Market Perspective for October 21, 2016

Strong earnings from Netflix (NFLX), McDonald’s (MCD) and several major banks delivered a flat week for the stock market, offsetting the effects of a strong U.S. dollar against the weakening yen, euro and yuan.

Netflix reported a large increase in subscriptions, particularly overseas. Shares of NFLX surged over 23 percent in response to the report. Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) also reported earnings per share (EPS) and revenues that beat expectations. Strong results in all banking divisions lifted shares of BAC by 3.5 percent, while shares of GS and MS rose more than 2 percent as both firms reported an increase in trading activity. SPDR Financial Select Sector (XLF) dipped on Friday, however, moderating the week’s gains to about 0.5 percent.

McDonald’s (MCD) profited from recent menu changes, such as all-day breakfast and new chicken nuggets. Same store sales climbed 3.5 percent, far ahead of the 1.5 percent consensus forecast. Shares rallied more than 2 percent following the Friday release. General Electric’s (GE) guiding revenue and full year earnings fell, despite an earnings beat, pulling shares lower.

European Central Bank (ECB) President Mario Draghi failed to clarify whether the ECB would taper its quantitative easing at the end of the year as was rumored last week, while the People’s Bank of China allowed the yuan to depreciate during the week to its lowest levels in six years. The lack of clarity from the ECB and hawkish comments regarding domestic interest rates by U.S. Fed officials kept markets relatively unchanged. The S&P 500 Index closed with a gain of 0.38 percent on the week.

West Texas Intermediate Crude prices surged to a 15-month high on Wednesday following a larger-than-expected inventory drawdown, but fell below $51 per barrel the next day. Copper was also under pressure as the greenback climbed steadily against the euro and yen.

The euro zone Consumer Price Index (CPI) rose 0.4 percent, a small increase over last month and in line with expectations. Reaching its highest inflation level since November 2014, the U.K. CPI rose 1 percent. This was slightly higher than forecast. Strong increases in gasoline and rents caused the U.S. headline CPI to rise by 0.3 percent, but core CPI was slower than expected at 0.1 percent. While the New York Fed’s Empire State Manufacturing index grew at its slowest rate in five months, the Fed Beige Book showed a modest increase in economic activity in all regions of the country. September industrial production was in line with forecasts, while capacity utilization missed by 0.1 percent, at 75.4 percent.

Although building permits jumped in September, housing starts fell 9 percent, declining for the second consecutive month. Waning demand in the multi-family sector has been cited as the primary cause for the trend. Existing home sales rose and beat analysts’ forecast in September. Still at multi-decade lows, unemployment claims rose to their highest level in five weeks, due in part to the impact of Hurricane Matthew. Chinese gross domestic product rose 6.7 percent for the third consecutive quarter, while home prices and lending surged in September.

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