Market Update: Tuesday, January 23, 2018

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Market Recap

  • Major domestic indexes finished at session highs following positive funding news out of Washington; Dow +0.6%, S&P 500 Index +0.8%, Nasdaq +1.0%.
  • Telecommunications, energy soundly outperformed. Materials and industrials lagged despite finishing only slightly negative.
  • Positive market breadth (NYSE 1.8:1, Nasdaq 1.3:1), volume remained above average (~108% of 30-day avg.).
  • Treasury yields flat; 10-yr. yield at 2.66%.
  • Commodities: WTI crude oil moved higher (+0.5% to $63.66/bbl.), COMEX gold near flat +0.1% to $1334/oz., industrial metals finished up.
  • Economic data: Chicago Fed National Activity Index above expectations (0.27 vs. 0.25).

Overnight & This Morning

  • Major domestic indexes opened near flat after fresh record-high closes following Congress’ passage of stopgap bill.
  • European stocks mixed, off session highs. Better-than-expected U.K. government borrowing data, German ZEW supportive. STOXX Europe 600 +0.3%, DAX +0.7%, CAC 40 -0.2%.
  • Asia sharply higher overnight; benefited from Bank of Japan (BOJ) leaving monetary policy unchanged, corporate earnings optimism. Shanghai Composite +1.3%, Hang Seng +1.7%, Nikkei 225 +1.3%.
  • Treasuries firming; 10-yr. yield -4 basis points (-0.04%) to 2.62%.
  • Commodities: Oil trekking higher (+1.0% to $64.20/bbl.), gold increasing +0.3% to 1336/oz., industrial metals mostly lower.
  • Economic data: Richmond Fed Manufacturing Index in-line at 18.0 vs. 20.0 prior; U.K.’s CBI Industrial Trends Survey beat expectations (14 vs. 12). German ZEW survey showed optimism, positive medium-term expectations for economy, capital markets, current conditions data came back higher than anticipated (95.2 vs. 89.8).

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Key Insights

  • Government shutdown ended…for now. The Senate passed a stopgap bill yesterday that will fund government operations until February 8; but as the next deadline quickly approaches, consensus will likely again be difficult to achieve. What impact could this have on the economy and markets? In case you missed it, we provided our thoughts yesterday on the LPL Research blog.

 Macro Notes

  • Another record goes down. The S&P 500 has officially closed within 5% of its all-time high for 395 consecutive trading sessions, topping the previous record of 394 during the mid-1990s. The recent streak started right after the Brexit sell-off in late June 2016. Although a 5% correction could happen at any time, it is important to note that the mid-1990s gained for four more years after that streak ended, although there was a good deal of volatility. Today on the LPL Research blog we will take a closer look at this record.
  • BOJ leaves policy unchanged. The BOJ released the statement from its latest monetary policy meeting this morning, and as expected, nothing changed. Markets had likely been pricing in at least a small chance of a near-term taper in the BOJ’s asset purchase program, following news two weeks ago that it adjusted purchases of intermediate- and long-term bonds. However, as we discussed at the time, the move appears to have been more operational in nature, and today’s statement didn’t make any mention of tapering.
  • 10-year Treasury breaks above March highs. The 10-year Treasury yield closed yesterday at 2.65%, above the post-election peak of 2.62% reached on March 13, 2017. Improving global growth, tax reform, and sporadic hawkish comments from central bankers (both domestic and overseas), as well as increasing inflation expectations have been the major forces driving yields higher since September. While yields have moved lower this morning, we do expect a gradual climb in rates throughout 2018; though it will most likely not happen in the straight line we’ve seen recently. We continue to expect the 10-year Treasury to end 2018 in a range between 2.75%-3.25%.
  • Is the yield curve suggesting that a recession is looming? The U.S. Treasury yield curve has been a good predictor of economic growth (or a lack thereof), and it is getting a lot of attention as continues to flatten. In case you missed it last week, we discussed the potential implications of a flattening or inverted yield curve on the LPL Research blog.
  • Credit markets showing few signs of stress. Spreads on both investment-grade and high-yield bonds have tightened in recent months, indicating that markets aren’t yet worried about the impact that rising rates could have on economic growth. We discuss this topic in more detail in this week’s Bond Market Perspectives, due out later today.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Richmond Fed Mfg. Report (Jan)
  • Germany: ZEW Survey (Jan)
  • Eurozone: ZEW Survey (Jan)
  • Eurozone: Consumer Confidence (Jan)
  • BOJ: 10-yr Yield Target
  • BOJ: Outlook Report & Policy Rate Decision
  • Japan: Machine Tool Orders (Dec)
  • Japan: Trade Balance (Dec)
  • Japan: Nikkei Japan Mfg. PMI (Jan)

Wednesday

Thursday

  • Wholesale Inventories (Dec)
  • Advance Goods Trade Balance (Dec)
  • New Home Sales (Dec)
  • LEI
  • Germany: Consumer Confidence (Feb)
  • Germany IFO Business Climate (Jan)
  • Italy: Industrial Orders & Sales (Nov)
  • Canada: Retail Sales (Nov)
  • ECB: Main Refinance Rate
  • ECB: Marginal Lending & Deposit Facilities
  • BOJ: Minutes of Policy Meeting
  • Japan: CPI & PPI (Dec)

Friday

 

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