Yesterday’s Market Activity
- Dow, S&P 500 Index inched to new record highs, as positive Q2 earnings continued, particularly in consumer staples. M&A activity in healthcare sector boosted Nasdaq 0.5%, outperforming major indexes.
- WTI crude oil’s fall on supply concerns weighed on energy sector, but consumer staples helped offset losses.
- St. Louis Fed President James Bullard said central bank doesn’t need to change rates in near-term as inflation unlikely to rise significantly, despite labor market movements.
Overnight & This Morning
- Asian stocks mixed as investors digested trade data from China; Shanghai Composite +0.1%, Nikkei -0.3%.
- Chinese exports +7.2% in dollar terms during July, imports +11.0%. Both categories missed forecasts, but moderation in trade growth has been anticipated. Investors likely to emphasize Beijing’s efforts to rationalize credit growth as financial de-risking currently perceived as more critical to economy by many investors.
- Australian banks remained under pressure; ASX 200 -0.5%.
- European stocks were also mixed as Chinese trade data, combined with yesterday’s disappointment in German industrial output, clouded an otherwise positive string of recent global economic data. STOXX Europe 600 unchanged.
- Commodities – Oil prices lower near $49/bbl. as Saudi Arabia’s Aramco cut September crude supplies to customers but was offset by a resumption of Libyan production after another temporary disruption in output.
- COMEX gold +0.1% as dollar eased ahead of U.S. inflation data due out on later this week.
- Dollar weaker on Bullard comments as expectations for another Fed hike in 2017 fall.
- 10-year Treasury yield higher at 2.27% as bond investors await data today on small business confidence, JOLTS. Also, U.S. Treasury set to auction $24 billion in 3-year notes, first of three major offerings this week.
- U.S. indexes slightly lower at the open, as investors weigh Q2 earnings, economic data, and the Treasury auctions this week.
- U.S. dollar remains under pressure. The U.S. dollar slipped for a second day overnight, yet it is still holding on to most of Friday’s gains after the solid jobs report. Investors remain unconvinced that the Federal Reserve (Fed) will raise rates again this year, pressuring the greenback, which slumped to 15-month lows last week and is down ~8.0% year to date. The lack of inflationary threats; however, especially from wages, could continue to give the Fed pause. We encourage investors to focus on the positive impact to corporate earnings from the weaker dollar, rather than the potential inflationary boost from imports. The Fed will no doubt be vigilant on this aspect of currency pressure.
- Rising rates have pressured high-quality fixed income over the last year. As of August 4, 2017, the Bloomberg Barclays Aggregate U.S. Bond Index has returned -0.2% on a trailing 1-year basis, as longer-term rates have increased significantly from the depressed levels of last summer. This may leave some investors frustrated and questioning their high-quality fixed income allocations. Despite these headwinds, there have been pockets of success within high-quality fixed income, and opportunities remain. In this week’s Bond Market Perspectives piece, we look at what occurred over the last year, what may be in store for the future, and why we still believe high-quality fixed income plays an important role in a diversified portfolio.
- Flatter yield curve on the week. The 2’s to 10’s slope, a measure of the steepness of the yield curve was flatter by 0.05% to 91 basis points (0.91%). The 2’s to 30’s yield slope was flatter on the week by 0.07% to 148 basis points (1.48%) as the 30-year Treasury bond finished lower by 0.05% to a 2.84%. Increased new issuance supply may impact the shape of this week’s yield curve with $24 billion in 3-year notes auctioning on Tuesday, a $23 billion 10-year note auction on Wednesday, and a $15 billion 30-year auction on Thursday.
- Inflation expectations fell slightly. Inflation expectations, as measured by the 10-year breakeven inflation rate, fell last week from 1.82% to 1.81% according to Federal Reserve Economic Data. This is lower than the Fed’s 2% inflation target but is higher than the June 20, 2017 lows of a 1.67%. Additional economic strength and improving oil prices could cause inflation to move higher.
- Municipal bond supply is higher. The Bond Buyer’s 30-day visible supply totaled $11.37 billion, above the 10-year average of $11 billion. New issuance is down 13% to $210 billion through July 31, 2017, according to Lipper data. With demand up and yields lower, issuers may take advantage of the high prices being paid for bonds and issue new supply after the summer months, which could lead to price weakness.
- Municipal to Treasury ratios richen on the week. Municipal bond fund inflows have been steady with only two weeks this year experiencing net cash outflows according to Lipper data. Higher yields have been met with increased inflows and as a result have driven prices up. The 10-year municipal to Treasury ratio richened to 82% and the 30-year AAA municipal to Treasury ratio richened to 96%. Generally as ratios tighten, demand for munis can decrease.
- More new highs, yet more of the same. Yesterday was a perfect summation of the action in 2017, new highs, yet very slow intraday action. The S&P 500 closed at its 30th new high of the year, the most since 53 in 2014. However, the index traded in a daily range of only 0.20%, which was the smallest daily range since May and the third smallest within the past 20 years. Since 1970, there have only been three times the S&P 500 closed at a new high amid a smaller intraday range. Finally, the S&P 500 has now gone a record 13 consecutive closes between 0.30% and -0.30%, well above the previous record of 10 days from 1961 and 1966.
- Were there clues the bull would be this strong? A year ago the S&P 500 closed higher five consecutive months, which prompted many to think it was extended and due for a well-deserved consolidation. We noted at the time that going back to 1950, that had happened 23 other times and a year later the index was higher all 23 times. Today, on the LPL Research blog, we will take a look at this statistic, along with several others we’ve shared that suggested continued equity strength.
 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.
- NFIB Small Business Optimism (Jul)
- Germany: Trade Balance (Jun)
- Germany: Imports & Exports (Jun)
- France: Budget Balance (Jun)
- Japan: Money Supply (Jul)
- China: CPI (Jul)
- China: PPI (Jul)
- MBA Mortgage Applications (Aug 4)
- Non-Farm Productivity & Unit Labor Costs (Q2)
- Wholesale Trade & Inventories (Jun)
- Italy: Industrial Production (Jun)
- Japan: Machine Tool Orders (Jul)
- Japan: PPI (Jul)
- China: New Loan Growth & Money Supply (Jul)
- PPI (Jul)
- Monthly Budget Statement (Jul)
- France: Industrial & Mfg. Production (Jun)
- Italy: Trade Balance (Jun)
- UK: Industrial & Mfg. Production (Jun)
- UK: Trade Balance (Jun)
- UK: NIESR GDP Estimate (Jul)
- CPI (Jul)
- Germany: CPI (Jul)
- France: CPI (Jul)
- Italy: CPI (Jul)
- Russia: GDP (Q2)
Past performance is no guarantee of future results.
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