July 5, 2017

Stocks opened lower this morning but quickly recovered (Dow -15 pts; SPX flat). The energy sector is down 1.5% as oil prices pull back for the first time in eight trading sessions. Tech, on the other hand, is the best-performing sector with semiconductors (+1.3%) leading the way. That said, over the last week or so “value” sectors like energy and financials have begun to outpace tech. So we’re seeing a bit of a sector rotation. The dollar is slightly higher on the day as commodities fall. WTI crude oil is down over 3% to trade around $45.40/barrel. Iron ore and copper are also down at least 1% today. Bonds are mostly unchanged after selling off over the past week. The 5-year Treasury yield has backed up to 1.92% and the 10-year yield is hovering around 2.34%. This is a big deal since all investors are watching the bond market like a hawk for any signs of accelerating inflation expectations. 

Factory orders fell more than expected in May due to weakness in petroleum, coal, and aircraft. But digging deeper into the numbers, we find some good news. Corporate capital spending, as measured by new orders for capital goods excluding defense equipment & aircraft, continue to rebound from weakness in 2015 & 2016. By this measure, orders for goods are up 6.9% y/y, the highest growth rate in 5 years. 

The Federal Reserve is expected to release minutes from its last monetary policy meeting today. The Fed is sort of walking a tightrope between expressing confidence that strength in housing and the labor market will drive higher economic growth & inflation, and also acknowledging that growth & inflation haven’t accelerated this year. In fact, according to Bloomberg, inflation has been below the Fed’s target “for almost every month since April 2012, raising worries…that the US central bank is headed for a mistake if [growth] doesn’t rebound and officials continue to tighten monetary policy.” Traders will be looking for details regarding the Fed’s plan to gradually reduce its balance sheet. 

Citigroup’s US Economic Surprise Index is beginning to recover. The index, which measures whether economic data are coming in better or worse than expected, absolutely plunged over the last few months. It fell to -78 from +58 and the last time we saw such a big move was back in 2012. Fortunately, the index, like the economy, is mean-reverting and its looks as though it has troughed. Over the last few days the index ticked up to -63. 

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