July 16, 2018

The major stock market averages are meandering aimlessly today (Dow & SPX flat). Financials are up 1.2% after some positive earnings announcements (see below). Telecoms are also higher in early trading, but most other sectors are in the red. The VIX Index jumped back up to 12.6, but that’s still considered very low. Most European markets will close down slightly today, and except for Japan, Asian markets were down overnight. Oil is taking a hit, down 3% after Treasury Secretary Mnuchin said some US oil importers could get waivers to continue buying Iranian oil temporarily. “We want people to reduce oil purchases to zero, but in certain cases if people can’t do that overnight, we’ll consider exceptions.” Seems like a massive over-reaction by oil traders, but they’ve always been good at creating volatility where it’s not needed. Anyway, most other commodities are also in the red today. Year-to-date, the Bloomberg Commodity Index is down 5.7%. Bonds are trading modestly lower this morning as yields tick upward. But there is now only 10 basis points difference between the 5-year and 10-year Treasury note yields. The yield curve continues to flatten. 

The Commerce Department’s monthly Retail Sales report was broadly positive. US consumer spending rose for a fifth straight month in June. Not only that, but the year-over-year rate of growth accelerated to 6.6%--the fastest since early 2012. The move took economists by surprise largely because May’s data had to be adjusted significantly higher. Last month, consumers poured more money into health & personal care (+2.2%), restaurants (+1.5%), online retailers (+1.3%) and gasoline (+1% on higher oil prices). 

Bank of America (BAC) reported strong second quarter results today, beating Wall Street expectations for revenue and earnings-per-share. Deposits grew 3% y/y, loan growth was modestly positive at 2.2%, and expenses fell 5% during the quarter. Trading operations were broadly positive (equities +17%;  fixed income/currencies/commodities +2%). If there was any bad news it was that investment banking revenue fell 7% y/y. Despite the flattening yield curve—which hurts profit margins—a whole lot of other factors allowed earnings to jump 33%. Huge stock buy-backs dropped the outstanding share count by 4.7%. Management kept tight control of expenses. And, of course, corporate tax rates are much lower than they were last year. The stock is up 2.3% today.

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