Market Update: Friday, September 29, 2017

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Market Recap

  • Major U.S. indexes up slightly; small caps continued to advance on tax reform expectations. Dow +0.3%, S&P 500 Index +0.1%, Nasdaq flat, Russell 2000 +0.3%.
  • Materials led on the day; energy stronger despite WTI crude down >1%. Industrials, consumer discretionary lagged.
  • 10-year Treasuries stopped slide, finishing flat after a big spike the day before at 2.31%.
  • NYSE volume light again at 89.4% of 30-day average, breadth positive (1.5:1).
  • Commodities mixed; WTI crude down 0.2% to $51.6/bbl, COMEX gold (+0.1%) to $1289.6/oz.
  • GDP higher. Second revision of Q2 GDP stronger than expected at 3.1% vs. 3.0% expected.

Overnight & This Morning

  • U.S. stocks opened slightly lower; focus remains on lack of details around tax blueprint.
  • Asia mostly gained amid few drivers ahead of Chinese National Day holidays; Hang Seng +0.5%, Nikkei flat, KOSPI+0.9%.
  • Europe near flat in late trading in a relatively quiet session. STOXX Europe 600 flat, DAX +0.3%, FTSE 100 +0.1%
  • Rates little changed after a week of hawkish Fed officials’ comments; 10-year yield at 2.31%, up from 2.26% last week.
  • Crude oil pulling back slightly, down 0.4% this morning near $51.3/bbl.
  • Commodities mixed with gold, silver up ~0.3%; while industrial metals lower.
  • Today’s key economic data: U.S. consumer spending data in line at +0.1%, income levels lower than expected at +0.20% vs. 0.25% expected. Eurozone inflation came in slightly below consensus at 1.5% vs. 1.6%; U.K. GDP year-over-year growth fell short at 1.5% vs. 1.7%.

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Key Insights

  • Second quarter GDP ends at 3.1%. The third estimate of second quarter gross domestic product (GDP) was released yesterday, and real GDP was revised higher to 3.1%, beating expectations that it would be flat with previous estimates at 3.0%. The major driver of the change was an uptick in private inventories. While GDP is always closely watched, by the time we reach the third revision, the impact on markets is usually somewhat limited unless there is a large unexpected change. However, the next GDP release–the advance estimate of third quarter GDP, set to publish on October 27–is likely to be more impactful for markets. Consensus estimates, which should by now include the impacts of recent hurricanes, currently expect an increase of just below 2%, though we would expect that the fourth quarter may make up for some of the weakness as rebuilding becomes more of a factor. The takeaway for investors is that though we may see some volatility in the third and fourth quarters, GDP growth remains steady overall, which is a positive for markets.
  • Busy week for Fed speakers. Earlier this week, Federal Reserve (Fed) Chair Janet Yellen gave a speech in Cleveland that was widely viewed as hawkish; she said the low-inflation trend is likely temporary, and this lead to a big spike in yields. Additionally, Boston Fed President Rosengren stated policy makers should not “overreact to low current inflation readings that are widely expected to be temporary.” On the other side though, St. Louis Fed President Bullard said the current low-inflation could be here at least through the end of this year. The bottom line is that expectations for a December rate hike have increased significantly, now close to 70% according to the fed fund futures, from less than 30% this time a month ago.

Macro Notes

  • The least volatile September ever. Tomorrow is the last day of the month, but it is looking like a solid one for equities, which would be the sixth consecutive monthly win for the S&P 500. Along the way, it will be the least volatile month of September ever with an approximately 0.4% daily range. We discuss this more on the LPL Research blog here.
  • Here comes the fourth quarter. Next week kicks off Q4, which is historically a strong time for equities. Going back to 1950[1], this quarter has been up 3.9% on average and higher nearly 80% of the time–both are far and away the best out of the four quarters. Today on the LPL Research blog we will take a closer look at the history of the fourth quarter and show some other reasons the next few months might have bulls smiling.
    [1] 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.

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Click Here for our detailed Weekly Economic Calendar

Friday

Personal Income and Spending (Aug)

PCE Core Price Index (Aug)

Chicago PMI (Sept)

U of Mich. Consumer Sentiment (Sept)

Harker* (Hawk)

UK: GDP (Q2)

France: CPI (Sept)

France: PPI (Aug)

Germany: Unemployment Change (Sept)

UK: Current Account Balance (Q2)

UK: Money Supply (Aug)

Italy: CPI (Sept)

Eurozone: CPI (Sept)

Canada: GDP (July)

ECB: Draghi

BOE: Carney

IMF: Lagarde

Japan: Vehicle Production (Aug)

Japan: Housing Starts (Aug)

China: Manufacturing & Non-Manufacturing PMI (Sept)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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