Day Traders Diary

8/16/16

 The stock market ended a relatively quiet session on a lower note as volatility in the foreign exchange market and some hawkish-sounding talk from a few Federal Reserve officials pressured the major averages out of record territory.

The Nasdaq Composite (-0.7%) finished behind the S&P 500 (-0.6%) and the Dow Jones Industrial Average (-0.5%).  Mid-cap and small-cap stocks, though, bore the brunt of the selling interest, evidenced by the S&P 400 Midcap Index and the Russell 200 dropping 1.0% and 0.9%, respectively.

The future path of interest rate normalization was in focus as investors weighed the latest Consumer Price Index (CPI) reading. The CPI was unchanged in July, as expected. Core CPI, which excludes food and energy, ticked higher by 0.1% (Briefing.com consensus +0.2%). On a year-over-year basis, total CPI was up 0.8% in July while core CPI was up 2.2%, versus gains of 1.0% and 2.3%, respectively, in June.

Despite the tempered inflation rates, rate-hike expectations inched higher following remarks from New York Fed President William Dudley (an FOMC voter) and Atlanta Fed President Dennis Lockhart (non-FOMC voter).

Mr. Dudley stated that a rate hike remains on the table at the FOMC's September meeting while adding that he thinks the fed funds futures market appears too complacent with regard to future hikes and that current high valuations in the Treasury market are concerning. Separately, Mr. Lockhart said he was unable to rule out at least one rate hike before the end of the year.

In response, the implied probability of an interest rate hike at the September meeting increased to 18.0% from 9.0% in the prior session. The implied probability of an interest rate hike at the December meeting rose to 54.2% from yesterday's implied probability of 41.9%.

The perspective from those two officials weighed on the Treasury market, which saw price weakness across the curve. Investors will be looking for further clues on possible rate-hike timing when the FOMC Minutes from the July meeting are released on Wednesday at 2:00 p.m. ET.

The S&P 500 (-0.4%) settled the day at its low for the session as nine sectors settled with losses.

The defensively-oriented telecom services (-2.0%) and utilities (-1.2%) were the biggest laggards while the remaining decliners showed losses between 0.3% (financials) and 0.9% (health care). The commodity-sensitive energy sector (+0.2%) finished above its flat line, responding in kind to a 1.8% increase in crude oil futures ($46.57/bbl, +$0.84).

Biotechnology demonstrated relative weakness in the health care sector (-0.7%) as the iShares Nasdaq Biotechnology ETF (IBB 291.09, -4.12) declined 1.4%. Vertex Pharmaceuticals (VRTX 100.00, -2.48) underperformed after halting a study involving its VX-661 and ivacaftor therapy. In the broader health care sector, Dow component Johnson & Johnson (JNJ 120.33, -1.98) slipped 1.6%.

In the consumer discretionary space (-0.3%), Dow component Home Depot (HD 136.23, -0.83) underperformed despite beating bottom-line estimates for the quarter and raising its full-year outlook. The increased guidance was largely in-line with analysts' consensus expectations. TJX (TJX 77.97, -4.80) declined by 5.8% as its disappointing guidance overshadowed better-than-expected quarterly results. Lowe's (LOW 81.48, -0.06) inched lower by 0.1% ahead of the company's earnings report tomorrow morning.

The influential technology sector (-0.6%) finished in-line with the broader market, trimming its monthly gain to 1.7%. Microsoft (MSFT 57.44, -0.32) displayed relative weakness after several money managers noted decreased exposure to the stock in recently released 13F forms. Apple (AAPL 109.38, -0.10) for its part slipped 0.1% even though Berkshire Hathaway disclosed a 55.0% increase in its equity stake in the company. The top-weighted component trimmed its post-earnings advance to 13.2%.

The U.S. Dollar Index (94.79, -0.94) ended off its worst level as the euro and yen pared gains against the greenback. The single currency advanced 0.9% against the buck (1.1279) while the dollar/yen pair ended lower by 1.0% (100.28).

Treasuries ended the day near their lows. The yield on the benchmark 10-yr note settled higher by two basis points at 1.57% while the yield on the 2-yr note edged up two basis points to 0.75%.

Today's participation was below the recent average as fewer than 730 million shares changed hands at the NYSE floor.

Today's economic data included the CPI, Housing Starts and Building Permits, and Industrial Production and Capacity Utilization reports for July:

The Consumer Price Index (CPI) for July was unchanged, as expected, after increasing 0.2% in June. Core CPI, which excludes food and energy, was up just 0.1% (Briefing.com consensus +0.2%) after a 0.2% increase in June.

The key takeaway from the report is that consumer inflation pressure eased in July, which will leave the market inclined to think that the Fed is going to hold off on a rate hike at its next meeting.

On an unadjusted basis, CPI was up 0.8% year-over-year in July while core CPI was up 2.2%. Those growth rates mark a slowdown from June when they stood at 1.0% and 2.3%, respectively.

Housing starts in July were up 2.1% to a seasonally adjusted annual rate of 1.211 million units (Briefing.com consensus 1.167 million).  Building permits declined 0.1% to 1.152 million (Briefing.com consensus 1.153 million).

The key takeaway from the report -- and a source of relative disappointment -- is that there was little to no growth in the single-family sector

In terms of starts, single-family starts were up just 0.5% to 770,000 while single-family permits actually declined 3.7% to 711,000.

Industrial production increased 0.7% in July (Briefing.com consensus +0.3%) on the heels of a downwardly revised 0.4% increase (from 0.6%) in June. The Capacity Utilization Rate increased to 75.9% (Briefing.com consensus 75.7%) from an unrevised 75.4% in June.

The key takeaway from the report is that the improvement in July was driven by increases across all major industry groups, which is an encouraging focal point for third quarter growth prospects, assuming the strength is maintained

Manufacturing output increased 0.5%, which was its largest gain since July 2015; mining output increased 0.7%; and utilities output surged 2.1% for the second consecutive month as hotter temperatures increased air conditioning demand.

For further detail on these economic releases, be sure to visit Briefing.com's Economic Calendar page.

Tomorrow's economic data will be limited to the 7:00 a.m. ET release of the MBA Mortgage Index and the 2:00 p.m. ET release of the FOMC Minutes from the July meeting.  Tucked in between the Department of Energy will release its closely-followed inventory report at 10:30 a.m. ET.

Russell 2000 +8.6% YTD

S&P 500 +6.6% YTD

Dow Jones +6.5% YTD

Nasdaq Composite +4.4% YTD