(Thursday Market Open) The day opens with another milestone in sight for a resilient market. All three major indices set new highs Wednesday for the second-straight day with assistance from climbing oil prices, and the S&P 500 Index (SPX) starts Thursday just a tad shy of 2,500. Pre-market trading, however, pointed to possible weakness.
Possible catalysts today include inflation data, a decision by the Bank of England to hold rates steady, and earnings from a major tech company. The consumer price index (CPI) for August rose 0.4%, a little above Wall Street analysts’ expectations. Core inflation, however, was 0.2%, in line with Wall Street projections.
Also, keep an eye on rising oil prices, which helped give the energy sector and perhaps the whole market a boost yesterday and are approaching $50 a barrel this morning.
Overseas markets mostly fell Thursday and the big news out of Europe was the Bank of England’s decision not to raise rates. However, the BOE warned it could consider a hike in coming months if the economy performs as expected.
Defensive investments, including bonds and gold, pulled back a little early Thursday, with the U.S. 10-year yield clawing back above 2.20% for the first time since late August. Rising yields hint at economic optimism. The dollar rose against the euro and yen and seems to be coming off last week’s multi-month lows.
Just five of the 11 S&P 500 sectors rose Wednesday, but the overall index still put in a slight gain with energy leading the way. Telecom, and consumer discretionary also surged, and financials continued to move a bit higher.
Tech came under pressure, however, in part from what appeared to be some “sell the fact” action in Apple (AAPL) after the company’s product announcement Tuesday. Speaking of tech, this afternoon brings earnings from Oracle (ORCL). The company has received several upgrades from analysts on top of a string of upgrades the company received after reporting last quarter’s results.
The 2,500 level looks like a psychological one for the SPX, and we’ll see if it can get past it today. For those keeping score at home, the SPX first crossed 2,000 just over three years ago.
Over in the oil pit, prices approached $50 a barrel early Thursday despite a nearly 6-million barrel addition to U.S. stockpiles last week reported by the government. That was a bit below Wall Street’s expectations, and likely reflects refinery outages in the wake of Hurricane Harvey. Oil prices rose overseas as well on signs of strengthening demand and falling supplies.
Surging U.S. production has helped keep crude oil prices from getting much above $50 a barrel over the last few months. Eyes will probably be on this week’s oil rig count, due Friday, to see if U.S. producers were able to add new capacity in light of the hurricane. Most of the major oil- producing areas, aside from the Gulf of Mexico, were spared from Harvey’s winds and rain.
It’s like old times when it comes to volatility, if you consider early August to be “old times.” The VIX seems to be settling back into its familiar range between 10 and 11, where it was before North Korea helped send volatility spinning higher roughly a month ago. Judging from VIX, investors don’t seem too worried about the potential for major market moves in the weeks ahead. So far this year, there have only been eight days in which the S&P 500 Index (SPX) has moved 1% in either direction. The average through this date since World War II is 50, said research firm CFRA.
Tomorrow is quadruple witching, traditionally a day when volatility can perk up. Even on slow days, quadruple witching can cause some surprise moves as positions get unwound, so investors might want to be wary for possible moves Friday.
Yield Curve Blues for Financials: One reason financial stocks have been under pressure lately is the yield curve, which remains near five-year lows despite a small jump this week. The closely-watched gap between the yields of two-year and 10-year Treasury notes was near 84 basis points as of early Thursday, not far above the recent low of 77 basis points. The gap was more than 120 points at the start of the year. For an example of how low long-term rates are affecting the economy and bank profitability, consider 30-year fixed mortgage rates. They stand near 3.95%, down from about 4.2% at the start of 2017. Banks traditionally make more profit when they can lend money at higher rates over the long term.
Retail Sales Looming: There’s lots of data on tap tomorrow, with retail sales for August arguably the most important. The report, due at 8:30 a.m. ET Friday, could give some clues as to whether the strong employment trend is having an impact on consumer wallets. There were some signs of that in July’s report, which saw a 0.6% climb from June. However, the strong July number came after four months of relatively weak performance, so it remains to be seen if July was a blip or the start of a trend. Also, auto sales gave the number a big boost in July, and sometimes can vary significantly from month to month. Watch the core number, which strips out auto sales, for a better sense of the overall picture. Core retail sales rose 0.5% in July and are projected to climb 0.5% in August, according to a consensus of analysts reported by Briefing.com.
And That’s Not All: Besides retail sales, Friday offers a number of other data points, including Empire Manufacturing, Industrial Production, Capacity Utilization, Business Inventories, and Michigan Sentiment. All of this is out by 10 a.m. ET. So by midday, we should have a far better idea of how the economy is doing. Combined with housing data early next week and the inflation data already in the books for August, the Fed is going to have a lot to digest as it gets ready for next week’s meeting. We’ll summarize the tally early next week to give a better sense of where the economy seems to stand as the Fed gathers.
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