Month: April 2017

The 10-year Treasury yield slipped slightly below 2.3 percent.

Longer-term, if bonds slide back into a trading range, it will have important implications for rate-sensitive sectors, such as utilities. The relative performance of SPDR S&P 500 (SPY) versus SPDR Utilities (XLU) matches up closely with the 10-year Treasury yield.

The implication for dividend funds is less clear. Higher yielding dividend funds, such as iShares Core High Dividend (HDV) and SPDR S&P Dividend (SDY), have tended to outperform the S&P 500 when rates fall, but the signal is not as strong as it is with utilities and real estate. Dividend growth funds such as Vanguard Dividend Appreciation (VIG) show even less correlation.

Falling yields will boost prices on longer-term bond funds. The first chart below shows the 10-year Treasury yield versus iShares iBoxx Investment Grade Bond (LQD) inverted. Also, dividends are stripped out to show only the fluctuation in the underlying bond portfolio.

In contrast, floating-rate funds follow interest rates higher and tend to be relatively immune from long-term interest rates. From 2014-2016, falling oil prices increased credit risk in the market, pulling many higher-yielding bonds with it, regardless of energy exposure. Given the lack of credit risk in the market today, floating-rate funds should hold steady even if long-term interest rates continue dipping.

Thompson Bond (THOPX) also performs well through rate fluctuations.

The year-to-date index charts reflect consolidating gains from February’s big run-up. The Russell 2000 is the only exception with flat YTD performance. The Dow Jones Utilities Index is pushing towards a new high, consistent with the dip in interest rates. The Dow Transports are down slightly for the year, hurt by UPS and trucking shares.

Brick-and-mortar retailers have been closing stores at a healthy clip over the past year, but the SPDR S&P Retail (XRT) fund managed to rally for most of 2016. The fund recently broke its uptrend and shares hit the underside of this trendline, however, which has now become resistance.

Retailers with physical locations are losing business to online competition. An ETF launched in 2016, Amplify Online Retail (IBUY) shows the contrast. Shares of this fund are at a new all-time high.

West Texas Intermediate crude oil stormed back to $53 a barrel in the past week, completely reversing its losses from early March.

The U.S. Dollar Index climbed above 101 in the past week before slipping. It remains in a clear short-term downtrend.

A weaker euro lifted the dollar last week.

Foreign stock markets outperformed the domestic market in the first quarter, aided by the weaker U.S. dollar. Emerging markets are performing better than developed markets, with individual countries such as Poland, India, Argentina and Mexico among the best performers. Emerging markets linked to commodity exports, such as Russia and Brazil, lag.

The Nasdaq opened the week only 0.7 percent away from another new all-time high, while the broader market saw very slight gains on Monday as stocks attempt to break out of a six-week consolidation phase.
Weekly jobless claims, producer prices for March and the University of Michigan consumer sentiment reading for April will be out on Thursday, and most developed markets will be closed on Friday in observance of Good Friday. Initial claims for unemployment are expected to remain low at 245,000, while producer price inflation anticipates a pause in March.
Core CPI rose 0.2 percent in March. March retail sales are expected to have fallen 0.3 percent, but to have increased 0.1 percent ex-autos. Economists forecast business inventories for February to climb to 0.3 percent.
This week’s overseas data will include Chinese CPI and PPI numbers for March, and Chinese trade data. Economists forecast Chinese producer prices climbed 7.6 percent versus March 2016. Although the year-on-year number is high, monthly Chinese inflation has been decelerating rapidly as commodity prices stabilize. Japanese industrial production for February will be out on Friday and is expected to show a healthy 2 percent increase.
The 10-year Treasury yield remains near the bottom of its four-month trading range. The yield dipped below 2.3 percent last week, signaling a potential breakout rally in bonds, but has since moved up to 2.36 percent. The U.S. Dollar Index followed yields higher and hit 101 on Friday, reversing nearly all of its losses since the Federal Reserve hiked interest rates in March.
First quarter earnings season kicks off this week with Delta Airlines (DAL) on Wednesday. Analysts forecast earnings per share of $0.73 in the quarter, down from $1.32 a year earlier. On Thursday, J.P. Morgan Chase (JPM) is expected to report earnings of $1.51 per share, a better than 10 percent gain on last year’s $1.35, on revenues of $24.9 billion. The consensus is for earnings per share of $0.97 at Wells Fargo (WFC), on revenues of $22.3 billion. WFC earned $0.99 per share in the year-ago quarter. Analysts forecast $1.24 per share at Citigroup (C), also a better-than 10 percent increase versus last year, on revenues of $17.8 billion.
Regional banks will also report on Thursday, including PNC Financial Services (PNC), First Republic Bank (FRC) and Commerce Bancshares (CBSH). Taiwan Semiconductor (TSM) is a major holding in some technology and semiconductor funds, as well as iShares MSCI Taiwan (EWT). Analysts are looking for $0.53 per share versus $0.38 a year ago, an increase of 39 percent.

The Nasdaq hit a new intraday all-time high on Wednesday, fueled in part by a rapid Amazon (AMZN) advance. Overall, the markets were calm, ending the week with small losses. The U.S. airstrikes on Syria triggered a bump in gold and oil prices, but markets were little impacted by the news.
March’s mixed employment report netted most of the week’s headlines. Jobs came in lower than expected, but the unemployment rate fell. Investors took the report in stride and rate hike expectations were unchanged in the futures market. 98,000 new jobs were added to the economy in March, missing expectations of 185,000. Construction jobs went from an increase of 59,000 in February to only 6,000 in March, but major snowstorms and wintry weather may have dampened hiring. Retail jobs predictably fell by 30,000. J.C. Penney (JCP) announced store closings in March, while Sears (SHLD) said it wasn’t sure it could continue its operations. Online competition is largely responsible for the weakness. This week, Amazon (AMZN) announced a need for 30,000 additional part-time warehouse employees.
The unemployment rate fell 0.2 percent to 4.5 percent, and the U-6 unemployment rate that captures discouraged workers and those who want full-time work, fell 0.3 percent to 8.9 percent. Average hourly earnings increased 0.2 percent.
Crude oil prices came under pressure midweek when the government announced inventories increased 1.6 million barrels. Analysts forecast a drop of 0.4 million. American airstrikes on a Syrian airfield more than made up for the midweek losses though, helping crude finish the week at $52 per barrel. Energy was one of the better performing sectors for the week, rising nearly 1 percent.
March auto sales missed expectations, rising at an annualized pace of 16.6 million in March. Analysts forecast a pace of 17.3 million. The February U.S. trade deficit was smaller than expected due to rising exports. Weekly unemployment claims fell sharply to 234,000, bringing the number close to 44-year lows. Economists expected 251,000 initial claims. Finally, wholesale inventories increased 0.4 percent in February.
In earnings news, shares of Constellation Brands (STZ) popped 6 percent after reporting strong earnings. Monsanto (MON) shares also climbed after the firm beat earnings and sales estimates. It also guided analysts towards the high end of its 2017 earnings forecast range. Although brick-and-mortar retail is in trouble, not all firms are suffering. Bed, Bath & Beyond (BBBY) shares rallied after it reported earnings of $1.84 per shares, beating estimates by 7 cents. Shares of Walgreen’s (WBA) fell after it met earnings estimates, but missed sales estimates. The company blamed tough European conditions and the stronger U.S. dollar.