2017

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Yesterday’s Market Activity

  • U.S. stocks range bound amid choppy trading following Federal Reserve (Fed) announcement (details below); Dow (+0.2%), S&P 500 Index (-0.1%), Nasdaq (-0.4%)
  • Investors skeptical of Fed projections as weaker economic data (retail sales, inflation) suggest an aggressive stance not warranted
  • 10-year Treasury yield -0.07% to 2.14%, dollar pulled back slightly
  • WTI crude oil prices plunged -3.5% to $44.75/bbl. on U.S. inventory buildup
  • Energy sector (-1.8%) the worst performer, followed by technology

Overnight & This Morning

  • Asian equities down across the board; MSCI Emerging Markets Index (-0.8%), Nikkei (-0.3%)
  • Shanghai Composite (+0.1%), the lone gainer
  • Bank of England (BOE) kept rates unchanged (details below)
  • Bank of Japan (BOJ) opened its two-day meeting (details below)
  • European stocks fell for a second day, led by retailers and commodity producers. Euro Stoxx 600 (-0.6%); most sovereign credits also lower, German Bund yielding 0.26%.
  • U.K. retail sales (-1.2%) plunged in May after +2.5% in April. Core sales -1.6% marked steepest decline of 2017.
  • Commodities – Oil holding below $45/bbl; COMEX gold ($1255/oz.), copper (-0.3%) extending losses
  • U.S. stocks lower in early trading after USD gained some traction overnight; yield curve flattened after Fed meeting and shorter-dated maturities underperformed. Weakness on short-end suggests global traders may hold Fed at its word, unlike U.S. traders.
  • 2-year Treasury +0.015% to 1.35%, 10-year yield flat around 2.14%

 

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Macro Notes

  • The Fed raised its target for the federal funds rate by 0.25% to a range of 1.00% to 1.25% at the conclusion of its two-day meeting yesterday. The move had been largely priced into financial markets and was the fourth rate hike of this cycle, which began in December 2015.
  • The Federal Open Market Committee’s (FOMC) statement was also more hawkish than many expected, particularly given yesterday’s weak inflation reading. The median (dot plots) interest rate projections (1.4% end 2017 and 2.1% end 2018) suggests one more hike this year with possibility three more hikes next year.
  • This was curious since the Fed reduced its projection for core personal consumption expenditures inflation from 1.9% to 1.7% in 2017. They did, however, raise gross domestic product (GDP) projections from 2.1% to 2.2% for 2017 and lowered the projection for the unemployment rate from 4.5% to 4.3%. Importantly, the Fed intends to gradually reduce the size of its balance sheet (currently $4.5T) by decreasing reinvestment of principal payments from maturing bonds. It appears to be a gradual and predictable plan that should not surprise markets.
  • The BOE announced this morning that it would keep interest rates unchanged at 0.25%. Recent economic data has been mixed, with surging prices and weak consumption. It should be noted, though, that the BOE’s vote to keep rates steady was divided, 5-3; the widest split in six years. Futures are pricing in less than a 50% chance that the BOE will raise rates through June 2018, as UK GDP is forecast to expand +1.7% in 2017 and +1.3% in 2018. Inflation, however, is projected to hold above +2.5% through next year as the weak pound weighs on European importers.
  • The BOJ began deliberations in its two-day meeting, with consensus expectations that it will eventually remove its 80T yen ($725B) annual bond buying target and cut its purchases of debt with more than 10 years to maturity; however, the timing of this process remains unknown. Since shifting focus from expanding the monetary base, the BOJ has adjusted the amount of debt it buys in market operations to respond to sharp rises or falls in bonds. Like the ECB and BOE, the BOJ is contending with a growing chorus about the possible exit from its quantitative easing program. The announcement is due later tonight. Remember the three arrows – government spending and monetary policy have been effective, but structural economic reforms remain elusive.
  • A look at new highs. While the Dow made a new all-time high yesterday, the S&P 500 Index barely missed it. Still, the S&P 500 Index has made 23 new highs so far this year, the most since 2014 hit 53 new highs. Today on the LPL Research blog we will take a look at new highs historically and show how they tend to happen in clusters that last upwards of more than a decade.

 

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Click Here for our detailed Weekly Economic Calendar

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)

 

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