October 13, 2017

Stocks gapped up at the open (Dow +30 pts; SPX .17%). Most sectors are in the green as earnings announcements track better than expected. Tech, materials and energy are leading the way. Only healthcare, telecom and utilities are in the red. Commodities are mostly higher on the day and oil is trading up 1% to $51/barrel. Bond prices are modestly higher again today as yields sag. The 5-year Treasury yield is back down around 1.91% and the 10-year yield is back down to 2.29%. 

Bank of America (BAC) reported decent third quarter results and the stock is up 1.5% this morning. Revenue rose 1% from year-ago levels and earnings per share rose 13% due to aggressive cost-cutting. In addition, Fed rate hikes are just beginning to aid the bank’s profitability. Just as with JP Morgan, BAC suffered from a 15% y/y decline in securities trading revenue. And the mortgage banking business declined. But investment banking and commercial banking fared better. Wall Street analysts are closely monitoring credit (that is, non-performing loans and loan loss reserves). BAC wrote off $900mil in bad loans during the quarter, up about 1.4% from year-ago levels. Also, loan loss reserves jumped 15% from prior quarter levels. That sounds pretty ominous, but analysts are saying that compares pretty favorably to other banks that have reported recently. 

US retail sales accelerated to 4.4% y/y growth in September. That’s the fastest growth rate of sales in five months. Headlines this morning are saying that figure is shy of economists’ consensus forecast, but the difference is minor. The fact is, consumer spending is rebounding from a fairly soft Spring/Summer. What’s more, improvement came in spite of the hurricanes. 

We also got inflation data this morning. The Consumer Price Index (CPI) rose 2.2% from year-ago levels. That is also a five-month high. But economists were expecting a slightly higher inflation reading. Understand that lower inflation at this point in the economic—and Fed tightening—cycle tends to suggest lower economic growth in the future and also makes investors wonder why the Fed is intent on continued interest rate hikes. Wall Street is convinced that the Fed will raise its short-term policy interest rate by .25% in December. An analyst at BMO Capital said this morning, “…while the Fed will surely stress the ‘mysterious’ nature of low inflation, we are increasingly concerned that the FOMC’s insistence on pushing toward a December rate hike risks a policy error, but we’re getting as tired of saying that as others are surely of hearing it.” As a reminder, the Fed’s inflation target is 2%, but they like to use “core” inflation (excluding food & energy) as the primary measure. Core CPI in both August and September was 1.7%.

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