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Clearing the Decks: Focus Turns to Fiscal Policy, British Election After Long Rally Ends

May 31, 2017

(Wednesday Market Open) It was nice while it lasted, but the seven-day run of gains that sent the S&P 500 Index (SPX) up a total of 2.5% to new record highs ended Tuesday. The rally largely reflected strong Q1 earnings, but with those out of the way, fiscal policy and the coming British election step into the spotlight.

Futures trading pointed to a slightly higher open Wednesday as investors await several important pieces of economic data, including pending home sales and the Fed’s Beige Book.

It wasn’t too surprising to see energy take a hit Tuesday, considering oil prices fell. And oil found itself under pressure again early Wednesday, sliding below $49 a barrel amid oversupply talk.

Financials also took it on the chin yesterday, with many bank stocks sliding as interest rates fell back toward recent lows. Biotech stumbled as well. At the same time, defensive sectors like telecom and utilities posted gains.

The falling Treasury yields that helped lead to weakness in financial stocks stemmed in part from a slide in the pound as concerns about the pending June 8 British election began to weigh. The pound moved slightly lower vs. the dollar early Wednesday. Polls are tightening for Prime Minister Theresa May’s party, which is now up by just single digits after a wide early lead. The fear is that potential gridlock in Britain could delay progress on Brexit negotiations between Britain and the European Union.

Back in the U.S., there was some noise yesterday about possible soft inflation after the release of the Personal Consumption Expenditure (PCE) Price Index, which showed inflation pressure slipping in April (see below). On the other hand, personal income and spending rose, and that’s a good sign of inflationary pressure, so perhaps some of the inflation concerns look overstated.

Ten-year yields climbed slightly early Wednesday, remaining just above 2.22%. The Fed’s Beige Book comes out later today and might give a sense of how regional economies have been performing. Chicago PMI and pending home sales might also be of interest.

Fiscal policy could force its way to the front and center in coming days with the president back in Washington. Investors might want to look at any initial tax proposals with an understanding that they could be scaled back by Congress in the usual Washington give-and-take. Meanwhile, it wouldn’t be too surprising if the market remains near these high levels until investors get a better sense of what tax reform might look like.

From an economic data perspective, payrolls data up ahead Friday is the major report to watch this week, with job creation seen at 185,000, according to a consensus of analysts compiled by

Bond Yields


Ten-year yields, plotted through Tuesday on the thinkorswim® platform from TD Ameritrade, fell back toward recent lows amid weak inflation data. The financial sector (purple line) followed rates lower, easing from its recent rally. Data source: Standard & Poor’s, CME Group. For illustrative purposes only. Past performance does not guarantee future results. 

Inflation Picture Mixed: Inflation growth slipped from the previous month on the Personal Consumption Expenditure (PCE) Price Index, now up just 1.7% year over year vs. a 1.9% rise in March. However, personal income and spending each climbed a solid 0.4%, and that could be seen as a sign of inflation starting to percolate. Tuesday’s numbers are unlikely to alter the prevailing view that the Fed will raise the target range for the fed funds rate at its June meeting. Odds of a hike recently stood near 88%, according to CME Group futures trading. 

Where’s Inflation? Ask a Home Buyer: If there’s one part of the economy where inflation is a factor, it’s in the home market. Tuesday’s Case-Shiller 20-city Housing Index rose 5.9% in March, and now stands at its highest level since July 2006. “The new peak… will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance” said David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, in the press release accompanying the report. “Other housing indicators are also giving positive signals: sales of existing and new homes are rising and housing starts at an annual rate of 1.3 million units are at a post-recession peak.” Next up in housing: Pending home sales for April due this morning.

So Much To Do: It’s normal to feel harried coming back from a holiday weekend to a short workweek, but members of Congress may suffer more than the rest of us. They’ve got a variety of things to address this summer, and many investors are watching closely. Tax reform, health reform, infrastructure, banking regulations, and the debt ceiling all loom large, and some analysts think it would take progress on tax legislation for stocks to move another leg higher. Signs of continued impasse in D.C. certainly wouldn’t be helpful from a market perspective, and it’s worth noting that the SPX is up less than 1% since its March peak, meaning it really hasn’t gone anywhere in the last three months as legislative progress stalled in Washington. Correlation isn’t necessarily causation, but in this case, there’s at least an argument for it.

Good Trading,

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