Last week’s headlines kept on giving as investors displayed caution in light of the ongoing situations in Syria and North Korea. The S&P 500 ended the week with a loss of 1.1%, but, more notably, the benchmark index finished the week below its 50-day moving average (2352).
North Korea took center stage at the beginning of the week after the U.S. Navy ordered the Carl Vinson Strike group towards the Korean Peninsula. This prompted rumors of Chinese troop movement along the North Korean border, but these claims were later refuted by China’s Defense Ministry.
President Trump added some fuel to the fire on Tuesday morning, tweeting that he would like China’s help in diffusing the North Korean situation, but the U.S. is willing to solve the problem on its own. However, through all the noise, the S&P 500 was flat through the first two days of the week as its 50-day moving average provided a measure of support.
North Korea celebrated the birth anniversary of founder Kim Il-sung on April 15 and there was speculation that another nuclear test failed that day.
The conflict in Syria took precedence on Wednesday as U.S. Secretary of State Rex Tillerson made a stop in Moscow. Mr. Tillerson met with Russian President Vladimir Putin, despite earlier reports that the U.S. diplomat would not have access to the Russian president, but conversations were reportedly heated. Nonetheless, the two countries agreed to establish a working group to iron out their issues.
Investors shifted their focus back to the home front on Thursday with JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) kicking off the earnings season. All three companies reported better than expected earnings, but were mixed when it came to revenues; JPM and C beat top line estimates while WFC fell short. However, the banks were unable to capitalize on the upbeat reports, which acted as a discouraging signal to the broader market.
If one thing can be said for sure after reflecting on this week’s activity, it’s that investors are becoming more skeptical about the future, evidenced by the CBOE Volatility Index (VIX 15.67, -0.10), which increased three points for the week. The VIX index now sits at its highest level since the presidential election.
The lingering geopolitical issues led to a notable dip in rate hike expectations. The fed funds futures market ended the week pointing to a 57.3% implied probability of a June hike, down from last week’s 70.6%.
- Dow Jones Industrial Average +3.5% YTD
- Nasdaq Composite +7.8% YTD
- S&P 500 +4.0% YTD
- Russell 2000 –0.9% YTD
- Business inventories increased 0.3% in February, as expected, following an unrevised 0.3% increase in January. Sales increased 0.2% on top of an upwardly revised 0.3% increase (from 0.2%) in January.The key takeaway from the report is that the inventory-to-sales ratio is at its lowest point since December 2014. That’s elevated from pre-financial crisis levels, when it was below 1.30, yet a further downtrend could restore some much needed pricing power.
- Manufacturers’ inventories (+0.2%) and wholesaler inventories (+0.4%) were already known. Retailer inventories were the only unknown and they increased 0.3% on the heels of an upwardly revised 0.9% increase (from 0.8%) for January.
- The biggest drivers of the increase in retailer inventories were motor vehicle and parts dealers (+1.0%) and furniture, home furnishings, electronics and appliance stores (+1.1%). Gains there were offset to a certain extent by a 0.8% decline in inventories at general merchandise stores.
- The total business inventory-to-sales ratio for February was unchanged at 1.35 but down from 1.41 in the same period a year ago.
- The U.S. producer price index fell by 0.1% m/m in March, missing the Briefing.com consensus for no change. That was the first decline since August 2016 and followed a 0.3% jump in February
- The PPI was up 2.3% y/y, the fastest pace since 2013
- The core PPI was unchanged m/m (1.6% y/y) in March, missing the Briefing.com consensus for 0.2% growth. February’s change was +0.3%
- The Consumer Price Index (CPI) decreased 0.3% in March (Briefing.com consensus 0.0%) while core CPI, which excludes food and energy, decreased 0.1% (Briefing.com consensus +0.2%).The key takeaway from the report is that consumer inflation pressures eased in March, led not only by a downturn in energy prices. That should take some of the edge off with respect to the idea that the Federal Reserve might have to be more aggressive than expected this year with its policy tightening efforts.
- The March decline in CPI was the first monthly decline since February 2016. The decrease in core CPI was the first one since January 2010.
- A decline in the gasoline index (-6.2%), which drove a 3.2% decline in the energy index, was the biggest factor behind the downturn. A 7.0% decline in the index for wireless telephone services was also cited as a contributing factor.
- The food index rose 0.3%, as the food at home index jumped 0.5%, which as its largest increase since May 2014.
- The shelter index rose 0.1%, and gains were registered in the indexes for motor vehicle insurance, medical care, tobacco, airline fares, and alcoholic beverages. The upticks in those indexes, though, was offset by declines in several other indexes, namely wireless telephone services (-7.0%), used cars and trucks (-0.9%), apparel (-0.7%), and new vehicles (-0.3%).
- On a year-over-year basis, CPI is up 2.4%, versus 2.7% for the 12-months ending February. Core CPI is up 2.0%, which is the smallest 12-month increase since November 2015.
- The Retail Sales Report for March was disappointing, not only because it was weaker than expected, but also because it featured downward revisions for February.Specifically, retail sales declined 0.2% in March on top of a downwardly revised 0.3% decline (from +0.1%) for February. Excluding autos, retail sales were unchanged in March (Briefing.com consensus +0.2%) after being revised to unchanged (from +0.2%) for February.The key takeaway from the report is that it underscores a clear divide between the strong consumer confidence readings, which are “soft” data, and the sluggish spending on goods by consumers, which is “hard” data.
- The downturn in March was driven by weakness in auto sales (-1.2%) and gasoline station sales (-1.0%), as expected. There was also some notable weakness, though, in building material and garden equipment and supplies dealers sales (-1.5%) and food services and drinking places sales (-0.6%).
- Other discretionary categories seeing sales declines in March were furniture and home furnishings stores (-0.3%) and sporting goods, hobby, book and music stores (-0.8%).
- Some offsetting strength was provided by electronics and appliance stores (+2.6%), miscellaneous store retailers (+1.8%), clothing and clothing accessories (+1.0%), nonstore retailers (+0.6%), food and beverage stores (+0.5%), and general merchandise stores (+0.3%)
- On a year-over-year basis, retail sales are up 5.2%. Excluding autos, retail sales are up 5.6%.
- Initial jobless claims fell to 234K for the week ending April 8 from the prior week’s 235K. The Briefing.com consensus was 251K
- Continuing claims fell to 2028K for the week ending April 1 (2035K prior)
- The Michigan Sentiment of consumer confidence rose to 98.0 in April from 96.9 in March, beating the Briefing.com consensus of 96.3
- Current Conditions were at a post-crisis high of 115.2 (113.2 prior)
- Expectations climbed to 86.9 from 86.5
- One-year inflation expectations remained at 2.5%
(Excerpts from Briefing.com)
Bonds yields fell with the the belly of the curve taking the biggest drop. The decline in yields was consistent throughout the week as investors ran into safety during a shortened week of geopolitical uncertainty.
- 2-yr: 1.21% from 1.27%, down 6bps from previous week’s close
- 5-yr: 1.77% from 1.91%, down 14bps from the previous week
- 10-yr: 2.24% from 2.37%, down 13bps from the previous week
- 30-yr: 2.89% from 3.00%, down 11bps from the previous week
Commodities saw Copper close lower while Crude and Precious close higher for the week.
- May WTI crude closed higher for the week at $53.18/barrel from $$52.25/barrel the previous week
- June gold finished the week higher at $1288.6/oz from $1257.20/oz the previous week
- May silver closed 56 cents higher at $18.52/oz from $17.96/oz the previous week
- May copper ended 7 cents lower at $2.57/lb from $2.64/lb the previous week
Agriculture Closing Prices all closed higher for the week, snapping a three week losing streak:
- May corn closed 11 cents higher at $3.71/bushel from $3.60/bushel the previous week.
- May wheat closed 5 cents higher at $4.30/bushel from $4.25/bushel the previous week.
- May soybeans closed 15 cents higher at $9.57/bushel from $9.42/bushel the previous week.
THE WEEK AHEAD
The coming week is the first of two of the most bullish consecutive weeks in the market – weeks 16 and 17 – for most equity issues.
Monday 17 to Friday 21 April (Week 16)
- The day after Easter is the second worst post-holiday session
- The Monday before April Expiration has been up on the DOW for the 18 of the last 28 but down 7 of the last 10
- The third week starts strongly and stays very bullish
- April Expiration Friday has seen the DOW close up 14 of the last 20 (last 2 years down)
The sixteenth week of 2017 (wk16) is bullish for the DIA with more than 70% over all the averages and very bullish for the SPY with 80% over all the averages.
The 2017 Stock Trader’s Almanac’s averages for the week are all bullish:
Key Economic Dates
Mon 17 Apr
- US Empire State Manufacturing Index
- Australia Monetary Policy Meeting Minutes
Tue 18 Apr
- EU German XEW Economic Sentiment
- US Building Permits, Housing Starts, Capacity Utilization Rate, Industrial Production m/m
Wed 19 Apr
- EU Final CPI y/y
- Australia Employment Change, Unemployment Rate, NAB Quarterly Business Confidence
Thu 20 Apr
- US Philly Fed Manufacturing Index
Fri 21 Apr
- EU, French and German Flash Manufacturing PMI and Flash Services PMI
- UK Retail Sales m/m
- US Existing Home Sales
Sat 22 Apr
- OPEC Meetings
Sun 23 Apr
- French Presidential Election
Key Earnings Announcements
- Monday (April 17)
- Pre-Market: MTB
- After-Hours: UAL
- Tuesday (April 18)
- Pre-Market: UNH, BAC, JNJ, GS,
- After-Hours: IBM,
- Wednesday (April 19)
- Pre-Market: MS, ABT,
- After-Hours: AXP, QCOM, CSX, EBAY, STLD,
- Thursday (April 20)
- Pre-Market: VZ, TRV, NUE,
- After-Hours: V,
- Friday (April 21)
- Pre-Market: GE, HON, SLB, COL,
- After-Hours: None of note
As we dive into the heart of earnings season on the back of more geopolitical uncertainty against the backdrop of two of the most bullish weeks in the trading calendar, I almost want to be 100% bullish as the broader market reels in doubt/fear. Such trepidation usually becomes unfounded as the facts unfold and any little good news will rally the markets in a huge way.
The only concern for me is earnings as no less than a third of the DOW components put their numbers on the line this week. I am not expecting downside surprises but I will be watch the language for any hint of hawkishness moving forward.
This respite in the market since March has seen the benchmark indices correct by more than 3% and could serve as the perfect springboard for the next leg up or at least return to its historical high.