Month: August 2016

The three major benchmarks simultaneously closed at record highs for the first time since 1999 last week, buoyed by earnings beats and a large rebound in crude oil prices. While the Dow and the Standard & Poor’s (S&P) 500 pulled back slightly Friday, the Nasdaq hit another record with its seventh straight weekly gain. The bulls were alsooff to a good start on Monday in an effort to build on those advances.

Futures markets forecast a 12 percent chance for a rate hike in September and 38 percent in December, based on recent mixed reports. Several influential Fed officials are scheduled to speak this week and could influence these odds. Atlanta Fed President Dennis Lockhart will deliver prepared remarks on Tuesday, St. Louis Fed president James Bullard will speak on Wednesday and San Francisco Fed President John Williams will detail his economic outlook on Thursday. The most recent FOMC meeting minutes will be released Wednesday as well. The 10-year Treasury yield started the week at 1.5 percent, up from Brexit panic lows of 1.3 percent, but below the March high of 2.0 percent.

Key reports this week will include the consumer price index, July housing starts and industrial production, as well as weekly unemployment claims data. Homebuilder sentiment edged higher in August as the number of existing homes fell. Housing starts and building permits will be out on Tuesday. Economists forecast 1.180 million starts. Industrial Production and Capacity Utilization will be released Tuesday. Economists forecast 0.4 percent growth in production and a 75.6 percent utilization rate. Analysts predict July inflation was flat and core prices rose 0.2 percent.

Energy has experienced a sharp short-term rally from $39 to $45 per barrel on a short-squeeze, though the weekly oil inventory report is expected to reflect a drawdown and continued volatility is likely. The Bank of Japan (BoJ) could announce additional monetary policy action this week following weaker-than-expected GDP growth.

Although earnings season is winding to a close, a few important reports in the housing, retail, technology and manufacturing sectors are due out this week. Home Depot (HD) and Lowe’s (LOW) will announce quarterly earnings in addition to major retailers Target (TGT) and Wal-Mart (WMT). Cisco (CSCO), a major holding in many technology funds, will also report this week. Agriculture and construction manufacturer Deere & Company (DE) will close out the week before the opening bell Friday.

All three major large-cap indexes achieved new all-time highs over the past week.  The Dow climbed above 18,600 before settling back on Friday, while the S&P 500 cleared 2,185 and the Nasdaq topped 5,235.

While import prices increased more than expected, lower unemployment claims reinforced the consensus opinion in favor of labor market strength. The Job Openings and Labor Turnover Summary (JOLTS) report was strong as well. The Labor Market Conditions Index (LMCI), an aggregate of 19 labor market data points swung positive for the first time in 2016, providing an additional argument in favor of a rate hike, though one this year remains unlikely.

Wholesale inventories for June improved despite an unexpected drop in U.S. productivity. The housing market continued to strengthen as mortgage applications rose 7 percent. Former Chairman of the Federal Reserve Ben Bernanke believes the Fed will be reluctant to raise interest rates in the near future.

Several retailers beat expectations earnings expectations. Macy’s (M) announced a strategic plan to close stores and strong online sales lifted earnings. Kohl’s (KSS) gross margins improved on inventory management initiatives, while shares of Nordstrom’s (JWN) also rose almost 7 percent on better-than-expected earnings. Although luxury goods retailers Coach (COH) and Michael Kors (KRS) reported relatively flat earnings, shares of online retailer Alibaba (BABA) were up close to 8 percent as the company reported strong revenue growth. Disney (DIS) delivered earnings per share and revenues that were in line with expectations. SPDR S&P Retail (XRT) saw a modest 1 percent gain on the week.

Finally, oil was up on the week, but fundamentals still point to lower prices. Production cuts being discussed will come off of inflated production numbers, which effectively will allow the Saudis and Russians, among others, to increase production going forward. U.S. shale oil producers have become extremely efficient and are currently selling oil for less than $40 a barrel.  August is also a quiet period for the markets. The number of short positions grew when oil dipped to $39, but they have been squeezed by aggressive bulls taking advantage of illiquid markets.

The U.S. markets opened in record territory following Friday’s better-than-expected monthly employment report, though the advance paused by midday as investors assessed weaker Chinese trade data.

This week’s earnings will illuminate consumer trends as the retail sector kicks off two weeks of heavy reporting. Kohl’s (KSS), Nordstrom’s (JWN), Macy’s (M), Coach (COH), Michael Kors (KORS) and online retailer Alibaba (BABA) are all scheduled to report. Most department stores are down considerably from March levels, despite the rise in consumer spending, due to competition from e-commerce.   Disney (DIS) will also report quarterly earnings this week and is expected to deliver encouraging numbers after three hit blockbuster movies during the quarter, though the ESPN division could potentially drag on profits.

Monthly retail sales figures for July are due out Friday. The average forecast calls for a 0.4 percent increase from June (0.2 percent ex-autos). The latest University of Michigan Consumer Confidence Survey and the U.S. producer price index (PPI) are also scheduled to be released on Friday. Consumer confidence is expected to rise, while the PPI is expected to slow considerably from June’s 0.5 percent increase to 0.1 percent.

China will release a number of economic reports for the month of July this week. On Sunday night, the country revealed a spike in the trade surplus due to an uptick in exports and a drop in imports. Later this week, new loan and inflation data will be out. Investors are closely watching credit growth following a recent bounce in real estate, which has prevented GDP from slowing, driven by an unprecedented rise in mortgage lending.

Oil prices rallied on Monday after hedge funds loaded up on short positions in anticipation of a move into the $30 range. This short-term rally should peak in the $43 to $45 per barrel range. In addition to rising gasoline inventory, there is still a large amount of “floating storage,” oil tankers filled to the brim and parked offshore at major oil ports around the world.

Investors adopted a wait-and-see attitude to start the week, but positive earnings and strength in the consumer sector will reinforce the bullish implications of the strong July jobs report. The Atlanta Fed raised its GDPNow target for the second quarter to 3.8 percent based on the recent slate of positive economic reports and further upside surprises could push estimates past 4 percent. Foreign central banks are accommodative as well, providing a bullish backdrop for the markets. New Zealand’s central bank meets Wednesday and is expected to cut interest rates. It is the last major central bank policy meeting this month.