U.S. stocks added to a solid weekly advance, with technology issues leading the ascent amid some eased Fed rate hike expectations following softer-than-expected reads on retail sales and consumer sentiment and as inflation remains subdued following this week's dovish testimony by Fed Chair Yellen. An increase in Treasuries coupled with some negative reactions to mostly upbeat banking earnings reports weighed on financials. The U.S. dollar was lower, while gold and crude oil prices were higher.
The Dow Jones Industrial Average (DJIA) gained 85 points (0.4%) to 21,638, the S&P 500 Index advanced 11 points (0.5%) to 2,459, and the NASDAQ Composite increased 38 points (0.6%) to 6,312. In light to moderate volume, 674 million shares were traded on the NYSE and 1.6 billion shares changed hands on the NASDAQ. WTI crude oil gained $0.46 to $46.54 per barrel and wholesale gasoline was $0.03 higher at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price gained $11.02 to $1,228.60 per ounce, and the dollar index, a comparison of the U.S. dollar to six major world currencies, was 0.6% lower at 95.14. Markets gained solid ground for the week, as the DJIA increased 1.0%, S&P 500 Index advanced 1.4% and the NASDAQ Composite surged 2.6%.
Dow member JPMorgan Chase & Co. (NYSE:JPM $92) reported Q2 earnings-per-share (EPS) of $1.82, above the FactSet estimate of $1.59, as revenues rose 4.5% year-over-year (y/y) to $25.5 billion, compared to the expected $25.0 billion. JPM noted a stable-to-improving global economic backdrop and a U.S. consumer that remains healthy, while saying loans and deposits continue to grow strongly but market trading revenue was down amid lower volatility and client activity. The company's net interest margin came in a bit shy of forecasts due to higher funding costs, and the company lowered its guidance for net interest income. Shares finished lower.
Citigroup Inc. (NYSE:C $67) posted Q2 EPS of $1.28, topping the projected $1.21, as revenues increased 2.0% y/y to $17.9 billion, above the forecasted $17.4 billion. The company said it saw continued momentum in its businesses, with loan and revenue growth across both sides of the house. Trading revenues topped forecasts and net interest income was roughly in line with forecasts. However, shares were lower amid analyst caution regarding the outlook for net interest income for the industry.
Wells Fargo (NYSE:WFC $55) achieved Q2 profits of $1.07 per share, exceeding the projected $1.01, as revenues were roughly flat y/y to $22.2 billion, versus the estimated $22.5 billion. The company noted continued modest economic growth, increased net interest income and continued improvement in credit results. However, loans were down quarter-over-quarter and its core fees missed expectations. WFC traded lower.
Retail sales and consumer price inflation miss, along with consumer sentiment
Advance retail sales for June declined 0.2% month-over-month (m/m), compared to the Bloomberg forecast of a 0.1% gain and compared to May's favorably revised 0.1% decline. Last month's sales ex-autos declined by 0.2% m/m, versus expectations of a 0.2% gain, and following the unrevised 0.3% decrease seen in the previous month. Sales ex-autos and gas were down 0.1% m/m, compared to estimates of a 0.4% rise, and versus May's unrevised flat reading.
The retail sales control group, a figure used to help calculate GDP, dipped 0.1%, compared to the projected 0.3% rise, and the prior month's figure was unrevised at a flat reading. Sales declined at restaurants, gasoline stations, as well as at grocery and department stores, while online and building materials sales were bright spots.
The Consumer Price Index (CPI) was flat m/m in June, versus estimates calling for a 0.1% gain, while May's 0.1% dip was unrevised. The core rate, which strips out food and energy, ticked 0.1% higher m/m, compared to expectations of a 0.2% increase and versus May's unrevised 0.1% rise. Y/Y, prices were 1.6% higher for the headline rate, below forecasts of a 1.7% rise, while the core rate was up 1.7%, matching projections. May y/y figures showed an unrevised 1.9% rise and an unadjusted 1.7% increase for the headline and core rates respectively.
Industrial production was up 0.4% m/m in June, above estimates calling for a 0.3% gain, and compared to May's upwardly revised 0.1% increase. This was the fifth-straight monthly advance as manufacturing production ticked higher and mining output rose solidly, while growth in utilities was flat. Capacity utilization increased to 76.6%, compared to May's downwardly revised 76.4%, and below forecasts of 76.8%. Capacity utilization is 3.3 percentage points below its long-run average.
The preliminary University of Michigan Consumer Sentiment Index fell to the lowest level since October 2016, dropping to 93.1 in July from the prior month's 95.1 level, and compared to expectations for it to dip to 95.0. The current economic conditions component improved modestly m/m, while the expectations measure fell. The 1-year inflation forecast rose to 2.7% from 2.6%, while the 5-10 year inflation outlook also ticked higher to 2.6% from 2.5%.
Business inventories increased 0.3% m/m in May, in line with forecasts, and versus April's unrevised 0.2% decrease.
Treasuries gained ground on the data, notably the softer-than-expected inflation and retail sales data, which added to this week's dovish monetary policy testimony from Fed Chairwoman Janet Yellen to temper expectations of the pace of rate hikes this year and beyond. A mixed economic picture, combined with the recent retreat in some inflation measures, has raised the level of uncertainty regarding future Federal Reserve actions. The environment for U.S. and global stocks continues to be in decent shape, but some risks are elevated and the possibility of a pullback exists. A notable potential driver of bouts of volatility could be U.S. and global central bank policy as they sail toward monetary policy normalization.
The yield on the 2-Year note dipped 1 basis point (bp) to 1.35%, the yield on the 10-Year note dropped 2 bps to 2.32% and the 30-Year bond rate was nearly unchanged at 2.91%.
Europe turns mixed on data and global central bank volatility, Asia mostly higher
European equities finished mixed, with strength in oil & gas issues and basic materials being offset by gains in the euro and British pound versus the U.S. dollar, which found pressure following some disappointing U.S. retail sales and inflation data. The currencies gained ground on eased Fed rate hike expectations that followed the U.S. data and this week's dovish testimony from Fed Chair Yellen. Also, reports fostered speculation that the European Central Bank may be moving closer to scaling back its stimulus measures later this year.
Financials saw some pressure as global bond yields moved lower and banking sector earnings reports in the U.S. were scrutinized. In economic news in the region, growth in EU new car registrations slowed, while the eurozone trade surplus came in below forecasts.
Stocks in Asia finished mostly higher, extending global market gains that have been fostered by the recent increase in crude oil prices and dovish monetary policy testimony from U.S. Fed Chair Janet Yellen, while appearing cautious ahead of key earnings reports out of the U.S. banking sector. Japanese equities ticked higher, with the yen giving back recent gains, while mainland Chinese shares also nudged to the upside.
Stocks trading in Hong Kong and South Korea advanced, while Indian equities dipped and all three of these constituents have indexes that are at or near record highs and for a look at emerging markets.
Stocks climb as Fed Chief strikes dovish tone
U.S. stocks participated in a global rally that was fueled by eased concerns about the pace of Fed rate hikes as the Central Bank moves toward the start of reducing its bloated balance sheet. Economic data continued to paint a mixed picture with U.S. industrial production extending a winning streak, while retail sales and consumer sentiment missed. However, the bulk of the shift in Fed sentiment came as wholesale and consumer price inflation remained subdued and as Fed Chair Janet Yellen struck a dovish tone in her semi-annual Congressional monetary policy testimony.
Yellen said the fed funds rate remains somewhat below its neutral level and "because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance." Technology stocks returned to rally mode after their brief hiccup. Energy and materials issues also helped lead the way as commodity prices added to a recent rebound on another dose of upbeat Chinese economic data and as the U.S. dollar drifted lower.
Crude oil prices also rallied, bolstered by some bullish oil inventory data. However, financials were noticeably lower as Treasury yields, especially on the short-to-mid end of the curve, fell, and some key banking sector quarterly results to unofficially kick off earnings season garnered a mixed reaction.
Next week, as earnings take center stage, the U.S. economic calendar will bring updates on areas of the economy that have been bright spots. Housing will dominate the docket, courtesy of the releases of the NAHB Housing Market Index, as well as housing starts and building permits. Moreover, we will get the first look at manufacturing activity, which has suggested growth has accelerated recently, for July, in the form of regional reports the Empire Manufacturing Index and Philly Fed Manufacturing Index. The week will culminate with the Index of Leading Economic Indicators, which is projected to continue to indicate further economic expansion.
We are likely in a more mature phase, which could be marked by bouts of volatility and/or pullbacks, possible driven by Fed policy. But liquidity remains ample, financial conditions loose and earnings growth healthy; which have underpinned this bull for much of its history. Those are the key things on which to keep an eye as we head into the year's second half.
Next week's international economic front will likely garner heightened attention with key release including: Australia—employment change. China—retail sales, industrial production, property prices and Q2 GDP. India—trade balance. Japan—trade balance and the Bank of Japan's monetary policy decision. Eurozone—consumer price inflation and the European Central Bank monetary policy decision. U.K.—inflation statistics and retail sales.