Year: 2016

Markets reacted favorably to the Federal Reserve’s latest report. The Dow is approaching 20,000, while the Nasdaq is reaching toward 5,500. Both indexes made new intraday highs this week.

The Federal Reserve raised benchmark interest rates 25-basis points this week, as predicted. The Fed also anticipates three rate hikes in 2017. Markets initially sold off following the meeting, but rapidly rebounded on Thursday. The U.S. dollar hit a 14-year high against a basket of foreign currencies, while gold and government bonds slid.

Home loan rates reached their highest levels since 2014, despite a decline in refinancing that pulled this week’s mortgage purchase application down 4 percent, in-line with estimates.  Oil and gasoline stockpiles rose more than forecast, depressing crude oil prices. After rallying Monday, West Texas Intermediate Crude faced selling pressure later in the week and closed relatively unchanged. Shares of the Energy Select Sector SPDR ETF (XLE) saw a slight gain on the week.

U.S. retail sales increased 0.1 percent in November, less than the 0.4 percent increase analysts had forecast. Analysts attributed the miss to a drop in auto sales. Domestic industrial production fell 0.4 percent, while capacity utilization dipped to 75 percent from 75.4 percent a month earlier. The latest producer price index (PPI) rose 0.4 percent, doubling expectations with the biggest increase in five months. Consumer prices increased 0.2 percent, matching analysts’ forecast.

Unemployment claims fell for the second consecutive week, per the Bureau of Labor Statistics.  The Empire State and Philly Fed manufacturing surveys came in stronger than the consensus estimates, reinforcing overall strength in the economy.

Chinese industrial output rose 6.2 percent, slightly over growth expectations. Chinese producer prices also jumped 1.5 percent in November, a pace that threatens runaway inflation in China. Chinese bond futures tumbled after the Fed hiked rates and the central bank halted bond futures trading on Thursday to stem the decline. The bank also weakened the yuan, dropping it to 6.95 versus the U.S. dollar.

Software developer Adobe Systems (ADBE) reported its sixth straight quarter of 20 percent sales growth, handily beating earnings and revenue estimates. After Thursday’s bell, Oracle (ORCL) reported mixed results, citing the transition from its core database business toward faster-growing sectors like cloud computing for light revenues. Although the company narrowly beat EPS estimates, shares fell more than 5 percent on the news.

Markets have rallied consistently since the election, though the next week may initially bring corrections in response to the Federal Reserve’s 25-basis point interest rate hike.  Some traders may take profits, while investors may rotate into sectors that have lagged since July.

Fixed income at the long end of the yield curve is likeliest to experience a corrective move. Investment-grade bonds have already stabilized, as reflected in the Fidelity Corporate Bond (FCBFX) and iShares iBoxx Investment Grade Bond (LQD) charts below. The 10-year Treasury yield also pulled back slightly ahead of the Fed’s hike. The 5-year Treasury yield has moved above its long-term trading range, but remains at risk.

Short-term yields, however, remain in an uptrend. Both 1- and 3-month LIBOR, the 1-year Treasury yield, and floating-rate funds all moved higher over the past week. Whether long-term rates rise or fall in the week ahead, floating rate funds should hold steady under the prospect of rising interest payments.

Energy

West Texas Intermediate Crude couldn’t sustain its rally this week, sliding back to $51 a barrel during Wednesday trading. Inventory and production data were mixed. The Department of Energy announced a 2.56-million-barrel inventory decline and a smaller-than-expected increase in gasoline inventory. Rig counts and production, however, are moving higher in the United States following a rush by shale producers to hedge above $50 a barrel.

WisdomTree US Dollar Bullish (USDU)
PowerShares DB US Dollar Bullish (UUP)

The U.S. dollar has broken out to the upside, but is still not far from a nearly 2-year trading range. Higher interest rates are bullish for the U.S. dollar, but if traders pushed the dollar up in expectation of a rate hike, they may reverse those trades following the Fed hike. A dip below 100 on the U.S. Dollar Index won’t end the dollar’s bull market, but it will create some confusion in the short-term. If the dollar can hold above 100, it will signal a strong bullish floor has formed.

The yen would benefit from a near-term dollar reversal. It experienced a rapid drop from USDJPY 100 to 115 in the past two months. The yen is also key for the gold market: the two have moved in lockstep for several years. A rebound in the yen back towards USDJPY 100 will be good news for gold, while a slide back towards USDJPY 125 could push gold back to 52-week lows, near $1050 an ounce.

Index Performance

The Russell 2000 and S&P 400 Mid-Cap indexes were flat over the past five trading days, while the Nasdaq rallied nearly 2 percent after lagging for most of the past month. The Dow Industrials has been a stalwart outperformer since the election.

We also saw a corrective move in the sectors. Utilities and healthcare, two post-election laggards, were last week’s best performers. Industrials, materials, and financials were the opposite. Consumer staples and real estate also outperformed the broader market over the past week.

U.S. equities continued to climb after closing at all-time highs on Friday, although the market will be tested this week by the Federal Open Market Committee’s anticipated interest rate hike.  The Fed is expected to increase rates by 25 basis points and will be the first hike since December 2015.

The latest mortgage purchase application index and weekly oil inventory data will be available on Wednesday. Mortgage applications have declined for two consecutive weeks as home loan rates increased, but loan refinancing, not home purchasing, has accounted for most of the slowdown.  Analysts expect oil stockpiles will rise by a million barrels. Non-OPEC countries announced they would cut production over the weekend, pushing West Texas Intermediate Crude to $54 a barrel. U.S. retail sales, domestic industrial production, capacity utilization for November, and the latest producer price index (PPI) will also be out on Wednesday. Economists anticipate a 0.4-percent increase in retail sales, a slight decrease in industrial production and capacity utilization, and a 0.2-percent rise in the PPI.

Weekly unemployment claims are forecast to drop slightly as the economy picks up. Both headline CPI and core CPI’s are forecast to rise 0.2 percent. The consensus estimate calls for a slight increase in the Empire State and Philly Fed manufacturing surveys, which will be released Thursday. Housing starts for November will be out on Friday. The week’s notable overseas economic reports will include Chinese and eurozone industrial output and the latest U.K. consumer price index (CPI), which is expected to increase by 1 percent.

Adobe Systems and Oracle will release post-season quarterly earnings on Thursday. Consensus estimates for software developer Adobe Systems (ADBE) call for earnings per share (EPS) of $0.86, significantly higher than the $0.62 per share reported during the same period last year. Analysts are calling for EPS of $0.61 on revenues of $9.2 billion for Oracle (ORCL) following mixed results last quarter.

Bullish sentiment reignited this week as financial and technology shares once again led major indexes to new all-time highs. Investors are confident President-elect Trump’s administration and proposed economic policies will mean higher profits for U.S. companies. The Russell 2000 Index is up 16 percent since the election, one of its best months in history.

Financials rose more than 4 percent this week, while technology gained roughly 4 percent. Consumer cyclicals, materials and energy rounded out the week’s top five performers. Defensive sectors, such as utilities, consumer staples and healthcare, all lagged.

Although last weekend’s referendum in Italy rattled markets, the feared drop in the euro did not materialize. Later in the week, however, the European Central Bank (ECB) kept its benchmark interest rate unchanged and extended its quantitative easing program to the end of 2017. Central bank officials did say that the amount of bonds purchased each month would start to decline in April 2017, but traders reacted by selling the euro, sending it near its 52-week low in Friday trading. A break of the low will start the next phase of the euro’s decline, down to parity with the dollar.

Service sector Purchasing Managers Indexes (PMIs) out this week were bullish. China’s service PMI rose to its highest level in 16 months and the U.K. PMI reached a 10-month high. The U.S. service PMI declined fractionally, but it continues to signal robust economic expansion. News of record production by OPEC raised doubts about the cartel’s ability to follow through on production cuts, and hedging by U.S. shale producers raised the specter of U.S. production growth. On Wednesday, the latest weekly oil inventory report showed an increase of 3.8 million barrels. Oil finished the week above $50 a barrel nonetheless.

Weekly mortgage purchase applications dropped 0.7 percent, in line with economists’ consensus forecast. The Job Openings and Labor Turnover Survey (JOLTS) report reflected a slight rise in October job openings to 5.5 million, joining low initial unemployment claims figures released Thursday to demonstrate continued strength in the labor market.

In earnings news, H&R Block (HRB) had a net loss of $0.67 per share on revenues of $131.3 billion, marginally better than forecast estimates. Shares fell more than 5 percent on the report. Wholesale retailer Costco (COST) was flat after the company beat earnings per share estimates, but missed on its total revenues. After the bell, Wednesday, lululemon athletica (LULU) reported earnings that handily beat forecast estimates. Shares rose more than 18 percent. Same-store sales at Sears (SHLD) dropped another 7.4 percent this past quarter and earnings missed estimates. Shares fell more than 5 percent on the week.