Market Perspective for June 17, 2016

Equities headed lower during the week with the Federal Reserve’s interest rate hold and Brexit concerns.

The Federal Reserve kept interest rates unchanged this week and Fed Chair Janet Yellen conveyed uncertainty, lowering expectations for the pace of rate hikes. The Bank of England and the Bank of Japan left their interest rates unchanged as expected. The yen rallied strongly in the wake of the BoJ decision, to its highest level since August 2014.

While some investors are still anxious about next week’s United Kingdom vote on European Union membership, the issue may be overblown in the short-term. Speculators are selling the British pound and euro when Leave has a polling lead, which sends investors into safe-haven assets such as the U.S. dollar and U.S. treasuries. Since polls shifted in favor of a British exit from the EU (Brexit) for most of the week, foreign markets fell as the U.S. dollar rallied, spilling over into weakness in U.S. equities. Global stock markets rose sharply Thursday afternoon and into Friday as sentiment moved back towards Remain and the U.S. dollar weakened against the euro and pound.

The week’s economic data was mixed. Chinese industrial production was released on Monday. The reported 6.0 percent growth was slightly higher than forecasts. Chinese private sector fixed-asset investment, however, weakened signaling the slowdown still hasn’t bottomed.

In the U.S., retail sales grew 0.5 percent, rising for the second consecutive month and beating consensus estimates. A small draw down in U.S. oil inventories at Cushing, OK didn’t help oil prices, as inventory levels are 14 percent higher than a year ago. Oil finished down for the week, though a strong Friday rally cut losses in half.

Domestic industrial production fell 0.4 percent in May, in line with expectations. The decline was led by automobile manufacturing. Capacity utilization was down as a result, to 74.9 percent. This offset the Empire State manufacturing survey, which showed an unexpected positive reading of 6.0. Last month, the survey had a reading of minus 9.0 and economists were looking for a minus 5.0 print. A number above zero signals expansion. Weekly unemployment claims were slightly higher than consensus estimates, 277,000 versus 270,000 expected. Producer price inflation increased 0.4 percent in May, faster than expected. Core PPI was also higher than expected, up 0.3 percent versus 0.1 percent expected.

Housing starts, reported Friday, were 1.16 million, above analyst forecasts. There were 1.14 million building permits issued in May, up from the 1.13-million issued in April. Homebuilders rallied on the news.

In earnings news this week, Kroger (KR) reported mixed results. The grocer beat earnings per share estimates, but the company reported lower than expected revenues. Kroger’s forward guidance indicates that the supermarket chain expects its same-store sales to increase, but shares were down about 4 percent on the week. As its merger with Walgreens (WBA) approaches, Rite Aid (RAD) delivered disappointing earnings Thursday. The company missed consensus earnings and revenue estimates. Shares shrugged off the miss thanks to Walgreens rallying. After the bell Thursday, Oracle (ORCL) reported earnings per share one penny less than expectations, but beat revenue forecasts.  The company delivered a strong performance in its cloud-related businesses and shares rallied on Friday, bucking the general decline in technology shares on the day.

Dividend shares generally outperformed during the week with utilities, consumer staples and industrials.

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