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Taking Pause: Geopolitical Tensions Return Even As Market Ponders Host of Data

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September 15, 2017

(Friday Market Open) Geopolitical tension bubbled up again Friday after a short hiatus, reminding investors that trouble on the international front isn’t necessarily going away. European and Asian stocks looked mixed, while pre-market trading in the U.S. pointed to slight weakness but nothing profound.

North Korea’s second missile launch over Japan and a subway station explosion in London dominated the headlines early Friday on a day that originally was supposed to be focused on economic data. A host of numbers hit this morning, including retail sales and Michigan sentiment. British police declared the tube incident a terrorist attack, while the UN Security Council is expected to meet later today to discuss the latest North Korean action.

Despite this new geopolitical stress, pre-market trading didn’t show much reaction, and defensive indicators like gold and bonds were relatively flat early Friday. Both had been under pressure Thursday as the dollar rose amid concerns about possible U.S. inflation after release of the August Consumer Price Index (CPI).

While it was only one month of data and needs to be taken in context (see below), the year-over-year CPI rise of 1.9% was close to the Fed’s 2% goal and brought more whispers about another potential rate hike before the end of the year. The futures market projects that as a roughly 50-50 proposition.

With the inflation news, bond yields began to creep higher. Yields on the 10-year note crossed the 2.20% mark after slumping to near 2% last week. One thing that could potentially keep yields in check, however, is this renewed geopolitical tension. The 10-year yield is right at 2.20% early Friday.

Checking the numbers so far this morning, retail sales for August didn’t look good. They fell 0.2% vs. Wall Street analysts’ consensus projection for a 0.2% gain. The government also downwardly revised some previous reports. It looks like gains in employment aren’t necessarily translating into spending at the store. Excluding autos, retail sales were up 0.2%, also below analysts’ projections.

There was some out-of-season earnings news late Thursday. Oracle (ORCL) shares fell in pre-market trading after the tech company reported earnings and revenue that both exceeded Wall Street analysts’ expectations. Though the quarter looked good, the company’s guidance was a little bit off.

Wall Street had an odd day Thursday, with the Dow Jones Industrial Average ($DJI) scooting up to a new all-time high while the S&P 500 (SPX) and Nasdaq (COMP) both moved lower. It looked like the DJIA, which only has 30 listings, got boosted by a couple of major names, including Boeing (BA) and United Technologies (UTX). Pfizer (PFE) also showed strength.

Weakness in the biotech sector helped sap the Nasdaq, while telecom, consumer discretionary, and financials all took some of the bloom off the rose with the SPX.

The info tech sector declined for the second day in a row, but remains up nearly 26% year to date. Health care, which inched a little higher Thursday, follows info tech with a 20% gain in 2017, while energy and telecom bring up the rear. Energy, however, is moving higher and climbed again early Friday. U.S. oil futures are once again above $50 a barrel after coming under a little overnight pressure in part due to the North Korean missile.

Don’t forget: Today is quadruple witching day. That means during the final hour of stock market trading, stock index futures, stock index options, stock options, and single-stock futures expire. Though witching isn’t as big a deal as it used to be, be careful at the open and the close because things may happen that don’t necessarily make sense as positions get unwound.

Energy sector

FIGURE 1: ENERGY BURST.

The energy sector hit a 17-month low in late August, but has scampered higher ever since. While some of this gain may be connected to advancing oil  prices (purple line), it’s important to note that it began before the oil rally started, perhaps pointing to some other fundamental factor. Data sources: Standard & Poor’s, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Inflation Intrigue: There was a lot of spin early Thursday about the government’s August consumer price index (CPI) reading, which rose 0.4% from a month earlier and 1.9% from a year earlier. The 1.9% was just a hair shy of the Fed’s 2% target for inflation. However, all the fuss over possible inflation resurgence should be considered in context.

First of all, core inflation rose just 0.2%, as Wall Street analysts had expected. Core rose 1.7% year over year for the fourth month in a row — hardly a sign of resurgence. Also, higher gasoline prices played a big part in raising the overall CPI reading, and, as we saw last month, hurricanes tend to raise gas prices. Time will tell if prices at the pump stay high, but even if they do, energy is a volatile component of the price index, which is why the core reading leaves it out. Additionally, producer prices for August didn’t budge much. To sum it up, it’s way too early to predict that inflation is back, though naturally it bears watching.

So How Will The Fed Read CPI? The Fed meets next week with this week’s PPI and CPI data in hand, as well as July’s rather tame personal consumption expenditures (PCE) price data for July. While headline inflation growth of 1.9% year-over-year is close to the Fed’s target, the rest of the data seem rather subdued. Even so, the futures market indicates budding chances for a Fed rate hike by the end of the year. Fed funds futures put the odds above 55% as of early Friday, well above levels down around 35% last week. Remember, too, that the government estimated 3% gross domestic product (GDP) growth in Q2, and GDP also plays into the Fed’s calculations.

Dollar Still Dragging: Since we’re talking inflation, we might as well check on the dollar. Though the greenback is up from last week’s lows vs. the euro and the yen, it’s still trading not far above its weakest levels of the year. A weaker dollar can sometimes be accompanied by inflation, making imports more expensive and often raising oil prices. It’s unclear if the current oil rally is tied in with the struggling dollar, in part because oil prices had been pretty low most of the summer until now even as the dollar languished. Oil is wrestling with fundamental factors of its own, including a decline in supplies. On the other hand, the weak dollar may have played into the slip in European stocks since spring, in part because European exporters tend to benefit from a strong dollar that can make their products — think fancy German cars, for instance — more attractive to U.S. buyers.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: TODAY'S ECONOMIC CALENDAR.

Source: Briefing.com

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