February 22, 2018.
More than anything, the Fed minutes released yesterday underscored the turbulence the market has ahead. Some Federal Open Market Committee (FOMC) members, the minutes noted, were worried about the duo of strong growth and an economy at full employment. With that potentially leading to higher wages, inflation was definitely on the Fed’s radar screen. Or in the words of the minutes, as for the views of the committee members: “a step-up in the pace of economic growth could tighten labor market conditions even more than they currently anticipated, posing risks to inflation and financial stability associated with substantially overshooting full employment.” What did futures do? They hinted at a weaker opening today, the Fed noting the “increased likelihood” of more rate hikes to come. The U.S. 10 year- T-bond yield hit a fresh 4-year high of 2.95%, something we noted yesterday would be a clear indicator of difficulty for stocks. The dollar, on the news of the Fed minutes, also gained ground. Dow industrials are off 5.2% for the month on the heels of higher inflation and indications of more immediate rate hikes.
Daily Summary: The blue-chip Dow shed 0.7% after being up 1.2% at the session peak. The S&P 500 was also up as much as 1.2%, though ended down 0.6%. The tech-leaning NASDAQ fell 0.2%. The three major indexes all saw sharp reversals approximately an hour before the closing bell – and more importantly, an hour after the release of the FOMC minutes.
In summary, the minutes placed the emphasis on the stronger economy and the effect that could have on future rate hikes. The FOMC highlighted the strengthening as a catalyst that “increased the likelihood that a gradual upward trajectory of the federal-funds rate would be appropriate.” All of this isn’t news; the question, now, though, is whether the volatility is here to stay. Whereas in the event of the prior correction talk was about a technical correction, the market having risen too much too quickly, now on a fundamental level, if the Fed’s words play out, it would seem that there’s ample justification for reassessing stocks’ underlying valuations. Not everyone, though, is so concerned about the uptick in inflation.
Baird chief investment strategist, Bruce Bittles, is one of the people in that camp. “Demographics are such that we have 10,000 people retiring every day and being replaced by younger employees with lower salaries.” He likewise believes that lower wages abroad would constitute ample pressure on employers not to hike rates; in an increasingly globalized world, were prices to be high on the home front, jobs would be outsourced, preserving the fine balance of a growing economy that doesn’t border on the throes of rapid inflation.
In economic news, U.S. manufacturing climbed to a nearly three-and-a-half year high in February. IHS Markit’s flash PMI service sector gauge hit a 6-month high. These growth metrics notwithstanding, existing home sales tapered 3.2% in January.
Who benefitted, after all from yesterday’s minutes? The market got clobbered, especially after trading up on the eve of the minutes released, but banks – it cannot be denied – were hands down beneficiaries. The SPDR S&P Regional Banking ETF (KRE), rose 0.9%. The SPDR S&P Bank ETF (KBE) tacked on 0.7%.
Retail king, Walmart (WMT) plunged 2.8%, adding to Tuesday’s sharp selloff. With retailers generally-speaking facing calmer waters this past quarter, Walmart faced earnings pressure, added competition and a blip or two in its foray into digital commerce after botching up its inventory assessment.
In other earnings news, Dish Network (DISH) shed 3.1% after seeing a decline in Q4 revenue. Devon Energy (DVN) slumped 12% after its Q4 numbers fell short of the consensus and after releasing a pessimistic forecast. Foot Locker (FL) tacked on 0.5% after announcing a dividend hike, and after relaying plans honing in on online initiatives. LendingClub (LC) toppled 5.6% after missing expectations. Owens Corning (OC) fell 4.8%, even though Q4 earnings beat out market expectations.
The Economic Calendar will be packed today. Jobless claims will be released at 8:30, followed by the speech of William Dudley and the release of the Leading Indicators index at 10:00. Oil inventories will be coming out at 11:00.
Thursday’s Hot Stocks: ROKU, PANDORA, CAKE, JACK, WMT
|Wednesday||9:45||PMI Composite Flash||54.0||Medium|
|Wednesday||10:00||Existing Home Sales||5.650 M||Medium|
|Thursday||10:00||William Dudley Speaks||N/A||Medium|
|Thursday||10:00||Leading Indicators||0.6 %||Medium|
|Thursday||8:30||Jobless Claims||230 K||Medium|
|Thursday||11:00||Oil Inventories||1.8 M barrels||Low|
|Friday||10:15||William Dudley Speaks||–||Medium|
|NBL||Noble Energy, Inc.||AM||Tuesday|
|WLK||Westlake Chemical Corporation||AM||Tuesday|
|MGM||MGM Resorts International||AM||Tuesday|
|DUK||Duke Energy Corporation||AM||Tuesday|
|HD||The Home Depot, Inc.||AM||Tuesday|
|DVN||Devon Energy Corporation||PM||Tuesday|
|LNG||Cheniere Energy, Inc.||AM||Wednesday|
|DISH||DISH Network Corporation||AM||Wednesday|
|CLR||Continental Resources, Inc.||PM||Wednesday|
|NEM||Newmont Mining Corporation||AM||Thursday|
|HPE||Hewlett Packard Enterprise Company||PM||Thursday|
|LBTYK||Liberty Global plc||PM||Thursday|
|BMRN||BioMarin Pharmaceutical Inc.||PM||Thursday|
|COG||Cabot Oil & Gas Corporation||AM||Friday|
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