Day Traders Diary

3/16/16

The stock market ended its Wednesday affair broadly higher as the major indices rallied in response to the Federal Open Market Committee's policy statement for March. Other contributing factors to today's gain included a sharp uptick in oil prices and key sector leadership from the heavyweight technology sector (+1.1%). The Nasdaq Composite (+0.8%) ended its day ahead of both the S&P 500 (+0.6%) and the Dow Jones Industrial Average (+0.4%).

The first half of today's trade was a balancing act as investors weighed a hotter-than-expected core CPI reading (+0.3%; Briefing.com consensus +0.2%) against the impending rate decision from the FOMC. The concern was initially that the above-consensus data might support continued tightening. As a result, the benchmark index traded in a narrow six point range. Also of note, the financial sector (-0.2%) displayed some early strength, but the group slid down the leaderboard in the afternoon.

In the early afternoon, the latest directive from the FOMC provided enough dovish undertones to illicit a rally from the equity market. The FOMC voted 9-1 to leave its benchmark interest rates unchanged. Furthermore, the Fed lowered its target rate projection for 2016 to 0.875% from 1.40% and cut the 2017 outlook from 2.40% to 1.90%. This was essentially in-line with the projections in the fed funds futures market.

Eight of ten sectors ended the day in positive territory with commodity-sensitive materials (+1.7%) and energy (+1.6%) leading the pack, while influential technology (+1.1%) rounded out a distant third place. On the flipside, the heavyweight financial (-0.2%) and health care (-0.3%) sectors ended in the red.

The energy (+1.6%) space enjoyed a sharp rebound in oil prices as investors responded to smaller than expected builds in this week's American Petroleum Institute and Department of Energy stockpile reports. To be fair though, the energy component was also boosted by headlines that OPEC and non-OPEC members will meet in Qatar on April 17 to discuss a potential production cap agreement. WTI crude ended its pit session higher by 5.6% at $38.52/bbl.

Large-cap names saw increased interest following the FOMC's rate decision as investors demonstrated an increased appetite for risk. Heavily-weighted Microsoft (MSFT 54.35, +0.76) and Apple (AAPL 105.97, +1.39) ended near their highs with respective gains of 1.4% and 1.3%. Elsewhere, Oracle (ORCL 40.22, +1.48) gained 3.8% after beating bottom-line estimates in the third quarter and raising its fourth quarter earnings estimates above consensus.

The economically-sensitive financial (-0.2%) sector abandoned some early strength and tumbled to the bottom of the leaderboard by the end of the session. Money center banks bore the brunt of the decline as Wells Fargo (WFC 49.54, -0.44) and Citigroup (C 42.23, -0.36) ended lower by 0.9% apiece. The sub-group was likely responding to decreased earnings prospects in light of revisions to the Fed's projected rate hike path.

Biotechnology also abandoned some early strength, as the iShares Nasdaq Biotechnology ETF (IBB 250.20, -1.27) slipped 0.5% after showing a gain of 1.6% at the start of today's session. To be fair though, large cap constituents like Allergan (AGN 272.76, -10.24) and Dow component Pfizer (PFE 29.04, -0.50) also weighed on the sector. The health care space settled lower by 0.3%, extending this week's decline to 2.3%.

The Treasury complex slipped to session lows shortly after receiving the hotter-than-expected core CPI data and floated there until the FOMC'c policy statement was released.Treasuries rallied to new session highs following the policy statement, sending the 10-yr yield lower by six basis points to 1.91%.

The U.S. Dollar Index (95.67, -0.97) plunged as the greenback surrendered gains against both the yen and euro. The dollar/yen finished lower by 0.5% at 112.57 while the euro/dollar pair rose to 1.1225 (+1.1%).

Today's trading volume fell beneath the recent average as fewer than 913 million shares changed hands at the NYSE floor.

Today's data has included the weekly MBA Mortgage Index, February CPI /Core CPI, February Housing Starts, February Building Permit, February Industrial Production Report, Capacity Utilization:

The latest Consumer Price Index (CPI) is going to give the Fed something extra to think about at today's meeting as it helped the argument for another rate hike, perhaps as early as the April meeting.

The point of debate won't be total CPI. It declined 0.2% in February as expected, driven lower by a 13.0% decline in the gasoline index that offset a 0.2% increase in the food index.

The main point of debate will be core CPI, which excludes food and energy. It rose 0.3% for the second straight month and is now up 2.3% year-over-year on an unadjusted basis.

The Fed has gotten tuned in more to core price trends based on its belief that the adverse impact of the decline in energy prices and the strong dollar is transitory.

Frankly, the February CPI report gives the Fed some data-based room to raise rates at today's meeting considering core CPI is now above the longer-run inflation target of 2.0% (to go along with a 4.9% unemployment rate) and knowing that the February uptick was spurred by price increases in almost all major components, namely shelter (+0.3%), apparel (+1.6%), and medical care (+0.5%).

At the least, this February CPI report could sway the FOMC to create an impression for the market that a rate hike at the April meeting is indeed a "live" possibility.

Housing starts were at a seasonally adjusted annual rate of 1.178 million in February (Briefing.com consensus 1.137 million), which was the highest rate since September and up 5.2% from an upwardly revised January rate of 1.120 million (from 1.099 million).

The Housing Starts report also provided some good news with respect to first quarter GDP forecasts. That good news was wrapped up in the number of homes under construction, which jumped to 987,000 from 978,000 in January. The first quarter average here is 983,000 versus the fourth quarter average of 962,000.

The increase in starts was powered by a 7.2% jump in single-family starts. The West region led the way there with a 24.8% increase in single-family starts.

Building permits dipped 3.1% to 1.167 million (Briefing.com consensus 1.204 million) due entirely to an 8.4% drop in permits for multi-unit buildings. Single-family permits were up 0.4%.

Industrial production declined 0.5% in February (Briefing.com consensus -0.3%) after increasing a downwardly revised 0.8% in January (from 0.9%). on a year-over-year basis, industrial production is down 1.0%.

The downturn in February was fueled by large declines in the indexes for utilities (-4.0%) and mining (-1.4%). The former was the result of unseasonably warm weather, which lowered the demand for heating, while the latter was a byproduct of decreases in crude oil extraction, coal mining, and oil and gas well drilling and servicing.

The silver lining in the report is that manufacturing output increased 0.2% on top of a 0.5% increase in January. That uptick was led by a 0.4% increase for durable manufacturing, which offset a 0.1% decrease for nondurable manufacturing. Total manufacturing output was up 1.8% year-over-year.

With less demand for heating, total capacity utilization slipped to 76.7% from 77.1% in January.

The capacity utilization rate for utilities fell to 74.8% from 78.0%. Manufacturing capacity utilization was unchanged at 76.1%, which is 2.4 percentage points below its long-run average.

Tomorrow's data will include weekly initial claims (Briefing.com consensus 266k), March Philadelphia Fed Survey (Briefing.com consensus -1.4), and Q4 Current Account Balance (Briefing.com consensus -$116.0 Billion) each crossing the wires at 8:30 ET. Meanwhile February's Leading Indicators (Briefing.com consensus 0.2%) will be reported at 10:00 ET.

Russell 2000 -5.0% YTD

Nasdaq Composite -4.9% YTD

S&P 500 -0.8% YTD

Dow Jones -0.6% YTD