Market Perspective for January 3, 2017

Markets started 2017 on a bullish footing: Asian and European markets opened higher, as did the U.S. markets. The major domestic stock market indices are close to all-time highs and testing key psychological levels, namely the 20,000 level on the Dow Jones Industrial Average. The index started the year only 1.2 percent away from shattering that mark. Investors are optimistic about the incoming Trump Administration and proposed economic policies. Consumer confidence is also at a multi-year high.

Trading volume will return to normal this week as traders return from vacation. Energy was the first market to benefit from the jump in activity and is leading out of the gate: oil opened at a new 18-month high following news that Kuwait and Oman cut production as agreed in last month’s production cut deal. Bullish sentiment in the oil market is high.

Global manufacturing and service sector growth, minutes from the last Federal Open Market Committee (FOMC) meeting, and light vehicle sales are on tap this week.

The Eurozone manufacturing Purchasing Managers’ Index (PMI) reached its highest level in five years at 54.9. China’s PMI hit 51.9, while the U.K. jumped to 56.1, up from 53.6 a month earlier, more evidence that Brexit fears were 180 degrees wrong. The U.S. manufacturing PMI increased to 54.7, beating expectations. Any reading above 50 indicates expansion.

November construction spending in the U.S. increased 0.9 percent, beating expectations of 0.6 percent.

FOMC minutes and domestic light vehicle sales for December are out on Wednesday. The consensus is looking for a slight dip in the sales pace, to 17.8 million from November’s 17.9 million.

Services PMI data for China, the U.K., and the U.S. will be out on Thursday. While the Chinese report is expected to decline marginally, analysts forecast the U.S. report to remain unchanged and the U.K. service sector to grow slightly. Weekly crude inventory figures will also be released on Thursday due to the holiday. Domestic stockpiles are forecast to increase by only a few thousand barrels. Weekly unemployment claims, which remain at multi-decade lows, are expected to show a marginal decline from the previous report.

The December employment report is out on Friday. Non-farm payroll is expected to show a net gain of 170,000 jobs. The unemployment rate is expected to increase from 4.6 percent to 4.7 percent. Economists forecast hourly earnings rose 0.2 percent, a reversal from the 0.1 percent dip in November. Factory orders and the foreign trade balance for November are also due Friday. Analysts believe the trade deficit increased to $43.4 billion, up from $42.6 billion in October. Although some have blamed the rising trade deficit on the rising U.S. dollar, in the short-term a stronger dollar cuts the trade deficit because imports and exports are ordered months in advance. Instead, the rising trade deficit reflects rising oil prices since the U.S. is still a net importer of energy, as well as improving economic conditions driving consumer spending.

In earnings news, Monsanto and Walgreens are set to report before Thursday’s opening bell. Monsanto (MON) will deliver its first-quarter report. Analysts are forecasting earnings per share (EPS) of $0.01 versus the $0.10 loss recorded during the same period last year. Although shares gained in 2016, they are 6 percent below the June 2016 high and stuck in a trading range since making that high. Analysts expect Walgreens (WBA) will report $1.09 per share in earnings. The main story remains the Rite Aid (RAD) buyout. Walgreens recently announced it would sell 865 stores in an effort to gain regulatory approval. The deal is expected to close on January 27.

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