Market Update: Tuesday, January 16, 2018

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Market Recap

  • Another strong week as domestic markets kicked off Q4 earnings season. Friday ended with all major indexes higher; Dow +0.9%, S&P 500 Index +0.7%, Nasdaq +0.7%, Russell 2000 +0.3%.
  • Consumer discretionary, energy, financials led markets; rate-sensitive utilities, REITs underperformance continued.
  • Treasury yields slightly higher; 10-yr. yield +1 basis point to 2.55%.
  • NYSE breadth positive (1.2:1), Nasdaq (1.5:1), volume picked up a bit ~104% of 30-day avg.
  • Commodities: WTI crude oil strength persisted (+0.9% to $64.34/bbl.), COMEX gold climbed +1.3% to $1339/oz., industrial metals mixed.
  • Economic news: U.S. Consumer Price Index, retail sales data came back in line with expectations (+0.1%, +0.4% month over month).

Overnight & This Morning

  • U.S. equities opened solidly higher, tracking gains overseas; earnings optimism buoying sentiment.
  • European stocks broadly higher. U.K. inflation slowed but remains +3.0% year over year. Global sovereign bond yields lower. STOXX Europe 600 +0.4%, DAX +0.8%, FTSE 100 +0.3%.
  • Asian markets closed higher. Hang Seng (+1.8%) 14-day win streak ended Monday. Weaker yen boosting Japan. Nikkei +1.0%, Shanghai Composite +0.8%
  • Treasury yields edge lower; 10-yr. yield -2 basis points (-0.02%) to 2.53%.
  • Commodities: Oil unchanged ~$64.30/bbl. despite reports OPEC may pare supply cuts; gold -0.5% to ~$1333/oz. weighed down by U.S. dollar advance. Industrial metals weaker on China demand concerns.
  • Economic releases: U.S. Empire Manufacturing for January (17.7) below consensus (19.4), prior reading (19.6).

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Key Insights

  • Government shutdown? Reports out of Washington, D.C. suggest Congress may be unable to reach a spending deal before the January 19 deadline, setting up a potential stopgap extension until February 16. A shutdown still appears unlikely despite the apparent logjam on immigration, though a potential shutdown would likely be resolved quickly and be minimally disruptive to markets in our view.

Macro Notes

  • Fourth quarter earnings season gets going this week. About 5.0% of S&P 500 profits, from 27 S&P 500 companies, will be reported this week. The focus for investors will be on company guidance regarding the impact of the new tax law. We are looking for the typical 2-4% upside to consensus estimates that are currently calling for a 12.0% year-over-year increase in S&P 500 earnings for the quarter, according to Thomson Reuters. This suggests a final increase in the 14-16% range, while revenue growth may top 7.0%. The strong growth is expected to be driven mostly by a solid rebound in energy sector profits, as well as the potential for double-digit gains in the technology and financials sectors. Pre-announcement trends and recent earnings revisions, positive global economic surprises, the new tax law, U.S. dollar weakness, and higher oil prices all bode well for results.
  • U.S. dollar bounces off multi-year lows. After four straight declines that pushed the dollar to three-year lows on Monday, the greenback stabilized in Tuesday trading. Strength came more-so from downward pressure on other major currencies such as the euro, which fell on expectations that the European Central Bank (ECB) will maintain its bond-buying program and on political roadblocks in Germany as prospects for a coalition government appear to be weakening; as well as a reversal of the yen’s five-day run-up after Japan’s finance minister expressed concerns about the extent of the recent strength. Despite weakness so far this year, we expect modest upward pressure on the U.S. dollar in 2018 as the Federal Reserve (Fed) hikes interest rates and continues to taper bond purchases against the backdrop of gradual and delayed tapering by the ECB and continued aggressive monetary policy stimulus from the Bank of Japan.
  • Favor U.S and emerging markets equities. In last week’s Weekly Market Commentary, we reviewed our thoughts on the U.S. equity markets, particularly given the changes to our outlook relative to the new tax law. We’re expanding on our 2018 equity outlook this week with a focus on global markets in our latest commentary due out later today. As we discussed in our Outlook 2018: Return of the Business Cycle, from a regional perspective we favor the U.S. and emerging markets over developed foreign markets broadly, although the improving outlook in Japan is noteworthy.
  • Global growth expected to continue in 2018. Similar to the other commentaries this week, our Weekly Economic Commentary takes a closer look at our global outlook. Global growth surprised to the upside in 2017, and we expect the positive trend to continue in 2018. We forecast global growth of 3.7%, with emerging markets (4.8% expected GDP growth) expected to outpace developed markets (where we expect a still-decent growth rate of 1.8%, ex-US).
  • Global bonds under pressure. Similar to our forecast for the United States, we expect slowing central bank accommodation and a gradual rise in interest rates to put pressure on foreign developed bonds in 2018. Emerging market debt offers higher yields, though tight valuations and interest rate sensitivity could be headwinds in 2018. We discuss this in more detail in this week’s Bond Market Perspectives, due out later today.
  • The week ahead. Market participants will be watching the housing data come in this week after the U.S. Homebuilder Sentiment Index hit its highest level in 18 years (74) in December. The Fed’s Beige book is slated for release on Wednesday; and other U.S. data due out include industrial production and capacity utilization. In Europe, investors will get a read on inflation data for the Eurozone, Germany and the United Kingdom. In Asia, Japan releases its Producer Price Index, along with industrial production data; and in China, gross domestic product and retail sales come out toward the end of the week.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Empire State Manufacturing Index (Jan)
  • Germany: CPI (Dec)
  • Italy: CPI (Dec)
  • UK: CPI & PPI (Dec)
  • Italy: Trade Balance (Nov)
  • BOJ: Outright Bond Purchase
  • Japan: Core Machine Orders (Nov)
  • China: New Loans & Money Supply (Dec)

Wednesday

  • MBA Mortgage Applications (Jan 12)
  • Industrial Production & Capacity Utilization (Dec)
  • National Association of Home Builders Housing Market Index (Jan)
  • Total Net Treasury Int’l Capital Flows (Nov)
  • Beige Book
  • Evans (Dove)
  • Mester (Hawk)
  • Eurozone: CPI (Dec)
  • ECB: Nowotny
  • Bank of Canada: Rate Decision
  • Japan: Industrial Production & Capacity Utilization (Nov)
  • China: GDP (Q4)
  • China: Retail Sales (Dec)
  • China: Industrial Production (Dec)

Thursday

Friday

  • U. of Michigan Sentiment (Jan)

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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