- U.S. markets pullback midday. Decline followed hawkish commentary from Federal Reserve (Fed) Chair Powell on U.S. economy, increasing speculation of a fourth rate hike occurring in 2018 (details below). S&P 500 Index -1.3%, Nasdaq -1.2%, Dow -1.2%, Russell 2000 -1.5%.
- All sectors closed lower. Financials (-0.9%), led as rates rose, technology (-0.9%) also outperformed. REITs (-2.2%) and consumer discretionary (-2.1%) lagged.
- Negative breadth on NYSE (3.4:1) trading volume still subdued (~90% of 30-day avg.).
- Treasury yields resumed climb; 10-yr. note yield +4 basis points (+0.04%) to 2.90%.
- Commodities: WTI crude oil traded lower (-1.6% to $62.9/bbl.); COMEX gold down to $1319/oz.; industrial metals fell; U.S. dollar followed rates higher against major crosses.
- Economic data: Investor Confidence Index results grew month over month (m/m) from 103 to 107.4, indicating a rise in investor appetite for equities. Domestic home price rise fell in line with expectations, growing 0.6% m/m.
Overnight & This Morning
- Domestic equities open higher, focus remains on rising rate worries.
- European markets lower but paring early losses. Eurozone inflation slowed, countering recent worries and providing support for market. STOXX Europe 600 -0.2%, DAX -0.2%, CAC 40 -0.3%, FTSE 100 -0.2%.
- Asian markets closed lower. Hawkish takeaways from Fed, mix of disappointing economic releases cited as drivers. Nikkei -1.4%, Shanghai Composite -1.0%, Hang Seng -1.4%.
- Treasury yields partially retrace advance; 10-yr. note yield -2 basis points to 2.88%.
- Commodities: Oil slightly higher ~$63/bbl.; gold flat ~$1319/oz.; industrial metals down.
- Economic releases: Busy economic release day abroad. Overnight, Japanese industrial production (-6.6% vs. -4.2% m/m) and retail sales both disappointed (+1.6% vs. +2.0% m/m). Eurozone flash inflation indicated decline from 1.3% year over year down to 1.2% year over year. German unemployment met expectations at 5.4%.
- Powell’s debut leads to higher yields. New Fed Chair Jay Powell had his first public appearance yesterday, testifying in front of congress for a semi-annual monetary policy update (known as Humphrey-Hawkins testimony). In his prepared remarks, Powell stuck close to former Fed Chair Janet Yellen’s views, saying the Fed remains data dependent on the future path of rate hikes. However, the Q&A session turned out to be the bigger takeaway, and markets interpreted his personal outlook on the economy as hawkish. Though a rate hike was and is still expected at the Fed’s March meeting, it will be interesting to see the next set of economic projections and dot plots to gauge how many other members of the FOMC agree with Powell’s view. However, longer-term rate hike expectations did rise, and the fed fund futures market is now pricing in 3 rate hikes in 2018, and 1.5 in 2019 (up from 2.83 and 1.38 the day before). Expectations for a fourth rate hike this year rose slightly, with fed fund futures now pricing in a 26% chance. We continue to believe that three rate hikes are most likely, and that it would take a sustained move higher for inflation before the Fed would raise 4 times.
- Eurozone headline inflation declined in February. The flash estimate of Euro area inflation came in at an annualized rate of +1.2% for this month, as expected; down from +1.3% in January. This marks the third consecutive drop in the headline figure and the lowest reading since December 2016. However, the (arguably) more important core reading, which excludes the volatile energy and unprocessed foods components, and is the European Central Bank’s (ECB) preferred measure, held steady at +1.2%. The data support the ECB’s cautious approach to removing monetary stimulus despite a pickup in economic growth, and reinforces the expectation that the ECB will maintain the status quo when it meets next week.
- U.S. fourth quarter GDP figures reaffirmed by second estimate. Domestic real gross domestic product grew 2.5% quarter over quarter annualized in the fourth quarter of 2017, in line with expectations and a -0.1% downward revision from the initial estimate of 2.6%. Nonresidential fixed investment was revised slightly lower while the inventory drag was revised slightly higher. The data confirms a solid end to 2017 for the U.S. economy. The release also showed inflation near the Fed’s 2% target as core personal consumption expenditures rose 1.9% year over year (unrevised), a key metric to monitor going forward as the Fed continues on its rate tightening campaign. We continue to expect a pickup in economic growth in 2018 driven by consumer and business spending, spurred by the new tax law.
- Get ready for March. Today will most likely end a record 15 month win streak (on a total return basis) for the S&P 500. The good news is March and April are historically two of the best months of the year for equities. In fact, over the past 10 and 20 years, March ranks as the second best month in terms of average return. Today on the LPL Research blog we take a closer look at how March has historically fared.
- Personal Consumption (Q4)
- GDP (Q4)
- Core PCE (Q4)
- Chicago Purchasing Managers Report (Feb)
- France: CPI & PPI (Jan)
- France: GDP (Q4)
- Germany: Unemployment Change (Feb)
- Eurozone: CPI (Feb)
- Italy: CPI (Feb)
- India: GDP (Q4)
- Japan: Nikkei Japan Mfg. PMI (Feb)
- China: Caixin China Mfg. PMI (Feb)
- Personal Income & Spending (Jan)
- Core PCE (Jan)
- Italy: Markit Adaci Mfg. PMI (Feb)
- France: Markit France Mfg. PMI (Feb)
- Germany: Markit Germany Mfg. PMI (Feb)
- Eurozone: Markit Eurozone Mfg. PMI (Feb)
- UK: Money Supply and Bank Lending (Jan)
- UK: Markit UK Mfg. PMI (Feb)
- Italy: GDP (2017)
- Australia: Commodity Index (Feb)
- Brazil: GDP (Q4)
- Japan: Consumer Confidence (Feb)
- Japan: Tokyo CPI (Feb)
- Japan: Monetary Base (Feb)