- Major U.S. indexes reversed sharp premarket losses; finished up >1%. Unexpected jump in consumer inflation triggered sell-off in futures, but stocks regrouped and marched higher throughout the session. S&P 500 Index (+1.3%) posted fourth consecutive gain, moved back into positive territory on the year; Dow +1.0%, Nasdaq +1.9%, Russell 2000 +1.8%.
- Jump in rates drove sector returns. Financials (+2.3%) outperformed; utilities (-1.2%), telecommunications (-0.7%), REITs (-0.7%) lagged.
- Positive breadth on NYSE (2.3:1) on muted volume (~92% of 30-day avg.).
- Treasury yields spiked. 10-yr. note yield +8 basis points (+0.08%) to 2.91% as curve steepened.
- Commodities: WTI crude oil (+2.6% to $60.70/bbl.), COMEX gold (+1.7% to $1354/oz.), industrial metals all jumped, helped by U.S. dollar weakness.
- Economic data: Headline (+2.1%) and core (+1.8%) inflation higher than expected year over year, strongest rise since January 2017. Headline retail sales disappointed (-0.3% month over month vs. +0.3% consensus), posted largest decline in 11 months. Core reading (ex-autos) flat but also came up short vs. +0.3% expected.
Overnight & This Morning
- U.S. equities opened solidly higher. Stocks continue to shrug off Wednesday’s increase in inflation; S&P 500 opened 0.8% higher.
- European stocks also up nicely, helped by strong aerospace earnings. STOXX Europe 600 +0.1%, DAX +1.1%, FTSE 100 +0.7%.
- Asian markets finished higher, ahead of Lunar New Year holidays. Nikkei jumped 1.5% despite strong yen, Shanghai Composite +0.4%, Hang Seng +2.0%.
- South African regime change may help support EM. South African equities were higher overnight as new President Cyril Ramaphosa is set to be sworn in today, replacing ousted leader Zuma. South Africa composes 7% of the MSCI Emerging Markets (EM) Index.
- Treasury yields higher again; 10-yr. yield +0.02% to 2.93%. Higher yields have yet to arrest the dollar’s slide as deficit concerns remain.
- Commodities: Oil (+0.6% to ~$60.99/bbl). getting lift from smaller than expected inventory build, bullish comments from Saudi energy minister; gold +0.3% to ~$1355/oz. on continued dollar weakness; copper (+0.3%) higher for a fourth day.
- Economic releases: Jobless claims (230K vs. 228K consensus, 223K prior). January producer price inflation +0.4% month over month as expected, though core above expectations and +2.2% year over year. Empire Manufacturing missed expectations. Industrial Production for January, homebuilder sentiment due out later this morning.
- Consumers remain in excellent shape. Yesterday’s weak retail sales data does not, in our view, signal a period of weakening consumer spending for several reasons. First, the data appeared to be distorted by weather with weakness in weather-sensitive categories such as building supplies. Second, higher wages underpinned by a healthy job market will continue to support consumer spending. Third, the fourth quarter spending data was very strong, suggesting some digestion was to be expected. And finally, consumers are getting a tax cut that hasn’t kicked in yet. We continue to expect strong consumer and business spending to drive accelerating gross domestic product growth at or near 3% in 2018.
- EM and U.S. continue to lead. Based on the S&P 500, MSCI EAFE, and EM indexes, the U.S. and EM have outpaced developed foreign markets this year, as well as over intermediate- and longer-term periods back to the 1990s. Until we see a sustained period of outperformance in Europe, driven by more than currency, we expect to continue to focus allocations in the U.S. and EM, as noted on our latest Portfolio Compass.
- Economic conditions in developed overseas markets have improved, but it has not been enough. Despite strong economic performance in Europe and Japan over the past couple of years, and the fact that their economic cycles are at earlier stages, the U.S. and EM equity markets have continued to outpace the developed foreign benchmark. While a weak dollar, attractive valuations, and global flows have generally favored international over U.S., the U.S. and EM benchmarks have continued to lead. We continue to look for tactical opportunities in developed overseas regions and encourage investors who prefer greater exposure to consider strategic positions and focus client conversations on LPL’s diversified (global) benchmarks.
- Empire State Mfg. Report (Feb)
- PPI (Jan)
- Philadelphia Fed Mfg. Report (Feb)
- National Association of Home Builders Housing Market Index (Feb)
- Total Net TIC Flows (Dec)
- Eurozone: Trade Balance (Dec)
- Import & Export Price Index (Jan)
- Housing Starts & Building Permits (Jan)
- of Mich. Sentiment (Feb)
- China: New Loan Growth and Money Supply (Jan)