Market Update: Wednesday, December 20, 2017

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Market Recap

  • Stocks pulled back despite upbeat data on housing starts, building permits; Congress passing tax reform legislation. S&P 500 Index -0.3%, Dow -0.2%, Nasdaq -0.4%.
  • Few sectors gained; consumer staples, energy, industrials inched higher; bond proxies REITs, utilities led to the downside.
  • Negative breadth on NYSE (1.8:1), Nasdaq even (1.0:1).
  • Treasury prices fell sharply as yield curve steepened; 10-yr. yield +6 basis points (0.06%) to 2.45%.
  • U.S. Dollar index -0.3%, though USD stronger vs. euro.
  • Commodities: WTI crude oil +0.6% to $57.49/bbl., COMEX gold flat, industrial metals all higher.

Overnight & This Morning

  • Major indexes opened higher with tax reform nearing completion.
  • Europe mostly lower, off worst levels. German producer prices up less than expected in Nov. (DAX -0.4%), Sweden’s Riksbank didn’t extend QE program (OMX -0.3%), STOXX Europe 600 -0.1%.
  • Asia little changed overnight. Focus remains on U.S. tax reform, though reports that China may back-peddle some of its regulatory ramp-up to prop up growth failed to appease traders. Shanghai Composite -0.3%, Hang Seng -0.1%, Nikkei +0.1%.
  • Treasury yields continuing higher; 10-yr. yield +2 basis points (0.02%) to 2.49%.
  • Commodities: Oil (+0.5%) nearing $58/bbl., gold +0.4% to $1268/oz., industrial metals still climbing.
  • More housing data on the economic calendar as existing home sales jumped to a more than 10-year high in November (+5.6% year over year vs. expectations of +0.9%).

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Key Insights

  • Big surge in yields. News out of Europe, with a potential assist from the tax reform vote in the United States, caused global yields to move higher yesterday. The 10-year Treasury yield jumped from 2.39% to 2.46%, closing at its highest level since late October. One factor involved was comments from several European Central Bank members about the bank discussing moving away from quantitative easing (QE) and toward interest rates as the key driver of monetary policy at some point in the future, while comments from the German government about selling more long-term debt also helped push longer-term yields higher. These moves helped lift U.S. rates as well, as did news that the tax reform bill continued to move closer to the finish line. As a result, Treasuries had a rough day, with utilities and REITs having their worst days of the year. Yesterday was a good reminder that higher overseas rates could have a similar impact here in the United States, as outlined in our Outlook 2018.

Macro Notes

  • Senate passes tax legislation. The Senate voted in favor of the tax bill early Wednesday morning passing in a party line vote, 51-48. Despite passing in the House yesterday afternoon, by a margin of 227-203, a re-vote was scheduled for today due to a procedural snag affiliated with Senate reconciliation rules. Up until late last week, approval in the Senate was viewed as the last major hurdle for Republicans to meet President Trump’s Christmas deadline. Several notable late holdouts came through though as all Republicans, except John McCain, being absent for health reasons, voted in favor of the measure. It is widely expected that after the House passes the measure again today, President Trump will sign the bill into law later this week.
  • What does tax reform mean to you and your clients? Tax reform has been a key focal point for financial markets this year, for good reason, as we expect the impact to S&P 500 earnings to be ~5-6%. However, individuals and small business owners will also see important changes that will impact their take-home pay. Later today on the LPL Research blog, we highlight some of the key changes.

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Click Here for our detailed Weekly Economic Calendar

Wednesday

Thursday

  • GDP (Q3)
  • Weekly Jobless Claims (Dec 16)
  • Personal Consumption (Q3)
  • Philadelphia Fed Business Outlook (Dec)
  • Chicago Fed Nat Activity Index (Nov)
  • Federal Housing Finance Industry House Price Index (Oct)
  • LEI (Nov)
  • France: Manufacturing Confidence (Dec)
  • Eurozone: Consumer Confidence (Dec)
  • UK: Lloyds Business Barometer (Dec)
  • Canada: CPI (Nov)
  • BOJ: Kuroda

Friday

  • Personal Income & Spending (Nov)
  • Durable Goods Orders (Nov)
  • Cap Goods Shipments & Orders (Nov)
  • Core PCE (Nov)
  • New Home Sales (Nov)
  • University of Mich. Sentiment (Dec)
  • Kansas City Fed Manufacturing Index (Dec)
  • UK: GDP (Q3)
  • Germany: Consumer Confidence (Jan)
  • France: PPI (Nov)
  • France: GDP (Q3)
  • Italy: Consumer Confidence (Dec)
  • UK: Current Account Balance (Q3)
  • Italy: Industrial Orders (Oct)

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

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