Market Perspective for February 18, 2017

Federal Reserve Chair Janet Yellen’s Congressional testimony and faster-than-expected inflation pushed major indexes to new all-time highs this week. Large-cap indexes gained close to 1 percent, led once again by the Nasdaq.

The 10-year Treasury yield hit 2.5 percent following Yellen’s testimony, before moving back to 2.4 percent by Friday. Shifting interest rate expectations cemented a breakout in the financial sector. SPDR S&P Regional Banking (KRE) gained more than 2 percent for the week and hit a new all-time high on Wednesday.

Floating-rate bond funds held steady amid rising rates. Three-month LIBOR hit a new high following after a one-month pause. In addition to higher income payments down the road, the rise in LIBOR indicates the market’s anticipation of the next rate hike.

Economic data was generally positive this week, despite mixed industrial production signals. January industrial production fell 0.3 percent, but local production indexes from February climbed to multi-year highs. Retail sales exceeded expectations with an 0.8-percent rise. Retail Sales Ex-Autos growth was 0.4 percent, double expectations. Core CPI was on target at 0.3 percent. Producer prices rose 0.6 percent in January, primarily due to energy prices.

Homebuilder confidence has remained elevated in February. Housing starts and permits increased more than expected in January. New single-family residential construction drove the gains. The Atlanta Federal Reserve hiked its growth estimate for the current quarter to 2.4 percent based on rising residential housing investment.

Earnings season was eclipsed by “merger mania” this week. Kraft Heinz (KHC) missed sales estimates on Thursday, sending the stock down 4 percent. On Friday, however, the firm announced a buyout offer for Unilever (UL), sending shares up as much as 9 percent during Friday trading. Unilever immediately rejected the offer, calling it too low, and its stock subsequently rallied more than 10 percent.

Earlier in the week, Bristol-Myers (BMY) was also a rumored takeover target, with both Pfizer (PFE) and Gilead (GILD) mentioned as possible acquirers. Shares of BMY initially gained more than 5 percent. Shares of iShares Nasdaq Biotechnology (IBB) and iShares U.S. Pharmaceuticals (IHE) both advanced 3 percent. SPDR S&P Biotech (XBI) and SPDR S&P Pharma (XPH) saw slightly larger gains.

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