Falling Crude Prices a Drag Stocks and Inflation

Falling oil prices were a drag on U.S. stock indexes for a second day on Wednesday. Oil stocks dropped 1.6 percent helping to push the S&P 500 Index and the Dow Jones Industrial Average marginally lower. Both indexes face exposure to the energy sector while the technology-based NASDAQ Composite does not.

In the cash market, the benchmark S&P 500 Index closed at 2435.61, down 1.42 or -0.06%. The blue chip Dow Jones Industrial Average settled at 21410.03, down 57.11 or -0.27%. The tech-driven NASDAQ Composite finished at 6235.52, up 47.49 or +0.76%.

S&P 500 Index
Daily September E-mini S&P 500 Index

Economic News

In economic news, mortgage applications rose 0.6 percent as buyers continued to take advantage of the low interest rate environment. Existing home sales came out unexpectedly higher in May to the third highest monthly level in a decade. According to government figures, it rose 1.1 percent to a seasonally adjusted rate of 5.62 million units.

U.S. Treasury Yields

U.S. Treasury prices were mostly lower on Wednesday as investors reacted to the housing data and another plunge in oil prices.

The yield on the benchmark 10-year Treasury note was 2.153 percent, while the yield on the 30-year Treasury bond was slightly lower at 2.72 percent.

The drop in crude oil prices weighs heavily on inflation. If oil prices continue to fall then expect inflation to remain below the Fed’s 2.0 percent target. This would raise doubts about the central bank’s ability to raise interest rates later in the year.

WTI Crude Oil
Daily September West Texas Intermediate Crude Oil

Crude Oil

Oil prices continued to retreat on Wednesday after Tuesday’s sharp break. Traders were expressing concerns over the strength of compliance by OPEC and non-OPEC countries when it comes to slashing production.

Additionally, the U.S. Energy Information Administration said crude inventories declined by 2.7 million barrels during the week-ended June 16. This was greater than the 2.1 million barrel drop estimate.

Comex Gold
Daily August Comex Gold

Gold

Gold prices rose on Wednesday in reaction to the easing dollar and weakness in U.S. Treasury yields. The flattening of the U.S. Treasury yield to almost 10-year lows on Wednesday made the U.S. Dollar a less-desirable asset.

Gold prices were also supported by the notion that lower crude oil prices will be a drag on inflation. This is raising doubts as to whether the economy is strong enough to handle another rate hike by the Fed before the end of the year.

In other news, holdings in SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose 0.04 percent to 853.89 tonnes on Wednesday.

 

U.S. Equities Led Higher by Strong Recovery in Large-cap Tech Stocks

U.S. equity markets closed higher on Tuesday led by a strong recovery in large-cap technology stocks. The Dow Jones Industrial Average hit an intraday and closing record high. The S&P 500 Index posted a record close and the NASDAQ Composite rebounded from its biggest two-day decline since December.

In the cash market, the blue chip Dow Jones Industrial Average closed at 2440.35, up 10.35 or +0.45%. The benchmark S&P 500 Index settled at 2440.35, up 10.96 or 0.45% and the technology-based NASDAQ Composite finished the session at 6219.17, up 43.71 or +0.71%.

The advance in the Dow was led by 3M and Goldman Sachs. Apple also contributed to gains. Shares of Apple, Google-Parent Alphabet and Tesla, all helped push the NASDAQ higher. The S&P 500 Index was underpinned by strong performances in the information technology and materials sector.

In other news, a survey of fund managers released Tuesday by Bank of America Merrill Lynch showed the NASDAQ at the top of the most-crowded trade list. The survey also showed that 84 percent of fund managers believe the U.S. is the most overvalued equity market.

Economic News

It was another light day as far as economic news is concerned. The National Federation of Independent Business’ (NFIB) small business optimism index came in unchanged at 104.5 for May.

U.S. producer prices were unchanged in May as energy costs recorded their biggest decline in more than a year, suggesting inflation pressures were easing after rising at the start of the year.

According to the U.S. Labor Department, the PPI in May came in at 0.00%, following a 0.5 percent jump in April. In the 12 months through May the PPI increased 2.4 percent, retreating from April’s 2.5 percent surge, which was the biggest yearly increase since February 2012.

U.S. Treasury Yields

U.S. Treasury prices finished slightly higher on Tuesday as investors digested fresh supply into the market. The Treasury Department auctioned $12 billion in 30-year bonds at a high yield of 2.87 percent on Tuesday. The bid-to-cover ratio, an indicator of demand, was 2.32.

The 30-year yield was trading near 2.862 after the auction and the yield on the benchmark 10-year Treasury notes closed near 2.206 percent.

Gold

August Comex gold futures settle lightly lower on Tuesday as most of the major players stayed on the sidelines ahead of the U.S. Federal Reserve meeting on Wednesday. The Fed is widely expected to raise its benchmark rate 25-basis points. Investors are also hoping the central bank will provide signals on the pace of future rate hikes, its assessment of the economy and inflation, and its plan to trim its massive $4.5 trillion portfolio.

Crude Plunges on Surprise Inventories Build

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures fell nearly 5 percent on Wednesday after the U.S. government’s weekly inventories report showed an unexpected build in crude inventories.

According to the U.S. Energy Information Administration (EIA), crude stocks in the United States grew 3.3 million barrels to 513 million barrels during the week-ended June 2. Analysts and traders had forecast a drawdown of 3.5 million barrels. Preliminary data from the American Petroleum Institute (API) late Tuesday indicated an even larger drop.

Crude Oil
Daily July West Texas Intermediate Crude Oil

Gasoline inventories also unexpectedly rose by 3.3 million barrels, compared with analysts’ expectations for a 580,000 barrels gain. Distillate stockpiles also rose by 4.4 million barrels, versus expectations for a 281,000 barrels increase, the EIA data showed.

The EIA report also showed that imports increased and exports dropped.

Gold
Daily August Comex Gold

Gold

August Comex gold futures closed lower on Wednesday after nearly reaching a seven-month high the previous session. Sentiment is still bullish due to political uncertainty created by an election in the U.K., a European Central Bank monetary policy announcement and the testimony by former FBI Director James Comey to the U.S. Senate Intelligence Committee.

Light trading volume weighed on gold prices as bullish investors took a break ahead of Thursday’s major events. Gold was also pressured by a stronger U.S. Dollar, which rose in response to a weaker Euro. The weakness in the Euro was fueled by a report that the European Central Bank was preparing to cut its inflation forecasts on Thursday.

S&P 500 Index
Daily June E-mini S&P 500 Index

U.S. Equity Markets

The major U.S. stock indices closed higher on Wednesday as investors reacted to reports that suggested the testimony from former FBI chief James Comey will be less damaging to President Trump than previously feared. This news may have also pressured the safe-have gold and Japanese Yen markets.

The major indexes moved to their highs for the day after the Senate Intelligence Committee released Comey’s full opening remarks Wednesday afternoon, at which time the major indexes traded back near session highs.

U.S. Treasury Markets

U.S. government debt prices were slightly lower on Wednesday, as investors squared positions ahead of Thursday’s trio of major events. The yield on the benchmark 10-year Treasury Note came in at around 2.1755 percent, while the yield on the 30-year Bond rose to 2.8366 percent.

The price action also suggests an easing of tensions over the testimony of former FBI chief James Comey after the U.S. Senate Intelligence Committee released a copy of his opening remarks. There were some revelations, but nothing to suggest the President obstructed justice.

Crude Oil Recovers Ahead of API Inventories Report

After straddling a key technical area most of the session and flirting with a potential breakout to the downside, crude oil futures finished higher for the session on Tuesday. Early pressure was provided by the diplomatic rift in the Middle East and continued worries over high U.S. inventories. The inability to break the market lower on the news, helped trigger a short-covering rally into the close.

Crude Oil
Daily July West Texas Intermediate Crude Oil

Position-squaring ahead of Tuesday’s American Petroleum Institute’s weekly inventories report and Wednesday’s U.S. Energy Information Administration’s report may have also underpinned the market.

Traders are still trying to digest the impact of the diplomatic split between Saudi Arabia and other major OPEC producers with Qatar. Some traders believe the rift could unravel the OPEC-led plan to cut output, trim the global supply glut and stabilize prices.

In other news, U.S. crude output jumped more than 10 percent since mid-2016 to 9.34 million barrels per day, industry figures showed.

Gold
Daily August Comex Gold

Gold

August Comex Gold futures surged to its highest level in seven weeks on Tuesday, driven by weak U.S. economic data that reduced expectations for multiple Fed rate hikes this year. Worries about the number of rate hikes also pressured U.S. Treasury yields to multi-month lows, making the U.S. Dollar a less attractive investment, and driving up demand for the dollar-denominated gold market.

Investors were also drawn to gold as a hedge against economic uncertainty. Stock market investors especially were looking for protection against a sell-off ahead of Thursday’s European Central Bank monetary policy announcement, the election in the U.K. and former FBI Director James Comey’s testimony before the Senate Intelligence Committee.

U.S. Treasury Markets

U.S. Treasury prices rose on Tuesday as investors digested key economic data and the potential impact of a trio of geopolitical issues later this week.

The yield on the benchmark 10-year Treasury Notes was lower at around 2.134 percent, hitting its lowest level since November 10. The 30-year Treasury bond yield settled at 2.80 percent.

USDJPY
Daily USDJPY

Forex

Weaker U.S. Treasury yields and greater demand for safe haven assets drove the USD/JPY into a six-week low on Tuesday. The spike to the downside was triggered when Treasury yields took out a major technical support level on the charts.

Economic News

In U.S. economic news, job openings hit a record high in April, according to the Job Openings and Labor Turnover Survey (JOLTS), which showed a total of 6.0 million openings.

U.S. Stocks Weaken on Fresh Economic Concerns

The three major U.S. stock indexes declined across the board for a second day, driven by a drop in financial sector stocks. Traders said concerns over the Fed’s ability to raise interest rates several times in 2017 as previously forecast were behind the weakness.

Dow Jones Industrial Average
Daily June E-mini Dow Jones Industrial Average

In the cash market, the blue chip Dow Jones Industrial Average was off 20.82 or -0.10%, the benchmark S&P 500 Index settled down 1.11, or -0.05% and the technology-based NASDAQ Composted ended the session at down 4.16, or -0.07%.

The Dow, S&P and NASDAQ posted monthly gains in May. The tech-based NASDAQ reached a new contract high early in the session, gained 2.5 percent in May and finished with a 7-month winning streak.

Comex Gold
Daily August Comex Gold

Gold

Gold settled $9.70 higher on Wednesday as investors reacted to the weaker U.S. Dollar. Uncertainty over the direction of U.S. interest rates also helped support the precious. Political tensions in the U.S. and Europe also continued to support gold.

Brent Crude
Daily August Brent Crude

Crude Oil

Crude oil futures hit a three-week low on Wednesday on concerns of the global supply glut, but the market was able to rebound into the close, following an industry report that showed U.S. crude stockpiles had fallen more than expected.

According to the American Petroleum Institute (API), crude inventories dropped 8.7 million barrels to 513.2 during the week-ended May 26. Analysts were looking for a decrease of 2.5 million barrels.

Early Wednesday, internationally-favored Brent crude oil fell to its lowest level since May 10 and the futures contract finished the month down 2.7 percent. This was also its third monthly decline. U.S. West Texas Intermediate reached its lowest level since May 12. It also fell for a third month, finishing May about 2 percent lower.

U.S. Treasury

U.S. Treasury yields plunged on Wednesday as investors reacted to weaker-than-expected economic data. This helped pressure the U.S. Dollar against a basket of currencies.

The yield on the benchmark 10-year Treasury Note inched lower to 2.199 percent, while the yield on the 30-year Treasury Bond also edged lower to 2.863 percent.

Economic News

In U.S. economic news, the Chicago PMI came in higher-than-expected at 59.4, higher than the 57.0 estimate and the 58.3 previous read. Pending Home Sales were disappointing, coming in at minus 1.3%, lower than the 0.7% forecast and worse than the previous minus 0.9%.

The most disappointing news was the U.S. Federal Reserve’s Beige Book. It revealed “some districts noted falling prices for certain final goods, including groceries, apparel and autos.”

Additionally, Dallas Fed President Robert Kaplan said in a speech the central bank will start trimming its balance sheet later this year, adding the economy is approaching full employment.

Yea or Nay for the Fed after NFP, Consumer Inflation Data

With the Federal Reserve’s May 3 policy minutes injecting an air of caution into the outlook for U.S. interest rates last week, investors are going to put increased weight on Friday’s U.S. Non-Farm Payrolls report.

The Federal Open Market Committee minutes said that most officials judged “it would soon be appropriate” to tighten rates again, supporting odds of a June rate hike, discussion that “it would be prudent” to ensure that evidence confirms the transitory nature of the first quarter slowdown may throw some doubt into the timing of further hikes, traders said.

Although the CME Group’s Fed Funds Indicator is showing about an 80% chance of a rate hike at the June 14 Fed monetary policy meeting, the price action by the U.S. 10-Year Treasury Notes, 30-Year Treasury Bonds, the U.S. Dollar and gold suggests there are still doubts that the central bank will follow-through with the rate hike.

Even if the Fed does hike rates 25 basis points as expected, its monetary policy statement is going to have to assure investors that the economy has turned the corner and that it has the fire power to lead to additional rate hikes later in the year.

Given the certain degree of uncertainty at the FOMC, according to the minutes, the May U.S. employment report due on June 2 is likely to take on extra importance in tipping the scales toward or away from a possible rate hike when Fed members meet June 14.

At the start of the week, Non-Farm Payrolls are forecast to have risen 177,000 in May versus a gain of 211,000 in April. Average Hourly Earnings, a key indicator of wage inflation, are expected to rise 0.2%, down slightly from the previous 0.3%. The Unemployment Rate is expected to remain steady at 4.4%.

Given the turbulence in Washington and the outlook for U.S. tax reform and fiscal stimulus looking like they’re going to be delayed because of the distractions facing President Trump, any change in monetary policy expectations fueled by the jobs report may have a significant impact on the dollar.

Most traders will be watching the headline number, but I think the key number to watch is average hourly earnings. Lower than expected gains in hourly earnings will send a warning to the Fed that the economy may be slowing.

This will be especially significant when it is combined with data on consumer spending. The big question market for the Fed after the economy’s mixed signals during the first quarter is going to be the strength of consumer spending. With the Core PCE Price Index and Personal Spending reports due to be released on Tuesday, May 30, the significance of the jobs report will be even greater if these two reports come in weaker than expected.

U.S. Stocks Mixed after S&P 500, NASDAQ Reach New Highs

The major U.S. stock indexes are trading mixed on Tuesday after the benchmark S&P 500 Index and the tech-based NASDAQ Composite reached record highs.

There was little follow-through in the crude oil market on Tuesday, which may have dampened today’s gains after the news of a Saudi and Russian agreement to extend the output cuts drove the S&P and Dow higher on Monday.

Today’s weakness was fueled by a lower health care sector which declined due to uncertainty over health care reform.

The early price action suggests that investors continue to ignore geopolitical events that could’ve weighed on prices. These include President Trump’s abrupt firing of FBI Director James Comey, Friday’s global cyber-attack and North Korea’s successful test of a ballistic missile. Late Monday, Trump raised additional concerns about his ability to run the government when the Washington Post reported that he revealed classified information to Russia.

The event could lead to an erosion of Trump’s support which may make passing his economic agenda very difficult. This may eventually lead to selling pressure in the market, but so far we haven’t seen any signs of selling, other than profit-taking.

U.S. Economic News

U.S. building permits came in lower than expected at 1.23 million units versus a 1.27 million unit forecast. Housing starts also came in lower than expected at 1.17 million units versus a 1.26 million unit estimate.

Capacity utilization was 76.7 percent higher, in line with expectations. Industrial production rose 1.0 percent, higher than the 0.4 percent forecast.

U.S. Treasury Markets

The disappointing housing data helped drive U.S. Treasury yields lower. Housing starts fell to their lowest level since last November and followed a downwardly revised rate of 1.20 million units in March.

The yield on the benchmark 10-year Treasury Notes was lower at around 2.31 percent, while the yield on the 30-year Treasury Bond was also lower at 2.977 percent.

Forex

The drop in U.S. Treasury yields also pressured the U.S. Dollar, which was already weaker from strong economic data from Europe. Data released earlier in the session showed the Euro Zone growing at 1.7 percent year-on-year in the first quarter, in line with expectations.

Some traders are also pressuring the dollar on speculative bets that the economy is too weak for the Fed to deliver the June rate increase that had been almost fully-priced in last week.

Stocks Weaken Ahead of Friday’s U.S. Retail Sales Data

U.S. equity markets closed lower on Thursday, mostly in reaction to weaker quarterly results from retail giant Macy’s. The weakness spread to the entire retail sector which was a drag on the S&P 500 Index. It also highlighted concerns over consumer spending, which is essential to the growth of the U.S. economy.

&P 500 Index
Daily June E-mini S&P 500 Index

The benchmark S&P 500 Index declined 0.2 percent, dragged down by retailer stocks. The blue chip Dow Jones Industrial Average fell 23.69. At one point, it was down over 100 points. A drop in Home Depot stock weighed the most on the market, but losses were cut by a surge in Caterpillar. The tech-based NASDAQ Composite continued to drift lower for a third day, losing 0.23%.

The retailers were in focus on Thursday because of the release of April retail sales data on Friday. Retail Sales are expected to increase 0.6 percent for the month. Investors will also get the opportunity to react to the latest data on consumer inflation.

Gold
Daily June Comex Gold

Gold

Political uncertainty helped boost June Comex Gold prices on Thursday. Traders reacted to a possible escalation in the tension caused by President Trump’s firing of FBI Director James Comey. Acting FBI Director Andrew McCabe pledged to continue an investigation into possible Trump campaign ties to Russia.

WTI Crude Oil
Daily June West Texas Intermediate Crude Oil

Crude Oil

U.S. West Texas Intermediate and internationally-favored Brent crude oil rose for a second day as support grew for OPEC output cuts. The market was supported early in the session by follow-through buying related to Wednesday’s bigger-than-expected draw in U.S. crude inventories.

U.S. Economic News

In economic news, the producer price index showed producer inflation rose 0.5 percent in April, more than the expected increase of 0.2 percent. Weekly initial jobless claims, came in at 236,000, well below the 245,000 estimate.

Treasury Yields

U.S. Treasury debt prices finished mixed on Thursday as investors absorbed key economic data and a 30-year bond sale.

The Treasury Department auctioned $15 billion in 30-year bonds at a high yield of 3.05 percent on Thursday. The bid-to-cover ratio, an indicator of demand, was 2.19, the weakest since November. This number represents liquidity and demand. It was likely lower because this was the third offering by the Treasury this week. The first two also showed weak demand.

During the trading session, the yield on the benchmark 10-year Treasury Note was marginally lower at 2.402 percent, while the yield on the 30-year Treasury Bond was flat at 3.046 percent.

Crude Finishes Worst Quarter in Two Years on Supply Concerns

Crude oil prices finished higher on Friday after early session weakness threatened to derail the momentum created by last week’s rally. Although the market was set to close the quarter with its worst performance since 2015, the daily and weekly price action suggest that there may be hope for a follow-through rally at the start of April.

U.S. May West Texas Intermediate Crude Oil finished the week at $50.60, up $0.25 for the day or +0.50%. Internationally favored June Brent Crude Oil closed at $53.53, up $0.40 or +0.75%.

WTI Crude Oil
Daily May West Texas Intermediate Crude Oil

For the week, bullish traders continued to worry that growing U.S. supplies are undermining OPEC and non-OPEC member attempts to control production, trim the global supply and stabilize prices.

Although U.S. supplies rose again according to the U.S. Energy Information Administration, the number was in line with expectations. Short-covering controlled the price action, however, after bearish investors reacted to the possibility that oil production giant Russia would agree with OPEC members to extension the program to cut output beyond the original deadline in June.

In other news, late Friday, energy services firm Baker Hughes’ weekly count of U.S. oil rigs rose for an eleventh straight week and ended the quarter with the largest number of rig additions since 2011. The new data showed the number of rigs operating in U.S. fields rose by 10 to a total of 662, compared with 362 at this time last year.

Economic News

In the U.S. on Friday, a report on personal income showed a 0.4 percent increase in February. This was in line with expectations. Consumer spending, however, came in up 0.1 percent, below an expected increase of 0.2 percent.

The Fed’s favorite indicator of inflation, the PCE price index, rose 2.1 percent year over year, while core PCE increased 1.8 percent from last year.

The Chicago PMI nudged higher in March to finish the strongest quarter in more than two years. This was a sign of growing business optimism since the election of President Donald Trump. The Chicago PMI rose to 57.7 in March, up from 57.4 in February. Investors were looking for 57.4.

The final reading of the University of Michigan March consumer confidence index declined to 96.9 from the preliminary reading of 97.6 and was below expectations of no change from the initial reading.

U.S. Treasurys

U.S. Treasury instruments were mixed on Friday as investors had little reaction to the fresh economic data after a volatile week of trading. Most of the trading appeared to be adjustments in the yield curve between short-term and long-term instruments. The yield on the benchmark 10-year Treasury Note was slightly lower at around 2.404 percent, while the yield on the 30-year Treasury Bond was slightly higher at 3.029 percent.

Comex Gold
Daily June Comex Gold

Gold

June Comex Gold futures ended the week and quarter slightly higher on Friday, closing at $1251.20, up $3.20 or +0.26%.

On Friday, traders seemed to take a breather after a steep sell-off earlier in the week. The market was pressured by a surprisingly stronger U.S. Dollar and diminished fears over the filing of Article 50 in the U.K. and the outcome of the French Presidential elections.

For the quarter, gold posted an impressive gain, its biggest in a year. Most of that strength was driven by uncertainty over President Trump’s tax and investment plans and a series of elections in Europe, which fueled demand for gold as a safe haven investment.

Crude Surges to Three-week High on Friendly EIA Data

Crude oil prices finished the session at a three-week high on Wednesday after a government report showed inventories rose less than expected. Also underpinning prices were supply disruptions in Libya and growing optimism that the OPEC-led output cut by major producing countries would be extended beyond the June deadline.

Daily WTI Crude Oil
Daily May West Texas Intermediate Crude Oil

According to the U.S. Energy Information Administration (EIA), crude oil inventories rose 867,000 barrels in the week-ending March 24. This figure was nearly half of the 1.2 million barrel build that was expected. Traders attributed the lower build to ramped up processing by refineries after seasonal maintenance. Additionally, imports dropped and exports rose.

The EIA report also helped U.S. gasoline futures surge more than 2 percent to their highest in three weeks. It was helped by the inventories report that showed a 3.7 million-barrel drop in gasoline stocks last week, nearly 2 million barrels more than forecast.

Daily Comex Gold
Daily June Comex Gold

Gold

June Comex Gold futures finished lower on Wednesday, but off its lows. It was pressured by a firmer U.S. Dollar which tends to limit demand for dollar-denominated assets. Helping to underpin the market was the start of Brexit talks, the French elections and concerns over President Trump’s economic policies.

In the U.K., Prime Minister Theresa May filed formal Brexit divorce papers to begin the process of exiting the European Union. The move triggered the start of years of uncertain negotiations that will challenge the strength and endurance of the European Union.

U.S. Treasurys

U.S. government debt prices were higher on Wednesday as yields fell. Trading was light as investors assessed the impact of fresh economic data while digesting the formal start to Brexit. The yield on the benchmark 10-year Treasury notes fell to around 2.393 percent, while the yield on the 30-year Treasury bond was also lower at 3.998 percent.

S&P 500 Index
Daily June E-mini S&P 500 Index

U.S. Stocks

The major U.S. stock indexes finished mixed on Wednesday with the benchmark S&P 500 and tech-based NASDAQ Composite closing higher and the blue chip Dow closing lower.

The S&P 500 Index benefitted from a 1.2 percent rise in the energy sector. Oil stocks rose sharply higher after the release of friendly weekly EIA data.

Economic News

It was a relatively quiet day as far as major reports were concerned. In the U.S., weekly mortgage applications were flat. Pending home sales data showed a 5.5 percent increase in February. This was well above the expected 2.3% boost. Last month’s data showed a 2.8% decline.

Frequency of Rate Hikes Could Change Investor Sentiment Towards Stocks

The Federal Open Market Committee meets next Tuesday and Wednesday, and is widely expected to raise rates for the third time in close to ten years. With the chances of a Fed rate hike sitting at about 91 percent on the eve of the February Non-Farm Payrolls report, traders are now focused on whether the Fed will signal a faster pace of tightening.

It’s going to be hard for Friday’s jobs report to be negative in terms of rate hikes. The consensus forecast estimates a rise of 200,000 nonfarm payrolls in February, down from 227,000 in January. The unemployment rate is expected to decline slightly from 4.8 percent to 4.7 percent, while average hourly earnings are forecast to increase 0.3 percent from the prior month.

I believe that regardless of what Friday’s jobs report shows, there is nothing that can stop the Federal Reserve from raising rates at its March 14 – 15 meeting. This is because the threshold for the Fed when it comes to job creation is very low.

During her testimony last month Fed Chair Janet Yellen noted that net new monthly jobs are well above the longer-run trend in labor force growth between 75,000 and 125,000. As a result, Yellen said, the labor market is in the range of the Fed’s employment goal and policymakers consider “it appropriate to move toward a neutral policy stance.”

Expectations for a solid, if not strong, headline number are high for Friday’s report. The bar was raised on Wednesday when ADP reported private payrolls well above expectations at 298,000. Because of this, the consensus has jumped from 184,000 jobs at the start of the week to as high as 225,000 as of late Thursday.

With the March hike a given, investors are starting to look ahead at the timing of future rate hikes and this is very important because this will set the tone for the yearlong trend in U.S. Treasury yields, the U.S. Dollar, gold and equities. These are the major asset classes.

The importance of two, three or even four rate hikes in 2017 can’t be emphasized more because the number of rate hikes will force investors to think about reallocating assets from one asset class to the other. This is most significant for those investors who like to keep the appropriate risk/reward ratios in their stock and bond portfolios.

So while stock investors will tell us that they are long the market because they are betting big on President Trump’s economic policies, one has to realize that they are speculative notions at this time, while the Fed is closer to reality.

The consensus may be thinking two rate hikes this year, but a big jump in the jobs report to well over 200,000 jobs could lead analysts to bump up the number to three, or perhaps four rate hikes. If this occurs, then expect a serious shift in investor sentiment. This will likely lead to investors shedding risky assets like stocks for the guaranteed returns offered by government debt.

So going into Friday’s report, don’t be too concerned over the short-term movement in stocks, bonds, gold and the dollar, but watch the numbers for what they mean for longer-term asset allocation plays. It’s going to take a lot of time to start pulling money out of stocks and redeploying them into Treasurys, for example, and this process may begin with Friday’s report.

Am I saying that stocks have reached their high for the year? I won’t say until I see if the next rally fails to take out the March 1 high. But if it does fail to make a new high and continue the rally between now and the Fed’s meeting in June then I think I can safely say we’ve seen the high for the year.

Once the Fed hikes rates in back to back to back quarters, I think it will be difficult to maintain the current buying spree in the stock market.

U.S. Stocks Weaken as Investors Shed Risky Assets

Investors continued to shed risky assets on Tuesday, pushing U.S. equity markets lower. The Dow Jones Industrial Average and the S&P 500 Index posted their first two-day losing streak since January. The catalysts behind the price action were worries over tighter monetary policy and the House Republicans’ legislation to repeal and replace Obamacare.

The S&P 500 Index was primarily driven lower by weaker energy markets. Biotech stocks dropped more than 1%. This helped take the NASDAQ down about 0.26 percent. According to reports, the iShares Nasdaq Biotechnology ETF and SPDR S&P Biotech ETF fell more than 1 percent on Tuesday after President Trump tweeted he was working on a “new system where there will be competition” in the drug industry.

Dow Jones Industrial Average
Daily March E-mini Dow Jones Industrial Average

U.S. Treasury Markets

According to the CME Group’s FedWatch tool, market expectations for a rate hike at the Fed meeting on March 14 and 15 are around 85 percent. This news helped push the yield on the benchmark 10-year Treasury Notes to around 2.51 percent.

Daily Gold
Daily April Comex Gold

Gold

Gold prices continued to slide on Tuesday. Prices were pressured by profit-taking and position-squaring ahead of Friday’s U.S. Non-Farm Payrolls report. Investors were also adjusting positions in anticipation of next week’s interest rate hike and expectations of additional cuts later in the year. The European elections, which have been a source of uncertainty, didn’t have much of an influence on prices on Tuesday. Physical holdings of gold also continued to decline.

Daily Crude Oil
Daily April West Texas Intermediate Crude Oil

Crude Oil

Crude oil prices settled lower, giving up earlier gains after Saudi Arabia’s oil minister gave mixed messages on future OPEC production cuts. Traders also prepared for this week’s inventories reports from the American Petroleum Institute late Tuesday and the U.S. Energy Information Administration on Wednesday.

Economic Reports

The Commerce Department reported on Tuesday that the U.S. trade deficit jumped in January to the highest level in nearly five years to $48.5 billion. This was higher than the $47.0 billion estimate and the $44.3 billion previous read.

The IBD/TIPP Economic Optimism index came in at 55.3, below expectations. Consumer Credit was 8.8 billion, below the 19.1 billion estimate.

Investors continued to look towards Friday’s February jobs report. Economists polled by Reuters expect the U.S. economy to have added 186,000 jobs last month. The headline number is not as important at the wages component. If wages increase then this will greenlight the Fed to hike rates.

 

Euro Gives up Early Gains Amid Rising Political Concerns

The EUR/USD rallied on Monday as investors reacted to the news that former French Prime Minister Alain Juppe ruled out running in the country’s presidential elections. This helped boost the chances of far-right candidate Marine Le Pen. Euro traders are nervous because her platform calls for France to leave the Euro Zone and for the country to hold a referendum which will decide whether the country remains a member of the European Union.

Additionally, investors began positioning themselves for the European Central Bank meeting scheduled for Thursday. Traders believe the ECB is unlikely to fortify its lending of government bonds.

Traders are saying the industry is calling for the ECB to lend out more of the 1.4 trillion Euros ($1.48 trillion) of sovereign debt they have bought to boost inflation. However, sources at the ECB said political, legal and technical hurdles are preventing them from beefing up its lending practices.

The USD/JPY weakened early in the session in reaction to the news that North Korea had fired four ballistic missiles over the weekend and U.S. President Trump’s unverified claims that his predecessor, Barack Obama, had wiretapped his phones from Trump Tower during his presidential campaign.

U.S. Interest Rates

U.S. government debt prices traded lower on Monday as investors geared up for a potential interest rate hike later this month. On Friday, U.S. Federal Reserve Chair Janet Yellen signaled a U.S. interest rate hike would likely take place during the Federal Open Market Committee meeting scheduled on March 14 – 15.

At the mid-session, the yield on the benchmark 10-year Treasury Notes was higher at around 2.498 percent, while the yield on the 30-year Treasury Bond was also higher at 3.102 percent.

Gold

April Comex Gold futures were trading flat at the mid-session after an early session rally failed to draw the attention of enough buyers to extend the move. A recovery in the U.S. Dollar helped put a lid on the move. Although the Fed’s comments have been increasingly hawkish, some traders are waiting for Friday’s U.S. Non-Farm Payrolls report to persuade the Fed to make the move towards higher rates.

Bullish investors are citing the European elections as one source of uncertainty that could provide support for gold prices. Others are citing stepped up geopolitical tensions created by North Korea as another reason to maintain a slight upside bias.

Economic News

The calendar was light on Monday. U.S. January factory orders rose 1.2 percent, more than the expected gain of 1 percent.

Market Snapshot – February 16

European Stock Markets are Heading South after Seven Days Rally

European stock markets are heading south, snapping the rise over the last seven days. The Stoxx Europe 600 is down after extending a 1-year high yesterday, along with the DAX and the FTSE. Approximately 50% of the firms in the index have now reported results and 51% of these beat profit estimates, while 61% exceeded sales forecasts. The FTSE 100, which managed to close above the 7300 mark Wednesday but fell back slightly again today and the DAX is also trading below 11800, but both remain at lofty heights and investors seem to be turning cautious again at these levels, amid ongoing political uncertainty and as the Fed remains on course for further tightening. The Nikkei underperformed, however, as a strong Yen weighted on automakers and exporters. Oil prices meanwhile are little changed on the day.

US Dollar is Trading Lower on Sudden Drop in U.S. Treasury Yields

March U.S. Dollar Index futures are trading lower shortly before the regular session opening on Thursday. The market gapped the opening, sending the index through yesterday’s low, confirming Wednesday’s closing price reversal top. The catalyst behind the move was a sudden drop in U.S. Treasury yields on Wednesday.

Yields rose early in the session, fueled by stronger-than-expected U.S. retail sales and consumer inflation data as well as hawkish testimony from Fed Chair Janet Yellen on Tuesday. Some traders are saying that Yellen’s cautious tone on Wednesday may have encouraged profit-taking in the U.S. 10-year Treasury Note and U.S. Dollar Index futures markets.

Gold Pushes Higher, Bitcoin Jumps on Global Concerns

The gold bulls seemed to have regained back control of the instrument and they will be looking forward to pushing the prices even further higher. It is to the credit of the bulls that they managed to hold the prices above 1220 even during the dollar onslaught since the beginning of the week and now they are being rewarded handsomely.

Gold is trading at 1238.75 up 0.44 as investors are back in search for a safe haven. Bitcoin is also acting as a safe haven instruments and is trading above 1000. BTC/USD is currently trading at 1024.76 up 1.09%.

Oil Prices Rise on Rumors of OPEC Output Cut Extension

Oil futures are trading higher shortly before the regular session opening. The market is also trading inside yesterday’s range which suggests investor indecision and impending volatility.

The market continues to remain range bound, supported by increasing compliance with OPEC’s plan to cut output and capped by record high U.S. crude oil and gasoline inventories.

The overall flat trend, which is rare in this market, looks to be persisting, with news of record crude and gasoline stockpiles in the U.S. failing to generate strong downside momentum, partly as recovering U.S. economic growth suggests increased demand.

WTI crude prices are up 0.6% today, at $53.40, which is just a few cents from the intraday peak. Prices have extended the rebound from yesterday’s $52.75 low. The week’s high at $53.95, seen on Monday, has remained resistance

Gold Shines Amid Political Uncertainty

Gold moved to a 2 ½ month high on Monday on speculator concerns over geopolitical events in the U.S. and Europe. In the U.S., it’s political uncertainty over President Trump’s policies that is raising issues about his ability to run a country. His policy announcements range from sweeping immigration reforms to trade agreements. He has also charged country’s with currency manipulation.

Also helping to underpin the market is rising tensions between Iran and the U.S. In Europe, the key issues are election jitters in the Italy, Netherlands, France and Germany. A weaker U.S. Dollar this year has also helped support the dollar-denominated gold market.

U.S. Dollar

The U.S. Dollar Index firmed on Monday, mostly driven higher by weakness in the Euro, which hit a one-week low. The EUR/USD was pressured by concerns over the French presidential election in April as well as other impending elections later in the year.

Investors were primarily reacting to the start of political campaigns in France. National Front leader Marine Le Pen began her campaign, pledging to fight globalization and take France out of the Euro Zone.

Investors were also responding to the upcoming presidential election in Italy where former Italian Prime Minister Matteo Renzi said he was willing to set aside his proposal for early voting.

The gains in the dollar were capped by weakness against the Japanese Yen. Helping to pressure the dollar was a drop in U.S. Treasury yields which tightened the spread between U.S. two-year Treasury Notes and two-year Japanese Government Bonds to their lowest in two-weeks.

Crude Oil

Early gains in crude oil disappeared at the mid-session because of the stronger U.S. Dollar and worries over increasing U.S. production. Both factors helped investors overcome their concerns over rising tensions between Iran and the U.S.

U.S. Treasurys

Political uncertainty in Europe helped drive up interest in safe-haven assets like U.S. government debt instruments. Additionally, traders positioned themselves ahead of a number of Treasury auctions later this week.

The yield on the benchmark 10-year Treasury Notes fell to 2.419 percent. The yield on the 30-year Treasury Bond traded down to 3.059 percent.

Later this week, the Treasury will auction $62 billion in three-year and 10-year notes, as well as 30-year bonds.

There were no major U.S. economic reports on Monday.

Financial Markets Mixed; U.S. CPI Data Solid; Yellen Speech Next

The financial markets traded mixed on Wednesday as investors digested a number of U.S. economic reports while awaiting a speech from Fed Chair Janet Yellen on monetary policy later today and Trump’s inauguration on Friday.

In economic news, the U.S. Consumer Price Index (CPI) came in at 0.3 percent as expected. Annualized, the CPI now stands at 2.1 percent. This is slightly higher than the Fed’s 2.0% target and the first time it has been over the target since the summer of 2014.

Industrial Production rose 0.8 percent in December also in line with expectations but well above the previous -0.7% read. The Capacity Utilization Rate was 75.5%, slightly above the previous 74.9% and slightly below the 75.6% estimate.

The NAHB Housing Market Index showed a slight drop in homebuilder sentiment, coming in at 67 versus a 69 forecast and previous read.

Also on Wednesday, Minneapolis Fed President Neel Kashkari said the Federal Reserve is launching a research institute to generate ideas elected officials might use to help Americans benefit from a growing economy. Kashkari did not refer to the U.S. economic outlook in his remarks. However, he did say, “If we can do research to understand the root causes of the problems and identify potential fiscal policy solutions or other approaches, I believe it is appropriate for the Federal Reserve to do that research.”

Later today at 1800 GMT the Fed will release its latest Beige Book. At 2000 GMT, Fed Chair Janet Yellen is scheduled to give a speech on monetary policy at the Commonwealth Club in San Francisco. Traders will be listening to her remarks for clues as to the timing of the next Fed rate hike.

U.S. Treasurys

U.S. Treasury debt instruments trended lower on Wednesday as yields rose after the release of the CPI data and ahead of remarks from Yellen. The yield on the benchmark 10-year Treasury Note rose to 2.369 percent and the 30-year Treasury Bond was also higher at 2.979 percent.

U.S. Equities

U.S. stocks mostly flat-lined as investors interpreted the latest data on corporate earnings and the inflation data. Investors also seemed reluctant to take positions ahead of Yellen’s speech and Trump’s inauguration on Friday. Although bank earnings continued to beat the street estimates, investors continued to use the opportunity to book profits rather than add to current positions. This is likely due to uncertainty over whether Trump will be able to relax banking regulations as promised during his campaign in a timely manner.

U.S. Stocks Inch Higher; Dow Nears Historic 20,000 Level

Demand for higher-yielding assets are helping to boost U.S. equities on Tuesday, while pressuring commodities and currencies.

U.S. Equities

The major U.S. stock indexes are trading higher on Tuesday as investors returned their focus to the prospects of a strong economy in 2017, given Donald Trump’s plan to rebuild America through massive fiscal spending. There was also little reaction to the geopolitical events in Turkey and German on Monday, suggesting they are isolated incidents and not likely to effect the global economic outlook.

At mid-morning, the Dow was up about 90 points, slightly below the 20,000 historical target. The Blue Chip average was led higher by financial giant Goldman Sachs. The benchmark S&P 500 Index was led higher by financial and telecommunication stocks. The NASDAQ Composite reached a new all-time high.

Volume is expected to be low and should continue to drop off as the week progresses. On Monday, the U.S. composite volume totaled 6.17 billion shares, the lowest since November 25, when only 3 billion shares were traded.

There are no major U.S. financial reports due on Tuesday, but investors will get the opportunity to react to a slew of earnings reports.

Treasury Yields

U.S. Treasury yields rebounded from Monday’s weakness and investor shrugged off the events in Turkey and Germany and returned their focus to the strength of the U.S. economy and expectations of higher interest rates in 2017.

The yield on the benchmark 10-year Treasury notes rose to around 2.5764. The 30-year U.S. Treasury Bond came in at 3.156.

Gold

Gold fell on Tuesday as investors reacted to a strong U.S. Dollar and rising equity prices. Gold tends to compete for investment capital with stocks so the often move in opposite directions. Essentially, the market is saying, “do you want to own paper or hard assets?” At this time, investors want the paper. If gold does rally, it will likely be fueled by short-covering and position-squaring ahead of the Christmas holiday.

Crude Oil

West Texas Intermediate and Brent Crude Oil traded higher on Tuesday as investors started to think about the possibility of shrinking global supply. This line of thinking is being fueled by predictions of a steep draw in U.S. crude oil stocks.

According to Reuters, Wednesday’s U.S. Energy Information Administration’s weekly inventories report is expected to show a 2.4 million barrel draw down.

In other potentially bullish news, Russian Energy Minister Alexander Novak told Russian newspaper Verdomosti that Russia may extend a production cut beyond the first half of the year if needed.

U.S. Stocks Edge Higher as Investors Await Labor Market Speech by Yellen

U.S. equity markets are trading marginally higher on Monday, but volume is extremely low. This may be because of central bank activity early Tuesday or an early Christmas break for mutual fund managers and institutions. Technology stocks are the biggest gainer.

Early Tuesday, the Reserve Bank of Australia will deliver the minutes from its recent monetary policy meeting. The Bank of Japan will hold a monetary policy meeting itself. It is expected to issue an upgrade for its economic outlook. It is not expected to alter its current strategy.

In U.S. economic news, the Flash U.S. Markit PMI Services for December was 53.4, down slightly from 54.6 in November. Later today, Fed Chair Janet Yellen is scheduled to speak on the job market in the afternoon at a University of Baltimore graduation commencement.

U.S. Treasurys

U.S. Treasury yields were down slightly on Monday as investors awaited the speech from Yellen at 1830 GMT. The benchmark 10-year Treasury Notes yield was lower at around 2.551 percent. The yield on the 30-year Treasury Bond was also lower at 3.136 percent.

Volume in the Treasury markets could be down this week as we begin the Christmas and New Year holiday season. Last week, the Fed raised interest rates for only the second time in ten years and projected at least three hikes for next year.

Forex

March U.S. Dollar Index futures were lower on Monday, but the market remained near its 14-year high. Volume is light, but it’s been enough to prop up the market at times as investors continue to pin their hopes on the fiscal expansion plans by President-elect Donald Trump and next year’s anticipated rate hikes.

The USD/JPY was under pressure as investors reacted to Japan’s better-than-expected export data from November. Position-squaring and profit-taking ahead of the BOJ meeting also weighed on the Forex pair. The Dollar/Yen was underpinned by firmer stock prices.

New data from the Commodity Futures Trading Commission showed U.S. Dollar net long positions were little changed in the week to December 13. The news reaffirmed the bullish market that began with the election of Donald Trump as president on November 18. Traders should also note that net shorts on the Japanese Yen rose to their largest since early December 2015.

Gold

December Comex Gold inched higher on Monday as investors reacted to the weakness in the U.S. Dollar. Gains were capped, however, by longer-term traders betting on weaker prices because of the Fed’s hawkish tone.

Crude Oil

March West Texas Intermediate Crude Oil rallied early in the session in reaction to potentially bullish export issues in Libya. However, the early strength was negated after the U.S. Dollar rallied from its low.

I Believe in Santa Claus Rallies, but Not This Year

Are we going to see a Santa Claus rally in the stock market this year, or did Christmas come early? Given the trend of starting the Christmas season earlier each year with Christmas in July sales, people putting up Christmas lights shortly after Halloween and the celebration of Black Friday in November, there is a strong possibility that it already came and went like Santa Claus on Christmas Eve.

According to Investopedia, “A Santa Claus rally is a surge in the price of stocks that often occurs in the week between Christmas and New Year’s Day.” By this definition, there is still time. However, last week’s price action suggests we may have already seen the move.

With the major U.S. stock indexes hovering near all-time highs, one has to wonder how many gifts Santa has in his gift bag. It seems that perhaps this year, Santa started making his deliveries around November when the surprise win by Donald Trump set off a strong rally.

It you separate stocks into naughty and nice then since Trump’s election as president and since the markets began seriously pricing in a Fed rate hike in December, utility stocks have been on the naughty list and financial stocks on the nice list.

Trump’s fiscal spending policy plans have been deemed inflationary by the markets, sending U.S. Treasury yields sharply higher. At the same time, the economy improved enough along with the prospects of higher inflation and firm labor market to convince the Fed to raise rates. Furthermore, in its dot plot projections, it felt economic growth combined with Trump’s plans could warrant as many as three rate hikes in 2017.

Utility stocks fell because they compete with Treasurys. For years, utility stocks were offering the best yields and as we all know, investors want the best yield. So when Treasury yields started to rise, investors dumped the utility stocks and moved into T-Notes and T-Bonds.

Financial stocks rallied for a couple of reasons including the possibility of the relaxing of a few regulations by the Trump administration and the forecast for better earnings because banks can get more revenue from rising mortgage rates and money market investments.

Conditions may have changed last week after the Fed raised its benchmark interest rate 25 basis points and surprised investors by increasing their 2017 interest rate hike projections from two to three.

The Dow had a shot at taking out 20,000, but the rally fizzled. However, the most telling news was that financial stocks decreased for the first time since Trump’s presidential victory. This essentially ended the five-week advance.

While the shares of financial stocks were going down, telephone and utility stocks were going up. Even while the benchmark 10-year Treasury note was climbing 13 basis points to 2.59 percent, utility shares were rising 1.8 percent for the week.

It was only one day, but on Friday, the U.S. Dollar also started to show signs of topping as the two funding currencies – the Japanese Yen and Euro – firmed.

If a short-term trend develops whereby utility stocks rally, financial stocks break and the Yen and Euro appreciate then I think there’s a pretty good chance we’ve seen the top in the stock market for the year. And in this case, there won’t be a Santa Claus rally. And that wouldn’t be too much of a surprise because as they say, “Christmas seems to come earlier every year.”

Gold Futures Plunge to 10-Month Low on Rising Treasury Yields

Gold futures continued to slide on Thursday in reaction to the Fed’s decision to raise its benchmark interest rate 25-basis points and its forecast for possibly three more rate hikes in 2017. The decision is driving up U.S. Treasury yields and consequently the U.S. Dollar. Gold doesn’t pay interest so investors are leaving the precious metal for investments that are offering better returns. Foreign demand is also falling because gold is dollar-denominated and the dollar’s rally is making it more expensive to these investors.

Treasury Yields

U.S. government debt prices continued to fall as Treasury yields spiked higher after the release of stronger-than-expected economic data. Investors are also reacting to the news of the faster-than-expected tightening cycle for next year.

The yield on the benchmark 10-year Treasury note was higher at 2.604. The 30-year Treasury bond yield reached at high at 3.169.

Forex

Rising Treasury yields are helping to boost the U.S. Dollar against a basket of currencies. March U.S. Dollar Index futures spiked to 103.425, up 1.697 or +1.67%.

The EUR/USD fell to a multi-year low on Thursday. The last price was 1.0377, down 0.0157 or -1.49%. The gap between U.S. and German 10-year bond yields reached its widest since at least 1990. The widening interest rate differential is making the dollar a more desirable investment over the Euro.

Traders are now predicting that the Euro will move to parity with the U.S. Dollar in 2017 for the first time in 25 years.

Crude Oil

The stronger U.S. Dollar is pressuring the dollar-denominated crude oil market. Prices are also reacting to concerns over the supply glut. The market is finding some support from traders expecting a tighter market in 2017 due to planned output cuts. Both the U.S. West Texas Intermediate and internationally traded Brent crude oil are threatening to take out the psychological $50 level.

U.S. Stocks

The major U.S. equity markets are trading higher on Thursday in reaction to strong economic data and renewed confidence in the economic plans of President-elect Donald Trump. The Dow Jones Industrial Average rose about 150 points, moving closer to 20,000. The market is being supported primarily by a strong rally in the financial sector.

Economic News

U.S. Consumer Inflation rose 0.2 percent in November, in line with expectations. Weekly jobless claims came in at 254,000.

The Philadelphia Fed business index rose 21.5 in December, beating November’s 7.6 read. The Empire State manufacturing index also rose to 9.0 in December. This was better than the 1.5 read in November.

According to IHS Markit, “Manufacturing output expanded for the seventh consecutive month in December. The December manufacturing PMI was 54.2, slightly better than November’s 54.1. Finally, the NAHB  homebuilder sentiment index rose 7 points to 70, beating expectations.