Day Traders Diary

3/1/17

President Trump's first address to Congress appeared to be a hit, at least among investors, as traders confidently pushed the major averages to fresh record highs on Wednesday. The Dow (+1.5%) finished just slightly ahead of the benchmark S&P 500 (+1.4%) and the Nasdaq (+1.4%), while the small-cap Russell 2000 (+1.9%) outperformed.

It wasn't necessarily 'what' Mr. Trump said on Tuesday evening that fueled investors' confidence, it was 'how' he said it. The new president looked, well, 'presidential', a good sign that his controversial style can be toned-down when need be. More importantly, he showed investors that he is committed to getting his pro-growth promises through Congress, even if it means a little compromise.

Financials (+2.8%) led the day's advance, a role that the sector has taken frequently in the stock market's post-election rally. The financial space is now higher by 26.0% since the presidential election on November 8 and currently hovers at its highest level in over a decade.

The Treasury market aided financials in their advance as unevenly distributed selling pressure steepened the yield curve. Treasuries closed lower across the board but the 2-yr Treasury note held up relatively well compared to its peers. The 2-yr yield finished two basis points higher at 1.29% while the 10-yr yield closed higher by six basis points at 2.46%.

Selling pressure plagued U.S. Treasuries after hawkish comments from New York Fed President Dudley (FOMC voter) on Tuesday evening. Mr. Dudley got investors seriously thinking about the possibility of a March rate hike, saying the case for increasing interest rates has become "a lot more compelling."

The fed funds futures market now points to March as an increasingly likely time for the next rate hike to be announced with an implied probability of 66.4%, spiking from yesterday's reading of 35.4%.

Just behind the financial space at the top of today's leaderboard was the energy sector (+2.1%), which finished Wednesday substantially higher despite a downtick in crude oil. The energy component closed 0.4% lower at $53.82/bbl, squandering its early modest gain following the latest EIA crude inventory report, which showed a build of 1.5 million barrels.

Conversely, the consumer discretionary (+1.0%) and the consumer staples (+0.4%) sectors failed to keep pace with the broader market amid a downtick in retailers. Best Buy (BBY 42.14, -1.99), Ross Stores (ROST 66.80, -1.78), and American Eagle Outfitters (AEO 14.34, -1.51) all reported their earnings between yesterday's close and today's open, but the reactions were generally negative after all three companies issued some form of disappointing guidance.

However, the SPDR S&P 500 Retail ETF's (XRT 42.89, -0.04) loss was capped thanks in part to a positive performance from Lowe's (LOW 81.45, +7.08). The company spiked 9.5% after reporting better than expected earnings and revenues in addition to issuing upbeat guidance.

On the downside, the rate-sensitive utilities (-1.0%) and real estate (-0.3%) sectors were the only two groups to finish Wednesday in the red. The spaces slipped in reaction to today's uptick in interest rates.

Also of note, the Wall Street Journal reported late this afternoon that Snap, the parent company of the popular messaging app Snapchat, will be priced in its IPO at $17.00/share. The company will begin trading on the New York Stock Exchange tomorrow morning under the ticker 'SNAP'.

Today's economic data included January Personal Income, February ISM Index, January Construction Spending, and the MBA Mortgage Applications Index:

January personal income rose 0.4%, which is in line with the Briefing.com consensus. Meanwhile, January personal spending increased 0.2% while the Briefing.com consensus expected a reading of 0.3%. The December Personal Spending and Personal Income readings were both left unrevised at 0.5% and 0.3%, respectively. Core PCE prices for January rose 0.3% (Briefing.com consensus 0.2%). The December reading was left unrevised at 0.1%.

The sticking point with this report is twofold: (1) Real PCE declined 0.3%, led by a 0.3% decline in goods spending and a 0.2% decline in spending on services. That is going to be a negative input for Q1 GDP forecasts; and (2) The PCE Price Index was up 1.9% year-over-year, which leaves it tracking toward, and very close to, the Fed's longer-run inflation target of 2.0%, which is to say it seems to satisfy the argument of any Fed official aiming to raise the policy rate at the March meeting (the core PCE Price Index was up 1.7% year-over-year, unchanged from December).

The ISM Index for February rose to 57.7 from an unrevised reading of 56.0 in January while the Briefing.com consensus expected an uptick to 56.1.

The key takeaway from the report is that manufacturing purchasing managers are feeling better about business prospects based in large part on the faster growth they are seeing in new orders.

The Construction Spending report for January showed a 1.0% decrease while the Briefing.com consensus expected an increase of 0.6%. The prior month's reading was revised to +0.1% from -0.2%.

The key takeaway from the report is that the decline in January was driven by public construction spending.

The weekly MBA Mortgage Applications Index, which was released earlier this morning, increased 5.8% to follow last week's 2.0% downtick.

Additionally, the Fed's Beige Book for March indicated that the economy expanded at a modest to moderate pace from early January through mid-February. The report also showed that business were generally optimistic about the near-term outlook but to a somewhat lesser degree than in the prior report.

On Thursday, investors will receive February Challenger Job Cuts at 7:30 ET and the weekly Initial Claims report at 8:30 ET.

Nasdaq Composite +9.7% YTD

S&P 500 +7.0% YTD

Dow Jones Industrial Average +6.9% YTD

Russell 2000 +4.2% YTD