Market Update: Wednesday, July 5, 2017

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Monday’s Market Activity

  • S&P started Q3 with a modest gain ahead of July 4 holiday. S&P 500 +0.23% Monday; Dow +0.61%, Nasdaq -0.49%, Russell 2000 +0.8%.
  • Rotation from tech to financials continued. Although energy (+2.01%) topped Monday’s sector rankings, financials (+1.4%) outpaced tech (-0.85%), ahead by ~12 percentage points over the past month.
  • Crude oil win streak reached eight. WTI crude oil rose 2.2% to ~$47/bbl.
  • Treasuries sold off, pushing 10-year yield up 5 basis points (0.05%) to 2.35%.

Overnight & This Morning

  • S&P 500 slightly higher despite North Korean threat. Market’s focus will be on Fed minutes and geopolitics. May see delayed reaction to strong ISM.
  • North Korean threat escalates. North Korea took a step forward in acquiring nuclear launch capabilities to strike U.S. Market shrugged off heightened geopolitical tensions thus far, and as scary as the headlines are, will probably continue to do so. Asian market gains overnight are reassuring, though they follow Tuesday’s losses. European markets little changed.
  • Treasuries firm. 10-year yield down one basis point (0.01%) to 2.34%, COMEX gold ($1221/oz.) slightly lower, suggesting little flight-to-safety buying.*
  • Oil’s winning streak is over. Marginal decline in holiday session though down another ~1% this morning near $46.50/bbl. Reports that Russia opposes deeper cuts weighing.
  • Metals broadly weaker in part on strong U.S. dollar as markets assess Fed outlook relative to overseas central banks.
  • Fed minutes from June 13-14 FOMC meeting due out this afternoon. Services Purchasing Managers’ Index (PMI) data overseas mostly in line and healthy. U.S. services sector PMI due tomorrow, Trump-Putin meeting and June jobs report on Friday.

 

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Key Insights

  • Manufacturing sector remains healthy. Amidst the series of economic data below expectations recently, Monday’s Institute for Supply Management (ISM) report provided strong evidence of a healthy manufacturing sector; data is a positive read-through for the near-term earnings outlook (details below).
  • Balance sheet normalization likely coming soon. Markets will be looking closely at today’s Federal Open Market Committee (FOMC) minutes for clues as to whether the Federal Reserve (Fed) will begin shrinking its $4.5 trillion balance sheet in September, and whether that means the next rate hike will be put off until December. A gradual and well-communicated path, as we expect, would reduce the odds of market disruptions.
  • Yield curve steepened last week for the first time in seven weeks, based on 2-year/10-year Treasuries, hawkish global central bank commentary, and the strong ISM report. A steeper yield curve has historically been a positive leading economic indicator.

Macro Notes

  • Yields move higher on ECB comments and ISM data. 10-year yields moved higher last week for all G7 nations as the market read comments from European Central Bank (ECB) president Draghi last Tuesday (June 27) as hawkish, even after the central bank came out a day later and tried to walk the comments back. A better than expected ISM Manufacturing Index also helped to push U.S. yields higher on Monday.
  • Yield curve also steepens. Over the past week the 2-year and 10-year Treasury yields have moved higher by 0.08% and 0.21% respectively. This move led to the first yield curve steepening year-to-date. The 2-year, which has been more directly impacted by Fed rate hikes, is 0.21% higher, while the 10-year is 0.1% lower. This was the first time in seven weeks that the yield curve (as measured by the difference between 10-year and 2-year Treasury yields) had steepened week over week. It is interesting to note though that 5-year and 30-year Treasuries both moved up approximately 0.18%, leaving the difference between the 5-year, 30-year measure of yield curve steepness basically flat week over week.
  • High yield energy spreads tighten on oil strength. As we discussed in our recent Bond Market Perspectives, oil weakness pushed high-yield energy spreads higher, but the overall impact on the broader high-yield market has been limited so far. The recovery in oil has helped push high yield spreads back to 3.60%, near where they were at the end of May when the oil pullback began, though high-yield energy spreads at 4.99% remain about 0.7% higher.
  • Manufacturing activity accelerates. ISM PMI for June posted a strong upside surprise, accelerating to 57.8 versus consensus expectations of 55.8, its strongest reading since August 2014 (above 50 indicates expansion). New orders, which tend to be a leading indicator of future activity, surged to 63.5 from 59.5. The health of U.S. manufacturing is a positive data point for the earnings outlook of manufacturing-dependent industries.

 

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Click Here for our detailed Weekly Economic Calendar

Wednesday

  • Factory Orders (May)
  • Durable Goods Orders (May)
  • Capital Goods Shipments and Orders (May)
  • FOMC Meeting Minutes for Jun 14
  • Italy: Markit Italy Services PMI (Jun)
  • France: Markit France Services PMI (Jun)
  • Germany: Markit Germany Services PMI (Jun)
  • Eurozone: Markit Eurozone Services PMI (Jun)
  • UK: Markit UK Services PMI (Jun)
  • Eurozone: Retail Sales (May)

Thursday

  • ADP Employment (Jun)
  • Initial Jobless Claims (Jul 1)
  • Trade Balance (May)
  • Germany: Factory Orders (May)
  • ECB: Account of the Monetary Policy Meeting
  • Mexico: Central Bank Monetary Policy Minutes
  • Japan: Labor Cash Earnings (May)

Friday

  • Change in Nonfarm, Private & Mfg. Payrolls (Jun)
  • Unemployment Rate (Jun)
  • Average Hourly Earnings (Jun)
  • Average Weekly Hours (Jun)
  • Labor Force Participation & Underemployment Rates (Jun)
  • Germany: Industrial Production (May)
  • France: Industrial Production (May)
  • Italy: Retail Sales (May)
  • UK: Industrial Production (May)
  • UK: Trade Balance (May)

*US Treasuries may be considered “safety” investments but do carry some degree of risk including interest rate, credit and market risk. Gold and other precious metal investing involves greater fluctuation and potential for losses.

 

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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