May 19, 2016

The major market averages opened lower following the release of the Fed minutes yesterday. The Dow and SPX are currently down 176 pts & .93%, respectively. Consumer staples and utilities, which sold off yesterday, are in the green. Banks, on the other hand, are lower in early trading. Go figure. This goes exactly opposite of yesterday’s initial reaction following news that the Fed is considering a June interest rate hike (see below). The dollar is flat today (at a 6-week high though) and commodities are lower. The Bloomberg Commodity Index is down 1.7% and WTI crude oil is down 2% to $47/barrel. Interestingly, gold is lower as well. Yesterday afternoon bond yields spiked. The 2-year Treasury yield moved up to .89% (2-month high) and is currently trading at .88%. The 5- and 10-year Treasury yields are trading at 1.37% and 1.84%, respectively. 

Yesterday, Goldman Sachs Chief Economist Jan Hatzius said the bond market is “mispriced.” He believes bond investors are not prepared for the Federal Reserve to resume short-term interest rate hikes. He noted Federal Reserve bank presidents Lockhardt and Williams recently said at least two rate hikes could be warranted as the economy recovers this year. In a Bloomberg interview he said, “If you look at where the yield curve is priced—how little normalization of monetary policy is discounted—that’s very striking.” Of course, those defending the bond market would say that low bond yields are signaling higher recession risk. Kevin O’Leary, who owns about 30 companies around the country, says sales growth is up nicely and “I’m telling you, we’re not going into recession.” He sees some inflation creeping back into the economic picture and that should give companies some pricing power.  

The Federal Reserve released minutes from its April meeting yesterday afternoon. Notes suggest will strongly consider raising interest rates in June if the economy continues to improve as expected. And the Fed is confident in a second quarter rebound. The market dipped and the 10-year yield spiked as the news came out. Bank stocks spiked immediately, as you might expect. Jim Paulsen of Wells Capital Management welcomed the Fed’s intent to resume rate hikes. In a CNBC interview, he noted temporary dislocation in the stock market is natural when the Fed begins normalizing rates. It’s unavoidable and the Fed should just move on with it. He said, “I don’t think anybody is going to be hurt by a 25 basis point raise,” but the Fed’s reluctance to normalize rates has restrained Wall Street. 

The US Index of Leading Indicators (LEI), which predicts economic activity 3-6 months out, shot up .6% in April from prior month levels. Economists were anticipating a .4% gain. Drivers of improvement were the job market, corporate capital spending, and building permits. On a year-over-year basis, leading indicators are up 1.9%, which is not terribly strong. LEI is hovered around 2% y/y growth for the past several months. 

Cisco Systems (CSCO) beat revenue and earnings expectations when it reported first quarter results yesterday afternoon. Revenue rose 3% y/y and earnings were up almost 6%. This is the first tech company to report April quarter results (most operate on calendar quarters). The revenue beat comes in spite of the fact that sales in the old switching & routing business fell 3.9%, and the company mentioned a tough environment for tech spending. But analysts were impressed with the company’s shift to higher growth areas, and with profit margin improvement. In addition, management raised current quarter guidance above Wall Street expectations. The stock is up 3.5% this morning.


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