Day Traders Diary

6/14/17

Equity indices finished Wednesday's session mixed after the FOMC voted to raise interest rates for the second time this year, as expected. The S&P 500 and the Nasdaq settled lower by 0.1% and 0.4%, respectively, while the Dow closed higher by 0.2%.

The Fed's decision to raise the fed funds target range by 25 basis points to 1.00%-1.25% was nearly unanimous with Minneapolis Fed President Neel Kashkari being the lone dissenter. The rate hike was attributed to realized and expected labor market conditions. In other words, it sounds as if the Fed is still expecting tight labor market conditions to produce stronger wage inflation that will presumably drive broader price inflation.

According to the Fed's dot plot, the median FOMC member expects one additional rate hike in 2017. However, the market doubts that a third rate hike will happen before the year's end with the CME FedWatch Tool assigning an implied probability of 47.0% to said event. In addition, the U.S. central bank plans to begin implementing a balance sheet normalization program sometime this year.

Going into the Fed's decision, equities were fairly flat as big losses from the financials, energy, and materials sectors were mitigated by modest gains from the remaining eight groups. The materials (-1.1%) and energy (-1.8%) groups never recovered, eventually settling the session at the bottom of the leaderboard.

Crude oil weighed on the energy group, dropping 3.5% to $44.79/bbl, after the Energy Information Administration (EIA) reported a smaller than expected draw of 1.7 million barrels (consensus -2.5 million barrels) in crude stocks and a build of 2.1 million barrels in gasoline inventories for the week ended May 9. The energy component settled at its lowest mark since mid-November.

Conversely, the heavily-weighted financial sector (+0.2%) retraced its earlier loss of 1.3% following the FOMC decision, settling higher for the sixth-consecutive session. However, a flattening of the yield curve, which is seen as a negative for the financial industry's bottom line, didn't make things easy on the sector.

Treasuries moved solidly higher following a weak batch of economic data, which included May CPI and May Retail Sales. Total CPI declined 0.1% (Briefing.com consensus 0.0%) in May while core CPI, which excludes food and energy, increased 0.1% (Briefing.com consensus 0.2%). On a year-over-year basis, total CPI is up 1.9% and core CPI has increased 1.7%.

Separately, May retail sales decreased 0.3% (Briefing.com consensus +0.1%) while the prior month's reading was left unrevised at 0.4%. Excluding autos, retail sales decreased 0.3% (Briefing.com consensus +0.2%) while the prior month's reading was revised higher to 0.4% from 0.3%.

The 10-yr and 2-yr yields traded at 2.11% and 1.29%, respectively, ahead of the Fed's policy statement, but ticked up from that level in the aftermath. The 2yr-10yr spread declined by four basis points with the 10-yr yield settling six basis points lower at 2.15% and the 2-yr yield dropping two basis points to 1.35%.

Back on Wall Street, the equity market was a little jumpy in the afternoon session, but eventually settled at the level it took into the FOMC rate decision. As noted above, the heavily-weighted financial sector flipped from negative to positive in the afternoon, however, the top-weighted technology sector did the opposite, exchanging a modest gain for a notable loss.

In conclusion, regardless of how Wednesday's session began, it ended with a risk-off tone as countercyclical sectors generally outperformed their cyclical peers, especially following the Fed's policy statement; the health care, consumer staples, utilities, telecom services, and real estate groups finished with gains between 0.3% and 0.6%.

Reviewing today's economic data, which included May CPI, May Retail Sales, April Business Inventories, and the weekly MBA Mortgage Applications Index:

Total CPI declined 0.1% (Briefing.com consensus 0.0%) in May while core CPI, which excludes food and energy, increased 0.1% (Briefing.com consensus 0.2%). On a year-over-year basis, total CPI is up 1.9% and core CPI has increased 1.7%.

The key takeaway from this report is that it shows a softening trend in consumer inflation, which should presumably be some cause for concern among Fed members.

May retail sales decreased 0.3%, which is below the Briefing.com consensus of +0.1%. The prior month's reading was left unrevised at 0.4%. Excluding autos, retail sales decreased 0.3% while the Briefing.com consensus expected an increase of 0.2%. The prior month's reading was revised higher to 0.4% from 0.3%.

The key takeaway from this report is that consumers clearly remain guarded with their discretionary spending activity, which is likely the result of seeing little, if any, wage growth.

Business Inventories declined 0.2% in April while the Briefing.com consensus expected a downtick of 0.1%. The prior month's reading was left unrevised at 0.2%.

The key takeaway from the report is that business inventories remain elevated relative to sales, which is standing in the way of restoring pricing power.

The weekly MBA Mortgage Applications Index rose 2.8% to follow last week's 7.1% increase.

Tomorrow, investors will receive a slew of economic reports, including Initial Claims (Briefing.com consensus 240,000) at 8:30 ET, June Philadelphia Fed (Briefing.com consensus 26.0) at 8:30 ET, June Empire Manufacturing (Briefing.com consensus 6.0) at 8:30 ET, May Import/Export Prices at 8:30 ET, May Industrial Production (Briefing.com consensus 0.0%) and Capacity Utilization (Briefing.com consensus 76.7%) at 9:15 ET, and June NAHB Housing Market Index (Briefing.com consensus 70) at 10:00 ET.

Nasdaq Composite +15.1% YTD

S&P 500 +8.9% YTD

Dow Jones Industrial Average +8.2% YTD

Russell 2000 +4.5% YTD