Weekly Market Analysis – 17 September 2018 BMO

WEEK IN REVIEW – 10 to 14 September 2018 :
Wind in the Sails

Wall Street returned to its winning ways this week, powering through trade-related headlines and Hurricane Florence, one of the strongest storms to hit the Carolinas in decades. The S&P 500 advanced 1.2%, the tech-heavy Nasdaq Composite rose 1.4%, and the blue-chip Dow Jones Industrial Average climbed 0.9%.

Hurricane Florence was largely the talk of the week, forcing residents near the Carolina coast to either pack their bags or hunker down. The storm weakened to a Category 1 from a Category 4 before it made landfall on Friday though, which helped the market keep a positive bias. WTI crude futures were once up nearly 4.0% on the week, but gave the majority of that back as the storm weakened.

Meanwhile, on the trade front,the White House confirmed reports that it has proposed a new round of trade talks with China – a proposition that was welcomed by Beijing. However, President Trump muddied the waters a bit with a tweet on Thursday, saying the U.S. isn’t under pressure to make a deal with China; rather, China is under pressure to make a deal with the United States.

China’s major stock index, the Shanghai Composite, fell 0.8% this week, touching its lowest level since January 2016.

Separately, President Trump is reportedly considering a second meeting with North Korean leader Kim Jong-un ahead of the November midterm elections. The two leaders held a historic summit in June, but relations have cooled since, due to North Korea’s unsatisfactory progress towards denuclearization.

In U.S. corporate news, Apple (AAPL) unveiled a trio of new iPhones – iPhone Xs ($999), iPhone Xs Max ($1099), and iPhone Xr ($749) – at its annual product event on Wednesday, extending last year’s high-end iPhone X line, which was created in celebration of the iPhone’s 10th anniversary. Apple shares added 1.2% on the week.

The top-weighted technology sector was among the top-performing groups this week, rebounding from last week’s disappointing performance, with a gain of 1.8%. In total, ten of eleven groups finished in positive territory. Cyclical sectors generally outperformed, although the heavily-weighted financial space did not, finishing lower by 0.4%.

On the data front, investors received some influential inflation data this week, including the core Producer Price Index for August and the core Consumer Price Index for August. The core PPI declined 0.1%, while the consensus expected an increase of 0.2%, and the core CPI showed a less-than-expected increase of 0.1% (consensus +0.2%).

Those readings helped to ease fears that the Fed might have to be more aggressive in raising rates in order to keep the economy from overheating.

In monetary policy, a trio of central banks released their latest policy decisions this week, including the European Central Bank, the Bank of England, and the Central Bank of Turkey. Both the ECB and the Bank of England kept interest rates unchanged, as expected, but Turkey’s central bank increased its benchmark rate to 24.00% from 17.75%, attempting to stabilize the beleaguered Turkish lira.

The Fed is expected to raise rates by 25 basis points at its September 25-26 policy meeting, with the market placing the chances of a rate hike at 100%.

(Economic Excerpts from Briefing.com)

Wednesday 12 September

Fed releases Beige Book: Fed sees economy expanding at a moderate pace in recent weeks. Most districts note concern on trade.

August Core PPI M/M -0.1% vs +0.2%: Producer Price Index Rolled Back in August

The Producer Price Index for final demand declined 0.1% in August (consensus +0.2%) and so did the index for final demand, less food and energy (consensus +0.2%).

The decline in the final demand index was attributed to a 0.1% decrease in prices for final demand services, which was led by a 0.9% decline in the index for final demand trade services, which measures changes in margins received by wholesalers and retailers. The index for final demand goods was unchanged.

The key takeaway from the report is that it will soothe some burgeoning inflation concerns, as the monthly declines led to a moderation in producer price inflation on a year/year basis. The latter point notwithstanding, the market is apt to maintain its view that the Federal Reserve remains on course to raise rates two more times this year.

Thursday 13 September

Initial Claims and Continuing Claims Still Running Low (Very Low). 

Initial jobless claims for the week ending September 8 decreased by 1,000 to 204,000 (consensus 210,000).  Continuing claims for the week ending September 1 decreased by 15,000 to 1.696 million.

The key takeaway from the report is that the four-week moving averages for initial claims and continuing claims are at their lowest level since 1969 and 1973, respectively.

August Headline CPI M/M +0.2% vs +0.2% consensus. August Core CPI M/M +0.1% vs +0.2% consensus.

Total CPI increased 0.2%, as expected, while core CPI, which excludes food and energy, increased 0.1% (consensus +0.2%).

The key takeaway for the market is that there was a moderation in the year-over-year growth rates for total CPI and core CPI. That won’t alter the prevailing view that the Federal Reserve is likely to raise rates two more times this year, yet the moderation is apt to be seen as a data point that could keep the Federal Reserve from tightening rates too rapidly.

Friday 14 September

Retail Sales in August Fail to Live Up to Expectations

Total retail sales rose just 0.1% (consensus +0.4%) on the heels of an upwardly revised 0.7% increase (from +0.5%) in July. Excluding autos, retail sales jumped 0.3% (consensus +0.5%) following an upwardly revised 0.9% increase (from +0.6%) in July.

The upward revisions to the prior month helped mitigate some of the headline disappointment for August, yet the key takeaway from the report is that consumer spending is up and will continue to support real GDP growth in the third quarter.

Industrial Production Rises for Third Straight Month in August

August Industrial Production +0.4% vs +0.4% consensus
August Capacity Utilization 78.1% vs 78.3% consensus

Industrial production increased 0.4% in August, as expected, following an upwardly revised 0.4% increase (from 0.1%) in July.  August marked the third straight month that industrial production has increased.  The capacity utilization rate increased to 78.1% (consensus 78.3%) from a downwardly revised 77.9% (from 78.1%) in July.

The key takeaway from the report is the understanding that factory output was unchanged, excluding the gain in motor vehicles and parts.

Business Inventories Rise in July, as Expected

Total business inventories increased 0.6% in July, as expected, after increasing 0.1% in June. Total business sales increased 0.2% after increasing 0.3% in June.

The key takeaway from the report is that business sales continued to outpace inventory growth year-over-year, which is a favorable trend that carries the potential to lead to a better pricing environment for businesses.

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Friday 14 September
Upbeat Week Ends on Flat Note

The stock market saw limited movement on Friday, ending a positive week on a flat note. The S&P 500 (unch) settled just above its flat line, locking in a 1.2% gain for the week. The Dow (unch) and Nasdaq (-0.1%) also finished near their flat lines, ending the week with respective gains of 0.9% and 1.4%.

Equities started the day just above yesterday’s closing levels, but relative weakness in a handful of rate-sensitive sectors and a mixed showing from other groups kept the market near its unchanged level. The underperformance in groups like utilities (-0.5%), telecom services (-0.4%), and real estate (-0.9%) was owed to overnight and early-morning selling in Treasury futures, which lifted the 10-yr yield to a six-week high just below the 3.000% area.

The broader market treaded water during early trade, thanks to gains in cyclical sectors like financials (+0.7%), industrials (+0.5%), and energy (+0.6%). The S&P 500 was on the verge of climbing to a fresh high around noon, but a Bloomberg report, indicating that President Trump is seeking to impose tariffs on $200 billion worth of imports from China despite the recent efforts to revive trade talks, sent the broader market to a session low.

In addition to pressuring stocks, the news weighed on offshore yuan and helped the U.S. Dollar Index (94.94, +0.42) climb to a fresh high, trimming this week’s loss to 0.4%.

Afternoon trade saw a slow climb off session lows, but the S&P 500 was not able to revisit its high, as heavily-weighted groups like consumer discretionary (-0.3%) and health care (-0.3%) struggled. For its part, the top-weighted technology sector spent the session near its flat line, ending little changed.

The market received just two earnings reports between yesterday’s closing bell and today’s open. Adobe Systems (ADBE) climbed 2.3% to a fresh record after beating earnings and revenue expectations while Dave & Buster’s (PLAY) rose 7.9% to a 13-month high after beating quarterly expectations and initiating a quarterly dividend of $0.15 per share.

Treasuries ended the day with losses, though intraday action saw the complex climb off mid-morning lows. The 10-yr yield rose three basis points to 2.99% after approaching its August high (3.02%) in early trade.

Investor participation was fairly consistent with the past two sessions as 762 million shares changed hands at the floor of the New York Stock Exchange.

Market Internals – Friday 14 September

Dollar: Skid Snapped

The U.S. Dollar Index closed up 0.5% at 94.95, locking in its first advance since last Friday. The greenback saw some early-morning weakness, which pressured the Index to a level not seen since the end of July. The Index climbed off its low during the European session, accelerating to a fresh high after the release of a Retail Sales report for August (actual 0.1%; consensus 0.4%), which missed estimates, but included an upward revision to the July reading. The Index built on its advance during the Friday U.S. session, trimming this week’s loss to 0.4%.

Bonds: 10-Yr Yield Flirts With 3.00% Again

U.S. Treasuries ended the week with losses across the curve. Treasury futures faced some selling pressure during overnight trade, as Hong Kong’s Hang Seng continued climbing off this year’s low while equity markets in Europe also recorded gains. Treasuries followed their lower start with a slip to fresh lows after the release of an August Retail Sales report (actual 0.1%; consensus 0.4%), which was below estimates, but contained an upward revision to the July reading. A bit more selling in mid-morning trade briefly lifted the 10-yr yield to its highest level (3.003%) since the start of August, but midday action saw Treasuries edge up from their lows. The rebound accelerated after Bloomberg reported that President Trump is seeking to impose tariffs on another $200 billion worth of imports from China despite the recent efforts to revive trade talks. The midday bid returned Treasuries to their opening levels, where they remained until the close. The slope of the yield curve faced flattening pressure over the course of the just-completed week, as the 2s10s spread compressed to 21 bps from last Friday’s 25 bps while the 2s30s spread tightened by six basis points to 35 bps.

The yield curve flattened as the shorter maturities’ yields made greater gains. The spread between the 5s10s narrowed to 9bps from 12bps the previous week while the 10s30s narrowed to 14bps from 16bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 82.46, marginally lower than 82.59 the previous week.

WTI oil bottomed at 67.54 and settled the week at $68.99. The spread between WTI and Brent widened for a sixth week to $9.10 from $9.08 the previous week.

EIA petroleum data for the week ended September 07

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 5.3 mln barrels from the previous week. At 396.2 mln barrels, U.S. crude oil inventories are about 3% below the five year average for this time of year. Total motor gasoline inventories increased by 1.3 mln barrels last week and are about 8% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories increased by 6.2 mln barrels last week and are about 3% below the five year average for this time of year. Propane/propylene inventories increased by 1.2 mln barrels last week and are about 11% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 10.1 mln barrels last week.

Natural gas inventory showed a build of 69 bcf vs a build of 63 bcf in the prior week. Working gas in storage was 2,636 Bcf as of Friday, September 7, 2018, according to EIA estimates. This represents a net increase of 69 Bcf from the previous week. Stocks were 662 Bcf less than last year at this time and 596 Bcf below the five-year average of 3,232 Bcf. At 2,636 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased +7 to 1055 following last week’s status quo.

Metals: Gold, Copper fight back

Agriculture: September 2018 USDA WASDE report:

Corn and wheat prices drop, while soybeans are modestly higher following monthly WASDE report 0n Wednesday. Here are a few key highlights from the report:

Note: I know it looks like Wheat and Soy swapped prices but its not a mistake. At Friday’s settlement;

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THE WEEK AHEAD
Week 38 (September 17 to 21)

The DOW, NASDAQ and S&P500 are expecting a rock and roll week ahead.

According to our 5, 10 and 15 year seasonal models, the SPY and DIA should be divergent on Monday, bullish on Tuesday, bearish on Wednesday and moderately bullish on Thursday. The DIA should finish Friday slightly divergent while SPY should be bearish.

Benchmarks (21 year average) for wk38:

Key Economic Dates

Week 38

In the coming week, the most important releases for the US are building permits and housing starts, existing home sales and flash Markit PMIs. Elsewhere, the BoJ interest rate decision, Japan trade and inflation, UK and Euro Area consumer prices and flash Markit PMIs for the Eurozone, France and Germany will also be in the spotlight.

Mon 17 September

Tue 18 September

Wed 19 September

Thu 20 September

Fri 21 September

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COMMENTARY

I am bullish for the coming week (hope I don’t regret it) especially after the past week’s drop. I won’t be hanging on to anything for too long and will be watching for signs that the September market sell-down might be imminent.

That wasn’t too wild and I didn’t live to regret it. America’s economy still looks solid. With two likely rate hikes between now and the end of the year, there’s little else that concerns me with regard to the economy’s state of health for now.

I am still expecting a September market correction, mostly because I suspect there’s more than enough reason for portfolio dumping in the second half of the month. Even though the benchmarks have been making gains, the broader market doesn’t seem to agree as seen in its internals. Volumes haven’t fallen off a cliff but are considerably lower than the first half of the year, as can be expected leading into the October Effect.

Expect a volatile week ahead. If this market is as resilient as I think it is, we should se e moderate gains this time next week. But I won’t count out the start of the September correction closer to expiration Friday.

Happy Hunting!

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