Market Update: Wednesday, January 3, 2018

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Market Recap

  • U.S. equities kick off new year with gains. Manufacturing data came in positive (details below), political news remained light. S&P 500 Index +0.8%, Dow +0.4%, Nasdaq +1.5%.
  • Energy stocks led despite flat day for WTI crude oil; rate-sensitive sectors utilities, REITs lagged.
  • Positive breadth on NYSE (1.6:1), Nasdaq (1.9:1) amid ~90% trading volume vs. 30-day avg.
  • Treasury yields higher across the curve amid reflation positioning; 10-yr. yield +5 basis points (+0.05%) to 2.46%.
  • U.S. Dollar Index fell to lowest level since September; down nine of past 10 sessions.
  • Commodities: Crude oil -0.1% to $60.37/bbl., COMEX gold up for eighth straight session (+0.8% to $1320/oz.), industrial metals rally continued.

Overnight & This Morning

  • U.S. equities open near flat after fresh records. Major indexes opened modestly higher after Nasdaq, S&P 500, and Russell 2000 posted fresh record highs Tuesday.
  • European stocks recouping Monday losses, though off earlier highs. German unemployment figures, Swiss manufacturing Purchasing Managers’ Index (PMI) both positive; U.K. PMI data disappointed. STOXX Europe 600 +0.2%.
  • Asia extends gains overnight. Shanghai Composite (+0.6%), Hang Seng (+0.2%) pushed higher despite China central bank adjusting renminbi exchange rate up to levels last seen in early May 2017. Nikkei closed.
  • Treasuries holding firm after Tuesday weakness.
  • Commodities: Oil +0.7% to ~$60.80/bbl., gold inching up (+0.1% to ~$1317/oz.), industrial metals up again.
  • Economic releases: Minutes from last month’s Federal Reserve (Fed) meeting due out this afternoon (details below), ISM manufacturing, construction spending, vehicle sales also on the docket.

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Macro Notes

  • Treasury yields rise after manufacturing data stokes reflation trades. The 10-year Treasury yield has managed to sustain its breakout above the 2.4% level, as a potential economic boost from tax reform and encouraging PMI numbers from around the world have markets on the lookout for a pickup in inflation. Both headline and core readings for the U.S. Producer Price Index have exceeded 2% since August. This increase has so far failed to carry through to consumer inflation, however market participants do seem to be picking up on the theme that inflation could reemerge, as the 10-year breakeven inflation expectation (as measured by the difference in 10-year Treasury and 10-year Treasury Inflation Protected Security yields) closed just above 2% on Monday, marking the first time this level has been breached since March 2017.
  • Minutes from last month’s Fed’s meeting due out today. The minutes from the Fed’s December 12-13 policy meeting will be released today at 2 p.m. ET. Fed watchers will be focusing on the shift in economic expectations at the last meeting, 2018 median growth forecasts seeing an upgrade from 2.1% to 2.5% without an accompanying shift in rate hike expectations, as well as any sign of rising concerns about inflation. Our base case continues to be for three hikes in 2018 with a bias to the upside based on our own upgraded economic growth expectations following the passage of the tax bill.
  • Nasdaq 7,000. The Nasdaq closed above the milestone level for the first time ever yesterday, and gained an impressive 1.5% for the best first day of a year since 2013 to boot. All this came on the heels of a year that saw technology lead all sectors. Although 7,000 is quite the milestone, it is important to remember that technology has produced extremely strong earnings over the past year, justifying the impressive gains. Also, adjusted for inflation, the March 2000 peak for the Nasdaq is above 7,200. In other words, one could make an argument that the Nasdaq still isn’t at a real new all-time high yet–so perhaps it isn’t as overbought as some claim.

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Click Here for our detailed Weekly Economic Calendar

Wednesday

Thursday

  • Challenger Job Cuts (Dec)
  • Weekly Jobless Claims (Dec 30)
  • Markit Services PMI (Dec)
  • Bullard (Dove)
  • France: Markit France Services PMI (Dec)
  • Germany: Markit Germany Services PMI (Dec)
  • UK: Markit UK Services PMI (Dec)
  • Eurozone: Markit Eurozone Services PMI (Dec)
  • UK: Money Supply & Bank Lending (Nov)
  • Japan: Monetary Base (Dec)
  • Japan: Nikkei Japan Services PMI (Dec)

Friday

  • Change in Nonfarm, Private & Manufacturing Payrolls (Dec)
  • Unemployment Rate (Dec)
  • Average Hourly Earnings (Dec)
  • Average Weekly Hours (Dec)
  • Labor Force Participation & Underemployment Rates (Dec)
  • Trade Balance
  • Factory Orders (Nov)
  • ISM Non-Manufacturing (Dec)
  • Durable Goods Orders
  • Cap Goods Shipments & Orders

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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