(Thursday Market Open) Geopolitics charged back toward center court early Thursday as market participants eyed developments in North Korea. Tensions rose after North Korea launched a missile several days ago, and stocks fell in pre-market trading as overseas markets came under pressure.
President Trump is in Europe meeting with foreign leaders including Russian President Putin today and tomorrow, and market participants might have their eyes on any developments there, especially related to policy on North Korea. Asian and European markets are feeling the heat, and volatility, as measured by VIX, climbed above 12. Previous face-offs between the U.S. and North Korea have cooled off relatively quickly, so many market participants consider these tensions to be “noise,” but we’ll see if this time is any different. Nerves are definitely elevated in the market this morning, though S&P 500 futures (SPX) did come off their lows after Trump’s most recent remarks.
Back home, Wednesday’s Fed minutes revealed debate but no further detail on when exactly the Fed plans to begin addressing its balance sheet, and on the subject of inflation Fed officials again blamed transient factors for recent weakness. What was more telling was that even though some Fed officials supported an increase in the target range they were also less comfortable with the degree of policy tightening through the end of 2018, and there were divergent views on inflation. Some say recent inflation softness might persist and the Fed’s 2% inflation goal might be hard to achieve.
The Fed does think economic activity grew faster in Q2, citing employment, consumer spending, industrial production, and business equipment expenditures. Futures markets reacted to the minutes with an increase in the odds for a rate hike by the end of 2017, and chances now stand at 64%.
Tomorrow’s monthly payrolls report, followed by consumer and producer price index reports next week, means that by this time a week from now we’ll likely have a much better sense of where the economy stands and whether growth actually picked up at the end of Q2, as the Fed observed. Wall Street consensus is for June jobs growth of 173,000 and June wages growth of 0.3%, according to Briefing.com.
Health care rose again Wednesday, and is now nipping at the heels of info tech for best-performing sector so far this year. Health care stocks are up more than 15% year to date. Biotech continues to play a big role in the health care rally, with biotech stocks rising more than 1% on Wednesday.
Oil rebounded slightly early Thursday after Wednesday’s 4% haircut, getting support from an industry report showing a large drawdown in U.S. stockpiles last week. Official government data are due later today. While oil moved higher, other commodities, including corn, got smacked around a bit early Thursday.
It’s a light day for data, but the ISM Services index for June is scheduled for release this morning, and may be worth a look.
Beyond the Headlines: After some robust manufacturing data late last week and Monday, factory orders on Wednesday looked somewhat disappointing, at least the main number. A probe deeper into the data revealed some positives. Factory orders fell 0.8% in May, worse than Wall Street analysts’ expectations, and April got downwardly revised to negative 0.3%. New orders for manufactured durable goods fell 0.8% on the heels of a 0.8% decline for April. On the bright side, new orders for nondefense capital goods excluding aircraft — a proxy for business investment — increased 0.2%, which was up from the 0.2% decline seen in the advanced report on durable goods orders on June 26. The takeaway here, Briefing.com said, is that improved business investment might work its way into gross domestic product (GDP) numbers for Q2. The government’s first scheduled estimate for Q2 GDP is due July 28.
Fed Back on Calendar: Two Fed speakers take the spotlight today, with Fed Governor Jerome Powell scheduled to speak on housing finance reform at 10 a.m. ET and Fed Vice Chair Stanley Fischer addressing government policy and labor productivity at 7:30 p.m. ET. Whether either addresses the economy or monetary policy remains to be seen. The Fed’s Beige Book comes next week. When listening to Fed speakers in coming days, the topic to key in on is arguably inflation. The Fed’s favored inflation indicator — Personal Consumption Expenditure (PCE) prices — was up just 1.4% year over year in May, down from 1.7% in April. The Fed’s inflation target is 2%, and Fed speakers, including Fed Chair Janet Yellen, have been saying that weak inflation looks transitory. The question is whether that idea could be starting to change based on price weakness, and if that’s having any impact on the Fed’s plans for rate hikes and balance sheet trimming.
Energy Sector Hit Again: The slumping energy sector got a boost early this week after crude oil rallied for eight-consecutive days. The tables turned Wednesday, however, as a dive in crude oil prices pulled the sector down more than 2%. Many of the major energy sector stocks remain closely tied to the price of crude oil, and energy is vying with telecom as the worst-performing sector year to date as oil prices had their worst first half in many a year. The impetus for Wednesday’s oil swoon appeared to be Russia’s ruling out of deeper production cuts, according to a report in TheStreet.com. OPEC is scheduled to meet later this month, so stay on watch for any developments that might come out of that gathering. U.S. government weekly crude inventories data, meanwhile, comes out today — one day later than usual due to the holiday. The previous week saw a small inventory build, which is unusual considering the time of year. Additionally, OPEC exports rose in June compared with a year ago.
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