Market Update: Tuesday, January 30, 2018

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Market Recap

  • Major U.S. indexes drop despite generally upbeat data as rising rates, inflation concerns weighed. S&P 500 Index -0.7%, Dow -0.7%, Nasdaq -0.5%, Russell 2000 -0.6%.
  • All sectors fell. Healthcare, consumer discretionary held up best; energy, rate-sensitive utilities led decline.
  • Broadly negative breadth; NYSE (4.6:1), Nasdaq (2:1) amid slightly below-avg. volume (~98% of 30-day avg.).
  • Treasury yields up across the curve; 10-yr. yield settled +3 basis points (+0.03%) to 2.69% after moving above 2.72% for first time since April 2014.
  • Commodities: U.S. dollar weakness paused against most crosses, hurting WTI crude oil (-1.0% to $65.45/bbl.) and COMEX gold (-1.0% to $1340/oz.); industrial metals mostly higher.
  • Economic data: Personal income growth month over month (+0.4% vs. +0.3% expected) a bright spot; personal spending (+0.4% month over month), headline PCE Price Index (+0.1% month over month) matched consensus.

Overnight & This Morning

  • U.S. equities’ slide continued at the open ahead of tonight’s State of the Union address (details below).
  • Europe broadly lower but off session lows. STOXX Europe 600 -0.5%, DAX -0.5%, CAC -0.4%.
  • Asia under pressure overnight, reacting to U.S. weakness. Nikkei -1.4%, Shanghai Composite -1.0%, Hang Seng -1.1%.
  • Commodities: Oil below $65/bbl., gold +0.1% to $1341/oz., industrial metals flat-to-higher.
  • Economic data: Case Shiller Home Price Index +6.2% in November, consumer confidence bests expectations, rising to 125.4 in January, German inflation down year over year (1.7% vs. 2.1% prior); Eurozone confidence, business climate slipped amid uptick in gross domestic product (GDP) (2.7% vs. 2.6% expected); GDP readings in Spain (3.2%), France (2.4%) slightly better than expected.

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Macro Notes

  • The Federal Reserve’s (Fed) latest meeting starts today, and will wrap up with a statement tomorrow (but no press conference). Markets aren’t expecting any changes to monetary policy out of this meeting, though investors will be watching closely to see if the recent rise in market-based inflation expectations has any impact on the Fed’s thinking. This meeting will also be the last of Janet Yellen’s tenure as chair, with incoming Fed Chair Jerome Powell taking over on February 3. We discuss this change in more detail in this week’s Bond Market Perspectives, due out later today.
  • Treasury yields move higher, for a variety of reasons. A lot of news flow over the past week has contributed to higher short- and long-term rates in the United States. Market reaction to last week’s European Central Bank (ECB) meeting has driven rates in Europe higher, with German rates moving higher at a faster pace than the United States. The U.S. Treasury also announced yesterday that it will borrow $441 billion in the current quarter, the highest quarterly amount since 2010. And finally, solid growth has pushed inflation expectations higher in recent weeks, which have also put upward pressure on rates. We continue to expect that the 10-year Treasury yield will end 2018 in a range of 2.75% to 3.25%. Please see the Outlook 2018: Return of the Business Cycle Publication for additional description and disclosure.
  • Eurozone GDP growth falls in line with expectations. This morning’s Eurozone GDP flash report highlighted a positive fourth quarter growth rate for the area of 0.6% quarter over quarter, which largely met the market’s expectations, and left preliminary growth figures for 2017 at 2.7% year over year–an increase from the prior year’s 2.5% year-over-year growth rate. The report adds to the recent string of positive economic data from Europe and may confirm that the Eurozone is in a well-established economic upswing. This could bring the ECB’s quantitative easing program back into the crosshairs as members consider mounting evidence that the economy is no longer in need of an easy monetary policy.
  • President Trump to use State of the Union address to push agenda. While some content will likely be a victory lap of sorts for the White House-highlights of tax reform, de-regulation, and the recent performance of the economy and stock market-much of the speech could be used as a platform to promote remaining key items on the White House agenda, including infrastructure, trade, and immigration. With midterm elections approaching and the president’s low approval rating, the speech will be an important opportunity for the president to drive other key initiatives.
  • The worst day for stocks since September. That’s right, it was the worst day for the S&P 500 since the first day of September. Here’s where it gets interesting: The S&P 500 was down only 0.67% yesterday. This ended an incredible streak of 99 days in a row without a 0.6% or greater loss. That puts in perspective how unique the past few months have been.

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Consumer Confidence (Jan)
  • Eurozone: GDP (Q4)
  • France: GDP (Q4)
  • Germany: CPI (Jan)
  • Eurozone: Consumer Confidence (Jan)
  • Mexico: GDP (Q4)
  • BOE: Carney
  • ECB: Mersch
  • BOJ: Summary of Opinions
  • BOJ: Iwata
  • Japan: Industrial Production (Dec)
  • China: Mfg. & Non-Mfg. PMI (Jan)

Wednesday

Thursday

  • Non-Farm Productivity (Q4)
  • Markit Mfg. PMI (Jan)
  • Construction Spending (Dec)
  • ISM Mfg. (Jan)
  • Italy: Markit Italy Mfg. PMI (Jan)
  • France: Markit France Mfg. PMI (Jan)
  • Germany: Markit Germany Mfg. PMI (Jan)
  • Eurozone: Markit Eurozone Mfg. PMI (Jan)
  • UK: Markit UK Mfg. PMI (Jan)
  • Australia: Commodity Index (Jan)
  • Canada: Mfg. PMI (Jan)
  • Japan: Vehicle Sales (Jan)
  • Japan: Monetary Base (Jan)

Friday

  • Change in Nonfarm, Private & Mfg. Payrolls (Jan)
  • Unemployment Rate (Jan)
  • Average Hourly Earnings (Jan)
  • Average Weekly Hours (Jan)
  • Labor Force Participation & Underemployment Rates (Jan)
  • Durable Goods Orders (Dec)
  • Cap Goods Orders & Shipments (Dec)
  • Williams (Dove)
  • Eurozone: PPI (Dec)
  • Italy: CPI (Jan)

Past performance is no guarantee of future results.

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

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

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