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Durable Data in Factory-Sector Report

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February 26, 2015
Ms. Yellen is done. We can all get back to trading now. And two of the first pieces of economic information for the Fed and markets to consider include a stronger-than-expected factory sector reading and a mixed consumer inflation report that included a jump in the closely watched wage segment. The Federal Reserve chief’s two-day congressional testimony reinvigorated Wall Street’s sometimes-shaky belief that the Fed will be slow and deliberate with interest-rate changes. Yellen indicated the Fed can likely wait at least until the economy is flirting with a 2% inflation rate target.  When all was said and done, the Dow Jones Industrial Average squeezed out yet another record high with a late-day move, while the S&P 500 (SPX) closed barely in the red and the tech-studded NASDAQ Composite (NDX) finally snapped its long string of up days. Wednesday did offer a few interesting individual stories. For one, oil rallied above the $51 level. But stock-by-stock repositioning seemed to be the order of the day. Hewlett-Packard (HPQ) and Apple (APPL) were on the move absent news, perhaps subject to some profit-taking. McDonald’s (MCD) and General Electric (GE), both of which have been dogged by a strong dollar, logged 13 times their typical daily volume in call options.
S&P 500 remains near record top as Fed signals slow moves.

FIGURE 1: CHURNING AT THE TOP.

The S&P 500 (SPX) remains near a test of its record high near 2119 but bulls are showing restraint. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Wages Jump. Now, talking about wage increases to anyone spinning their wheels at work always opens you up to a little backlash. What we’re all really talking about are broad trends. And, in fact, we’re talking about one of the key barometers of inflation risks—wages. This morning’s consumer price report had a little bit for all inflation watchers. Consumer prices fell again in January and inflation turned negative compared to 12 months ago because of falling energy prices. Excluding food and energy, so-called core consumer prices rose 0.2% in January. Core prices are also up 1.6% in the past year, mainly reflecting rising prices for housing, the single biggest expense for consumers. Real (meaning inflation adjusted) hourly wages, meanwhile, roared back 1.2% in January, the result of higher pay and lower inflation. Real hourly wages have climbed 2.4% in the past 12 months.

Factories Humming Again? Orders for durable U.S. goods rose 2.8% in January, smashing the cautious 0.5% gain that Wall Street expected after a few sloppy months. Orders for core capital goods— a proxy for business investment— surged 9.5%. Shipments of core capital goods, a category used to help determine quarterly economic growth, rose 1% in January. Orders fell 3.7% in December, newly revised data show. January’s reading making a little sense given rising employment gains.

Kohl’s is Also on Target? A couple of key retail names have largely delivered upbeat results this week. Middle-market department store Kohl's (KSS) said results in its holiday quarter topped Street expectations and its outlook for the current fiscal year is about in line with industry analyst expectations. Results may indicate some success from its spring cleaning last year. In May, Kohl's outlined a multi-year plan that included stocking better products, new savings promotions, gearing offerings to local tastes, and attracting top talent. For its 2015 fiscal year, Kohl's expects sales to grow 1.8% to 2.8%, while analysts had called for 2% growth. EPS are pegged at $4.40 to $4.60, also largely aligning with a consensus analyst call for $4.54. The company boosted its quarterly dividend by 15%. Kohl’s news follows largely positive headlines out of Target (TGT) a day earlier. The discount retailer and investors are putting new CEO Brian Cornell to the test and he’s starting to deliver with initiatives like free shipping and a stronger focus on clothing and home goods. Target said same-store sales rose 3.8% in Q4, ahead of a company projection for 3% growth.

Good trading,
JJ
@TDAJJKinahan

NC
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