- U.S. indexes finished mostly lower, well off best levels seen in early trading. S&P 500 Index -0.1%, Dow +0.2%, Nasdaq -1.0%.
- Telecommunications, financials led; healthcare, technology lagged as sector rotation continued.
- Positive breadth (1.0:1) on NYSE; relatively high volume (~116% of 30-day avg.).
- 10-year note yield +1 basis point (+0.01%) to 2.37%.
- Commodities – WTI crude -1.6% to $57.43/bbl., COMEX gold -0.2% to $1279/oz., industrial metals finished broadly higher.
- Economic news – Factory orders beat expectations (-0.1% vs. expected -0.4%), as did durable goods orders after October data upwardly revised, (-0.8% vs. -1.2% initial, -1.0% expected revision).
Overnight & This Morning
- Domestic stocks opened little changed, Nasdaq slightly weaker amid ongoing rotation out of technology to tax reform beneficiaries.
- European equities down on weakness in miners. STOXX Europe 600 -0.2% despite strong October PMI data; FTSE 100 +0.2%, DAX -0.2%, CAC 40 -0.3%.
- Asian markets lower. Major indexes mostly lower amid technology weakness, despite strong China services sector data. Nikkei -0.4%, Hang Seng -1.0%, Shanghai Composite -0.2%, Australia’s ASX 200 -0.4% after Australia’s central bank left rates unchanged at 1.5%.
- Commodities – Crude lower (-0.3% to $57.28/bbl.) ahead of weekly inventory data, gold -0.1% to $1275/oz., copper (-2.4%) leading industrial metals lower.
- 10-year note yield slightly higher at 2.39%.
- U.S. dollar mixed vs. major currencies. Pound among biggest losers after May’s Brexit deal hit a snag.
- Today’s economic calendar includes October trade data; ISM Non-Manufacturing (November, consensus 59.0), which will be discussed later today on the LPL Research blog.
- Technology fundamentals remain strong. We continue to favor a slight overweight to the technology sector given our positive outlook for earnings amid several powerful trends such as mobile, cloud computing, and machine learning, as well as the sector’s role as a productivity enabler. We do not see the latest selloff as the start of a prolonged period of weakness but rather a short-term rotation to areas that benefit more from tax reform. In addition, some profit-taking here is to be expected given the sector’s more than 35% return year to date, more than 13 percentage points ahead of the next best sector performer (financials). We would be looking for opportunities to buy a dip should technology suffer a more prolonged and deeper selloff.
- Treasuries look for direction. The 10-year Treasury yield popped over 2.4% last week due to progress on tax reform, only to fall back below that level on Friday due to political concerns. The yield now sits just under the 2.4% level where it has remained for some time. Given the muted response to the tax plan (relative to equities) the bond market is clearly trying to parse the tax plan and its impact on growth and inflation levels. The 10-year Treasury has closed in a less than 10 basis point (0.1%) range over the last month, the tightest 1-month range since September 2006.
- Rising rate hike expectations continue to flatten the yield curve. Though longer-term Treasuries’ response to progress on tax reform has been muted, the response from the fed funds futures market has been more decisive. The fed funds futures market-implied number of rate hikes in 2018 has risen to 1.9 as of today, compared to 1.3 just a month ago. A tightening labor market and strengthening economy, compounded by potential effects from tax cuts, increase the chances of an upside surprise to inflation, potentially necessitating more Federal Reserve rate hikes in the future than previously anticipated. This has pressed short-term rates higher, leading the spread of the 2-year relative to the 10-year Treasury to a cycle low and to its flattest level since September 2007. A flatter yield curve may not have the same implications as in previous cycles, however, due to the influence of lingering central bank accommodation and foreign demand in a low-yield environment. For more information on the flattening yield curve, please see our recent Bond Market Perspectives.
- Reconciliation of tax reform bills continues. Probability of passage is near 100% at this point but there are still a number of issues that need to be worked out, including: 1) the corporate rate (20% or higher?), 2) the corporate Alternative Minimum Tax (AMT), 3) depreciation treatment for the corporate net interest deduction cap, 4) capital expensing (phase in or immediate), 5) personal income tax brackets, 6) pass-through rates, and 7) the mortgage deduction. Effective loss of research and development tax credits related to corporate AMT is getting a lot of attention and has weighed on technology and biopharma this week. We expect the final bill to be completed by year end despite these sticking points.
- Trade Balance (Oct)
- Markit Services PMI (Nov)
- ISM Non-Manufacturing (Nov)
- Eurozone: GDP (Q3)
- Eurozone: Retail Sales (Oct)
- Italy: Markit ADACI Services PMI (Nov)
- France: Markit France Services PMI (Nov)
- Germany: Markit Germany Services PMI (Nov)
- Eurozone: Markit Eurozone Services PMI (Nov)
- Australia: GDP (Q3)
- BOJ: Masai
- Bank of Canada: Rate Decision
- MBA Mortgage Applications (Dec 1)
- ADP Employment Change (Nov)
- Nonfarm Productivity (Q3)
- Unit Labor Costs (Q3)
- Germany: Factory Orders (Oct)
- Japan: Buying Foreign Bonds (Dec 1)
- China: Foreign Reserves (Nov)
- Challenger Job Cuts (Nov)
- Weekly Jobless Claims (Dec 2)
- Household Change in Net Worth (Q3)
- Consumer Credit (Oct)
- Germany: Industrial Production (Oct)
- France: Trade Balance (Oct)
- Italy: Unemployment Rate (Q3)
- Bank of Italy: Report on Balance Sheet Aggregates
- Japan: GDP (Q3)
- Japan: Leading Index (Oct)
- Japan: Eco Watchers Survey (Nov)
- China: Trade Balance (Nov)
- China: Imports & Exports (Nov)
- Change in Nonfarm, Private & Manufacturing Payrolls (Nov)
- Unemployment Rate (Nov)
- Average Hourly Earnings (Nov)
- Average Weekly Hours (Nov)
- Labor Force Participation & Underemployment Rates (Nov)
- Wholesale Inventories (Oct)
- Wholesale Trade Sales (Oct)
- Germany: Trade Balance (Oct)
- Germany: Current Account Balance (Oct)
- Germany: Imports & Exports (Oct)
- France: Industrial Production (Oct)
- UK: Industrial Production (Oct)
- UK: Trade Balance (Oct)
- UK: Nat’l Institute of Economic & Social Research GDP Estimate (Nov)
- BOE: Inflation Next 12 Months
- China: CPI & PPI (Nov)