Yesterday’s Market Activity
- U.S. indexes closed mixed; S&P 500 Index (-0.1%), Dow (+0.4%), Nasdaq (-0.6%). After strong earnings reports, just a handful of stocks powered the Dow’s gains, while a mid-day collapse in the “FANG” stocks led Nasdaq lower.
- Telecom topped sector list for second day in a row; transportation stocks hit hard; Dow Jones Transportation Average (-3.1%).
- Yield curve steepened slightly, 10-year Treasury yield +2 basis points (0.02%) at 2.31%.
- WTI crude oil, COMEX gold modestly higher despite dollar strength.
Overnight & This Morning
- U.S. equities down ~0.3%, following Europe lower. Late-session weakness in technology Thursday, gross domestic product (GDP) report, conclusion of the busiest week of earnings season garnering most attention.
- European markets off ~0.7% on mixed bank earnings, follow through after late-day weakness in U.S. yesterday.
- Asian markets mostly lower, with Nikkei, Hang Seng -0.6%, and Shanghai Composite +0.1%. Earnings, Japanese political uncertainty getting attention in the region.
- Little change in Treasuries (10-year yield at 2.32%).
- Oil ($49.17/bbl.), gold ($1271/oz.), both marginally higher.
- Largely in-line GDP report with slight disappointment on modest Q1 downward revision (details below).
- “Skinny plan” vote fails in the Senate, sets the stage for pivot to tax reform. There are several paths healthcare talks could take from here, but the unsuccessful vote last night should move Congress closer to the still-difficult work that lies ahead in achieving tax reform. Republicans took the border adjustment tax off the table yesterday, which was another small, though expected, step forward. Overall, this news is an incremental positive for the healthcare sector.
- Potential paths ahead for healthcare reform:
- Unilateral regulatory changes that don’t require congressional approval (most likely)
- The Senate picks it back up again in the fall (unlikely, but possible)
- Bipartisan agreement to improve the law and firm up insurance markets (even less likely)
- Economy accelerates in second quarter. Real GDP grew at an annualized rate of 2.6% in the second quarter, slightly missing consensus expectations of 2.7%, but accelerating from a downwardly revised 1.2% in the first quarter. Looking inside the numbers, the data tilts more positive. Consumer spending rebounded solidly after a weak first quarter and business spending on equipment grew 8.2%, the most in almost two years. The two big disappointments were residential construction, which slowed after a strong first quarter, and inventories, which were expected to show some bounce after sharp contraction in the first quarter but were basically flat. Strong consumer and business sentiment, prospects of fiscal stimulus, and continued support from business investment help increase the likelihood that the quarter’s growth rate is sustainable with some potential for further upside if global economic conditions continue to improve.
- Initial reaction in the currency markets to the U.S. GDP data was mixed, with the dollar weakening right after the news was announced but regaining most of those losses within the hour. On a longer-term basis, we looked at the relationship between U.S. and German 10-year bond spreads and the value of the euro. There is a strong, though far from perfect, negative correlation between them. When U.S. yields increase relative to German yields, that tends to put pressure on the euro, as investors sell euro denominated bonds to buy dollar bonds. Recently, we have seen that spread start to narrow, accompanied by strength in the euro relative to the dollar.
- A number of countries released inflation data this morning. Japanese inflation was 0.4% annualized, as expected. German inflation was 1.5%, slightly higher than expected but still well below the European Central Bank’s 2% target. Overall, this will allow both countries to maintain relatively loose monetary policy.
- GDP (Q2)
- Core PCE (Q2)
- France: GDP (Q2)
- France: CPI (Jul)
- Germany: CPI (Jul)
- UK: Nationwide House Prices (Jul)
- Eurozone: Consumer Confience (Jul)
- Canada: GDP (May)
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