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Slumber Disturbed: Comey Firing Assessed for Impact on Economic Agenda

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May 10, 2017

(Wednesday Market Open) A market desperate for news to trade has some thanks to President Trump, whose firing of FBI Director James Comey seems to be the topic du jour on Wall Street.

Though the head of the FBI isn’t normally a market-moving factor, there’s concern that more turbulence in Washington, D.C., could potentially distract from or delay the president’s agenda of tax reform, health care, and infrastructure spending. That might help explain some of the weakness in stock futures early Wednesday, though it’s a little early to assess the ultimate impact. Meanwhile, volatility, which touched historic lows earlier this week, bounced back a little as the VIX climbed above 10.

The market is coming off a rather ho-hum day Tuesday, which saw a divergence between a lower S&P 500 (SPX) and the Nasdaq (NDX) setting its 31st high of 2017. The tech-heavy NDX continues to dominate the action, while the SPX has had a little trouble making a decisive move above all time highs. The SPX hasn’t closed above the psychological 2400 mark as of yet, though it finished just below that a couple of times recently.

On the earnings front, Walt Disney (DIS) reported after the close and shares fell in overnight trading after the company beat Wall Street analysts’ estimates on earnings per share but missed on revenue. The EPSN franchise once again was one of the primary sources of disappointment. Still, it’s worth noting that DIS outdid many analysts’ expectations with its theme park, resort, and movie revenues. Priceline (PCLN), the other big name reporting earnings yesterday afternoon, beat estimates on earnings per share, but the company’s lower forward guidance helped lead to after-hours selling.

By the end of the week, we’ll be 90% of the way through earnings, but there’s still plenty to sort through before we get there. Retailers take the spotlight over the next few days, including Macy’s (M), Kohl’s (KSS), Nordstrom (JWN), and J.C. Penney (JCP). Target (TGT) and Wal-Mart (WMT) report next week. The fun starts before the open tomorrow with M and KSS. Listening in on the calls could be interesting as we get a chance to hear some of the big store retailers discuss consumer demand and their strategies to deal with Internet competition.

Economic data keeps pouring in, and wholesale inventories for March released yesterday looked a little better than expected, rising 0.2%. However, in a bit of potentially troubling news to keep an eye on going forward, the Atlanta Fed’s GDPNow indicator lowered its Q2 growth estimate to 3.6% from 4.2%.

Today brings the weekly U.S. crude oil stockpiles report. Late yesterday the American Petroleum Institute (API) reported oil stockpiles rising 5.8 million barrels. That gave crude a lift back above $46 a barrel by early Wednesday, but we’ll see if the government’s number later today reinforces the API data. Energy sector stocks fell Tuesday amid the recent oil price slump.

A couple of Fed speakers are on tap today, and European Central Bank President Mario Draghi gives a speech as well. Earlier Wednesday, Bank of Japan Governor Haruhiko Kuroda said Japan’s current quantitative easing program would continue and there will be no adjustment to the 0% cap on the yield of the Japanese 10-year bond, TheStreet.com reported. The euro rose against the dollar and the dollar fell against the yen, while the gold market ticked a little bit higher.

U.S. 10-year Treasury yields finished back above 2.4% on Tuesday for the first time in more than a month as economic confidence seemed to grow. There’s a $23 billion Treasury auction of 10-years scheduled for today. The last auction, a month ago, saw a high yield of 2.332%.

Treasury Yield

FIGURE 1: YIELDS HIT ONE-MONTH HIGH.

The 10-year Treasury yield, plotted through Tuesday on the thinkorswim® platform from TD Ameritrade, closed above 2.4% for the first time in more than a month, but is about flat over the last three months. Meanwhile, the U.S. Dollar Index (blue line) also moved higher. Data source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.    

Producer Prices Up Next: April’s producer price index (PPI) bows before the open tomorrow, offering a chance to assess whether increased demand for goods is starting to be felt at the producer level. Wall Street analysts’ consensus for both PPI and core PPI — which excludes food and energy — is 0.2%, according to Briefing.com. That compares with a 0.1% decline in PPI and a flat core PPI in March. A few signs point toward slightly better economic growth in April following a sluggish Q1, and April PPI could help confirm whether that’s the case.

Fed Watch: Rate hike odds keep climbing, with chances of a hike by June now above 80%, according to Fed funds futures. Additionally, chances for an additional hike by the September meeting also ticked up, now at above 40%. Before last week’s Fed meeting and jobs report, most estimates pointed to no additional moves by the Fed (following an anticipated June hike) until December. So perhaps the solid jobs data and impressive earnings have market participants thinking the Fed might speed up.

The Danger Of Complacency: With the VIX settling at the historically low level of 10 on Tuesday, it’s important not to get complacent just because the market seems to be. Lack of complacency in and of itself can be a dangerous sign, because it might mean investors aren’t prepared for possible sudden swings from outside events. Media reports late Tuesday that North Korea might resume nuclear testing gave the market a twitch, though indices recovered pretty quickly. It served as a reminder, however, that geopolitics never really goes away. There isn’t likely to ever be another day with no news, as the BBC so infamously reported back on April 18, 1930.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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