November 15, 2017

The major stock market averages gapped down at the open, but are recovering somewhat. At the moment, the Dow is down 73 pts and the SPX is down .26%. The SPX is now about 1% off of its recent high and could fall another .8% to test its 50-day moving average. The energy sector is down about .8% this morning, following on yesterday’s decline. Other groups leading the dip are utilities, pharmaceuticals, semiconductors and retailers. Banks and telecoms are up a bit. European markets are poised to close about .5% lower and Asia was down more than that overnight. WTI crude oil is down another .6% to trade around $55.30/barrel. We got some higher oil inventory data last night and I think traders are looking at the fact that oil has rallied very sharply over the last five months. So you can expect a pullback. Bonds are  rising in price, falling in yield. The 5-year Treasury yield fell back to 2.05% and the 10-year yield dipped to 2.35%. 

Commodities are falling in price after China’s President Xi Jinping said the country would focus on the quality of its economic expansion rather than the pace of growth. In other words, economic growth may decline from current levels, and that means potentially lower global demand for commodities. So copper is down about 6% from its October peak. Also yesterday, we got some less than stellar economic data from China. Home sales in the country fell 3.4% y/y in October. That’s the biggest single month decline in three years. In addition, factory output, fixed-asset investment (i.e. corporate & government capital spending), and retail sales all slowed somewhat. China is still growing much faster than the US. Retail sales, for example, are still growing at a 10% y/y pace and factory output is rising at a 6.2% pace. But it’s pretty clear the economy, which picked up to 6.9% growth this year, is fading a bit. 

The Consumer Price Index (CPI) decelerated slightly to 2.0% growth in October. Economists anticipated slightly slower inflation. Core CPI, which excludes the more volatile food & energy categories, accelerated to 1.8% growth from 1.7% in the prior month. The Federal Reserve closely monitors this core inflation gauge and generally likes to see it around 2.0%. So inflation remains low. One of the reasons for slower inflation this year has been sharply lower wireless phone service prices. In addition, we’re told prices on prescription drugs and new cars are falling. You know what’s not falling? Medical costs.  

US retail sales also decelerated somewhat in October, rising .2% from prior month levels. But that was expected after a 1.9% hurricane-related jump in September. On a year-over-year basis, retail sales decelerated a bit to 4.6% growth from 4.8% in the prior month. But Barron’s characterizes the results as “respectable.” Anyway, November and December will be much more important months for consumer spending.  

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