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Market Update

Plenty to Ponder Amid Big Bank Q3 Results, Inflation Data, Retail Sales

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October 13, 2017

(Friday Market Open) Big bank earnings take the spotlight again Friday, as Bank of America (BAC) and Wells Fargo (WFC) step up to center stage. Additionally, a host of data could help shape market action.

Leading off for the banks was BAC, which reported revenue of $22.079 billion and earnings per share of $0.48. That compared with Wall Street analysts’ projections for revenue of $22 billion and EPS of $0.46.

It was good to see BAC beat on profit, but trading revenue fell 15%, so that’s a bit concerning. It brought back memories of yesterday, when we saw two other big banks report trading declines. On the other hand, BAC did well on the loans side of the business, and margins gained ground. Shares rose slightly in pre-market trading.

Wells Fargo reported revenue of $21.93 billion and EPS of $1.04, which compared with Wall Street’s estimates for revenue of $22.3 billion and EPS of $1.04. However, that’s looking at EPS on an adjusted basis, which excludes 20 cents of charges related to litigation. Shares of WFC fell in pre-market action, perhaps in part because of that miss on revenue. With all the charges and the revenue miss, maybe the best way to characterize WFC’s results is with one word: “Cloudy.”

Today’s a big session for data, with September retail sales, the September Consumer Price Index (CPI) and Michigan sentiment all competing with big bank earnings for investor attention. Thursday’s Producer Price Index (PPI) was higher than expected, putting more focus on how CPI might turn out.

CPI rose 0.5% in September, compared with estimates on Wall Street for 0.6%. That was up from 0.4% a month earlier, but might have been affected by hurricanes in Texas and Florida. Big gains in energy prices contributed to the rise.

Meanwhile, core CPI, which strips out food and energy, rose just 0.1%, below Wall Street analysts’ 0.2% estimate. Overall CPI rose 2.2% year-over-year, while core CPI is up 1.7% year- over-year for the fifth month in a row. While the headline CPI number might look a bit strong, it’s the core number remaining below 2% that’s more likely to concern the Fed. There’s still not much sign of any major acceleration in CPI once volatile food and energy prices are removed.

Retail sales climbed 1.6%, a little above the 1.5% analysts had expected. Again, there might have been a hurricane effect.

Overseas, Asian shares moved higher overnight, which might be translating into some strength here in the U.S. early on. Also, the U.S. dollar rose vs. the Mexican peso amid worries that the U.S. might withdraw from the North American Free Trade Agreement.

Crude oil might bear watching today amid a 2% jump in futures prices. The $50 a barrel level seems to be holding pretty well judging from recent action.

Looking back at Thursday, telecom was the weakest sector by far. AT&T (T) fell more than 6% after the company warned its Q3 could take a hit from hurricanes and an earthquake. As a whole, the telecom sector slipped more than 3%, a pretty big dive for any one sector on a single day and one we haven’t seen in a while.

T wasn’t the only company issuing a warning Thursday. Juniper Networks (JNPR) fell 5% after it, too, said it would miss Wall Street’s consensus earnings estimate for Q3 thanks in part to weakness in its cloud business. It’s unclear at this point if the issue is company-specific or possibly a broader issue in cloud computing. Either way, the warnings from T and JNPR helped keep the market in check.

Financials took a hit Thursday as well after earnings results from JP Morgan Chase (JPM) and Citigroup (C). Both companies easily beat Wall Street analysts’ Q3 estimates, but the focus centered on steep drops in bond trading revenue at JPM and weakness in C’s credit card business. During its earnings call, JPM warned that lackluster trading could continue in Q4.

On a separate note, Boston Fed President Eric Rosengren told CNBC yesterday that he thinks stocks are "fully priced," adding: "Something we must consider is how much prices are likely to go up if we don't continue the path of raising rates gradually.” Rosengren added he thinks if data come in as expected, it would be “appropriate” to raise rates in December.

While the “fully priced” comment is just one Fed official’s opinion and shouldn’t be taken for more than that, don’t forget how much influence words from the Fed can sometimes have. Anyone who was following the markets two decades ago probably remembers the bearish impact after Fed Chair Alan Greenspan used the term “irrational exuberance” to describe rallying equities. Listen to see if any other Fed officials start using language similar to Rosengren’s in coming days.

Sector Watch

FIGURE 1: "DEFENSIVE" SECTORS PLAYING DEFENSE.

The bar chart above represents the combined performance over the last month of the real estate, consumer staples, and utilities sectors. The purple line represents the combined performance of info tech, materials, and financials.  Notice the strength of the purple line vs. the bar, which likely indicates continued investor confidence in economic growth and a reluctance to embrace more defensive sectors. Data source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Unwind Rewind: Wednesday’s Fed minutes put the Fed’s unwinding policy back in the headlines, raising questions about how much impact it might be having. So far, it’s probably not making a big difference in the bond market. One reason, perhaps, is because even as the U.S. pulls back on economic stimulus, Europe and Japan continue their programs, with the European Central Bank (ECB) injecting about $71 billion a month into the bond market until at least the end of this year.

Producer Prices Tick Higher: Producer prices made solid gains in September, the government said Thursday. A 0.4% rise in the Producer Price Index (PPI) could add to expectations for a Fed rate hike by September, though it’s important to note that a big jump in energy prices played a role. Looking back over the last 12 months, PPI is up 2.6%, the largest 12-month rise for PPI since early 2012. Even with food and energy stripped out, PPI is up 2.2% over the last year.

Looking for Action? Not Much To See: Investors could be pardoned for yawning, the way markets have acted recently. A Rip Van Winkle who fell asleep at the start of October and woke up today wouldn’t notice much difference in many of the major indicators. The S&P 500 Index (SPX) is up about 1% since then, and 10-year bond yields are basically unchanged. Gold is up a little over 1%, and U.S. crude oil is hovering near the $50 a barrel mark like a moth around a flame and little changed from the beginning of the month. The Russell 2000 Index (RUT), which closed at 1509 on the month’s first trading session, closed just four ticks below that at 1505 on Thursday, 10 days later. It should come as no surprise, therefore, to see the VIX volatility measure back below the psychological 10 level. Earlier this month it set an all-time closing low    

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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