- U.S. markets continued retracing last week’s gain. January’s Fed meeting minutes ended with a hawkish tone despite the meeting taking place prior to several reports showing a pickup in inflation and market pullback. S&P 500 Index -0.6%, Dow -0.7%, Nasdaq -0.2%, Russell 2000 +0.1%.
- All sectors finished red; industrials and financials–buoyed by higher rates–outperformed. REITs led underperformers, followed by energy due to recent commodity price declines.
- Negative breadth on NYSE (1.2:1) trading volume remains below average (~89% of 30-day avg.).
- Treasury yields pushed higher following Fed minutes; 10-yr. note yield +4 basis points (+0.04%) to 2.94%.
- Commodities: WTI crude oil -1.1% to $61.12/bbl., COMEX gold -0.4% to $1327/oz., industrial metals down across the board.
- Economic data: Domestic home sales data came in below expectations (5.38M vs. 5.65M), Purchasing Managers’ Index (PMI) surprised to the upside (55.9 vs. 54.0).
Overnight & This Morning
- Domestic equities opened near flat, looking to rebound after yesterday’s late day sell-off.
- Europe mostly lower, European Central Bank minutes indicated no near-term change to monetary policy stance. STOXX Europe 600 -0.8%, DAX -0.9%, CAC 40 -0.5%, FTSE 100 -1.0%.
- Asian markets lower amid concerns of rising U.S. interest rates. Shanghai Composite (+2.2%) bucked trend following Lunar New Year holiday. Nikkei -1.0%, Hang Seng -1.5%..
- Treasuries strengthening; 10-yr. note yield -2 basis points to 2.92%. Dollar mixed against major crosses.
- Commodities: Oil prices down (-0.2% to ~$61.58/bbl.) but off earlier lows ahead of today’s supply data; gold -0.4% to ~$1326/oz.; industrial metals continue lower.
- Economic releases: Italian month-over-month inflation higher than expected (0.9% vs. 0.8%), U.K.’s Q4 gross domestic product figures revised downward slightly from 1.5% year over year to 1.4%.
- FOMC minutes spooked markets despite upbeat tone. In the minutes from the Federal Reserve’s (Fed) January monetary policy meeting, released yesterday afternoon, the central bank struck a decidedly upbeat tone on the U.S. economy. The data cited was consistent with above-trend growth in economic activity, the labor market, and household and business spending, a number of participants indicated they had increased their forecasts for overall economic growth since the December meeting. Equity markets’ initial reaction was positive as stocks quickly legged up; however, major indexes reversed course, possibly because traders realized the meeting occurred prior to several recent data sets that showed higher-than-expected inflation, including February’s nonfarm payrolls report, potentially stoking concerns that the Fed could move more aggressively with its rate-hike campaign than previously thought. While some members expect core inflation to be “notably faster” this year, and “almost all” continue to expect inflation to hit the Fed’s 2% target over the medium term, the odds of seeing more than three rate increases this year remain low, particularly as the bank continues to tighten monetary policy through its balance sheet normalization process.
- Several indications that the European economy may be peaking. European economic growth has been impressive in recent quarters but the evidence that the economy may be peaking continues to pile up. The latest Eurozone Composite PMI Index for February missed expectations and fell month over month. The German IFO Business Climate and Expectations surveys both missed expectations and fell 2 to 3 points month over month. And the Citi European Economic Surprise Index fell below zero for the first time since late 2016, suggesting that expectations may have gotten a bit too high. The economic outlook in Europe relative to the U.S. and Emerging Markets (EM) continues to favor the U.S. and EM. Earnings and valuations continue to point to EM over developed international (MSCI EAFE), while strong economic and earnings momentum continue to support the case for U.S. equities.
- Strong euro negatively impacting European economy? A strong euro helps U.S. dollar-based investors when translated back into U.S. dollar returns. However, the strong euro may be starting to impact exporters in Europe whose goods have become more expensive to overseas buyers. Currencies are always important determinants of relative performance of the U.S. vs. international, but in this environment of extreme euro strength, they become an even bigger driver.
- Stocks over bonds again? The bull market is about to turn nine next month, but another incredible streak is taking place as stocks (measured by the S&P 500) have topped bonds (measured by the 10-year Treasury bond) for six consecutive years. Should it happen again in 2018, an all-time record will be reached. Later today on the LPL Research blog we take a closer look at this phenomena and why we expect stocks to once again top bonds this year.
- Big reversal. At the peak yesterday, the S&P 500 was up by more than 1%, but in the end it closed down more than half a percent. The sell-off took place late in the day, after the Fed minutes were released. What stands out about this big reversal is that it is the second time this month we’ve seen such a massive intra-day sell-off. In fact, the last time we saw it happen twice in the same month was August 2011. Our take is that bottoms are a process and tend to be met with quite a bit of volatility. We are in the middle of that process now.
- LEI (Jan)
- Kansas City Fed Mfg. Report (Feb)
- UK: GDP (Q4)
- France: CPI (Jan)
- Germany: IFO Business Climate (Feb)
- Italy: CPI (Jan)
- UK: Imports & Exports (Q4)
- Mexico: Central Bank Monetary Policy Minutes
- Japan: CPI & PPI Services (Jan)
- Germany: Imports & Exports (Q4)
- Germany: GDP (Q4)
- Eurozone: CPI (Jan)
- Mexico: GDP (Q4)
- Canada: CPI (Jan)
- China: Property Prices (Jan)