Market Update: Thursday, February 1, 2018

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Market Recap

  • U.S. equities stabilized after two-day drop; likely some buy-the-dip trading, though small caps shed early gains to finish lower; Federal Reserve (Fed) meeting outcome mostly as predicted. S&P 500 Index +0.1%, Dow +0.3%, Nasdaq +0.1%, Russell 2000 -0.5%.
  • REITs (+2.1%) enjoyed a strong day, healthcare (-1.5%) lagged on lingering concerns over President Trump’s comments about high drug prices in his State of the Union address.
  • Market breadth diverged between NYSE (+1.1:1), Nasdaq (-1.6:1); NYSE trade volume well above 30-day avg. (~131%).
  • Treasury yield curve flattened; 10-yr. note unchanged at 2.72%.
  • Commodities: WTI crude oil ticked higher (+0.6% to $64.87/bbl.), as did precious metals (COMEX gold +0.7% to $1348/oz.), industrial metals mixed.
  • Economic data: ADP private payrolls topped estimates (+243k vs. +178k), Chicago PMI also topped (65.7 vs. 63.9) but fell from Dec. (67.8); Dec. pending home sales +0.5%. month over month, above prior month growth (+0.3%) and consensus (+0.4%).
  • Fed left rates unchanged in Fed Chair Yellen’s final meeting as chair (details below).

Overnight & This Morning

  • U.S. equities opened lower as markets digest Fed statement, prepare for earnings barrage.
  • European stocks falling despite solid PMI releases, well-received bank earnings. STOXX Europe 600 -0.4%, DAX -1.3%, FTSE 100 unchanged. 10-year German bund +0.03% at 0.72%. Euro higher vs. U.S. dollar.
  • Asian markets mixed overnight. Japan’s Nikkei (+1.7%) was a standout, bolstered by a weak yen; Shanghai Composite -1.0%, Hang Seng -0.7%, Australia’s ASX 200 +0.9%.
  • Treasury yields continue steady rise; 10-yr. yield +0.03% to 2.74%, near four-year high.
  • Commodities: Oil +1.0% to ~$65.40/bbl. after weekly inventory data, gold (+0.3% to ~$1346/oz.) on firming U.S. dollar; industrial metals mixed amid evidence of slight deceleration in Chinese manufacturing sector (details below), weaker demand in London.
  • Economic releases: U.S. ISM Manufacturing Index expected to dip slightly to a still strong 58.6 for January. Jobless claims slightly beat expectations (230k vs. 235k), dip from prior week (233k). Q4 productivity missed expectations (-0.1% vs. 0.7%).

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Macro Notes

  • Chinese economy decelerating slightly. We continue to favor emerging markets (EM) equities, supported by a firm Chinese economic outlook, improving economic growth in EM broadly, strong earnings, and attractive valuations. The Chinese government has effectively managed its growth and engineered, for now, a soft landing. The debt problem remains and some excess capacity still exists in the manufacturing sector, but the Chinese government has managed to continue to grow in the (reported) range of 6.5-7.0% and expects to continue to do so this year, even while enacting some structural reforms to help sustain longer-term, more consumer- and services-driven growth. The latest January manufacturing PMI at 51.3 is a slight deceleration over the prior month but still expansionary; meanwhile the services PMI, at a solid 55.3, has been indicating accelerating growth in that part of the Chinese economy, a trend that has been in place for the past couple of years.
  • Europe continues to struggle to generate inflation. Eurozone inflation, based on core consumer price indexes (excluding food and energy), stood at just 1% in January. Even after the latest move higher in global interest rates, European bond yields remain stubbornly low. The European Central Bank has only barely begun to pull back on its bond purchase program (quantitative easing), and may not start raising interest rates for another year or more, suggesting domestic yields may be well anchored at or near 3% this year and potentially beyond. With the Fed’s slightly more hawkish tone yesterday and low inflation in Europe, we expect the U.S. dollar to soon regain its footing relative to the euro despite twin U.S. deficits (trade/budget).
  • Strong PMIs highlight breadth of Europe’s economic health. Markit’s Purchasing Managers’ Index (PMI) for the euro area in January came in at 59.6, down from 60.6 in December but still one of the strongest readings on record. Not particularly surprising at this point was Germany’s strength, with its reading over 60; the acceleration in Italy (59.0) and Greece (55.2) was more surprising, highlighting the broad health of the European economy.
  • Fed Chair Yellen’s swan song. As was widely expected, the Fed voted unanimously to leave monetary policy unchanged yesterday following what was Janet Yellen’s final meeting at the helm of the world’s most influential central bank. However, changes in the Fed’s language around inflation and growth caught traders’ attention. Could the changes in the Fed’s assessment of the economy and the change in leadership impact its rate-hike campaign? We explore this topic in more detail on the LPL Research blog.

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Click Here for our detailed Weekly Economic Calendar

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.

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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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