Market Update: Friday, January 26, 2018

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Market Recap

  • Stocks little changed in choppy trading. Mixed earnings left Dow (+0.5%), S&P 500 Index (+0.1%) higher, Nasdaq (-0.1%) slightly down.
  • Mixed session for sectors. Healthcare led on gains in equipment makers, utilities also outperformed on M&A, lower rates; energy lagged.
  • Market breadth negative for a second day; trading volume remained elevated (~109% of 30-day avg.).
  • Treasuries mostly higher, some yield curve flattening; 10-yr. yield -2 basis points (-0.02%) to 2.63%.
  • Commodities: WTI crude -0.6% to $65.21/bbl., COMEX gold -0.7% to $1347/oz.
  • Dollar stabilized after President Trump countered Treasury Secretary Mnuchin’s comments that suggested U.S. favored weaker dollar (details below).
  • Economic data: Japanese inflation in December below consensus (0.1% vs. 1.0%); German IFO Business Climate Index 117.6 vs. 117.2 expected, German consumer confidence ticked up (11.0 vs. 10.8 prior, 10.8 expected).

Overnight & This Morning

  • Major domestic indexes opened higher, putting equities on track for a fourth straight week of gains to kick off 2018.
  • European stocks up midday, follows positive fourth quarter U.K. gross domestic product (GDP) release. STOXX Europe 600 +0.5%, DAX +0.1%, CAC 40 0.9%.
  • Asia mixed; attention still revolving around banking, potential liquidity concerns. Shanghai Composite +0.3%, Hang Seng 1.4%, Nikkei 225 -0.2%.
  • Treasuries flat; 10-yr. yield holding at 2.63%.
  • Commodities: Oil holding near flat overnight (+0.1% to $65.61/bbl.), gold retracing gains (-0.8% to 1351/oz.), industrial metals mostly higher.
  • Economic data: Big morning for domestic economic data as Q4 U.S. real GDP numbers miss expectations (2.6% vs. 2.9% QoQ), but consumer spending (3.8% vs. 3.6% QoQ), new durable goods orders beat (2.9% vs. 1.7% month over month), monthly trade deficit widened more than anticipated (-$71.6B vs. -$69.0B).

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Macro Notes

  • GDP falls short on inventory and trade drags but featured strong demand. The first release of fourth quarter GDP showed an increase of 2.6% annualized on an inflation-adjusted (real) basis, compared with expectations for 3.0% and 3.2% in the prior quarter. The shortfall was driven by an inventory drag, possibly hurricane related, after big rebuilding efforts late in the third quarter. Trade was also a drag-import growth strongly outpaced export growth and widened the trade deficit. Importantly, the report featured strong demand, with consumer spending (+3.8%), business equipment investment (+11.4%), and residential construction (+11.6%) driving a solid 4.3% increase in GDP excluding inventories and trade (referred to as final sales, all based on annualized data). Even government spending contributed 3% growth in the quarter, which is the best since 2015. For the full year, GDP rose 2.3%, only roughly in line with the expansion average, though fourth quarter 2017 GDP grew 2.7% versus the prior year’s quarter, while we expect the impact of the new tax law may help push the pace up closer to 3.0% in 2018.
  • Inflation picking up. Though not a surprise, the inflation component of the GDP report showed a pickup in inflation. Core personal consumption expenditures excluding food and energy, the Federal Reserve (Fed)‘s preferred inflation measure, rose 1.9% annualized and met expectations, up from 1.3% in the prior quarter. A clear pickup in inflation supports the Fed’s current timetable for rate hikes in 2018 at three and we believe a March hike is essentially fully priced in to fed funds futures.
  • Dollar slide halted after Trump rebuts Mnuchin comments. The U.S. dollar stabilized yesterday after President Trump, speaking in Davos at the World Economic Forum (WEF), said that “the dollar is going to get stronger and stronger…” over time under his leadership, and that he “..ultimately wants to see a stronger dollar.” The remarks came just a day after Treasury Secretary Mnuchin said he welcomed a weaker U.S. currency as it related to trade and other opportunities–comments that sent the greenback tumbling versus other major currencies. The president indicated, after reading the Treasury Secretary’s statement, that his remarks were taken out of context.
  • President Trump declares that America is “open for business” in WEF speech. In his address to attendees of the WEF on Friday, President Trump highlighted the country’s recently-passed tax reform and his administration’s push for deregulation as he declared that there has never been a better time to hire, build, invest, and grow in the United States. Though he reinforced his America-first agenda with references to stepping up efforts to enforce trade laws and intellectual property rights, he stressed that fair and reciprocal trade can create a system that works for America and all nations. To that end, he also noted on Thursday that he would reconsider the Trans-Pacific Partnership deal should it include better terms for America.

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