Day Traders Diary

2/27/18

Equities dropped on Tuesday, giving back all of their Monday gains, as new Fed Chairman Jerome Powell delivered his first semiannual testimony on Capitol Hill. The S&P 500 tumbled 1.3%, while the Nasdaq Composite and the Dow Jones Industrial Average lost 1.2%. The major averages finished at their worst marks of the day following a sharp sell off in the final minutes. Meanwhile, the small-cap Russell 2000 underperformed with a loss of 1.5%, returning to its flat line for the year.

Fed Chairman Powell's prepared remarks, which were released before the opening bell, didn't contain any surprises. Mr. Powell stayed largely in line with his predecessor Janet Yellen, saying that he expects further gradual rate increases based on the economic outlook and that risks to the economy are roughly balanced.

Wall Street opened little changed following the release of Mr. Powell's prepared statement, then started ticking higher as he began fielding questions from the House Financial Services Committee. However, stocks dove into negative territory after Mr. Powell said his economic projections have increased since the December FOMC meeting, prompting investors to adjust their rate-hike expectations.

According to the CME FedWatch Tool, the market is still projecting three rate hikes for 2018, but the probability of a fourth rate hike increased to 33.1% from 24.4% on Monday. Meanwhile, the probability of a rate hike at the March FOMC meeting increased to 87.4% from 78.9% on Monday.

U.S. Treasuries moved lower in tandem with the equity market following Mr. Powell's aforementioned comment, pushing yields back towards the multi-year highs they hit last week. The 2-yr yield ended three basis points higher at 2.26%, one basis point below last Wednesday's nine-year high, while the benchmark 10-yr yield climbed five basis points to 2.91%, which is four basis points below the four-year high it hit last Wednesday.

The rise in yields helped the S&P 500's financial sector keep ahead of the broader market on Tuesday, but the group still finished with a loss of 0.9%. The top-weighted technology sector also outperformed with a loss of 0.9%, but the nine remaining groups finished with losses between 1.0% and 2.2%.

The consumer discretionary sector (-2.1%) was among the weakest groups, with Comcast (CMCSA 36.66, -2.92) dropping 7.4% to a three-month low after upping a bid from 21st Century Fox (FOXA 37.63, -1.18) to $31 billion for a large stake in British pay-television broadcaster Sky. Fox already owns 39% of Sky, but was looking to acquire the remaining stake. The news also weighed on Dow component Walt Disney (DIS 104.87, -4.94), which agreed to buy a big chunk of assets from Fox, including its stake in Sky. Fox and Disney lost 3.0% and 4.5%, respectively, on Tuesday.

Elsewhere within the consumer discretionary space, Macy's (M 28.40, +3.5) rallied 3.5%, hitting a 10-month high, after beating earnings estimates for the fourth quarter and issuing above-consensus guidance for fiscal year 2019. Conversely, AutoZone (AZO 654.47, -81.43) dropped 11.1% after missing quarterly profit estimates.

Overseas, equity indices in the Asia-Pacific region ended Tuesday on a mixed note, with Japan's Nikkei (+1.1%) showing relative strength, while the major European bourses ended a tick lower. The U.S. Dollar Index jumped 0.6% to 90.33, hitting its best level since February 9, with the greenback adding 0.7% against the euro (1.2232) and 0.4% against the Japanese yen (107.37).

Investors received several economic reports on Tuesday, including Durable Orders for January, the Consumer Confidence Index for February, International Trade in Goods for January, the S&P Case-Shiller Home Price Index for December, and the FHFA Housing Price Index for December:

• January durable goods orders fell 3.7%, which is more than the 2.0% decrease expected by the Briefing.com consensus. The prior month's reading was revised to +2.6% (from +2.9%). Excluding transportation, durable orders decreased 0.3% (Briefing.com consensus +0.5%) to follow the prior month's revised increase of 0.7% (from +0.6%).
  • The key takeaway from the report is that there wasn't a lot of carryover order momentum from December, suggesting first quarter activity is proceeding at a slower pace.
• The consumer confidence reading for February increased to 130.8 (Briefing.com consensus 126.5) from the prior month's revised reading of 124.3 (from 125.4).
  • The key takeaway from the report is that consumers are feeling more upbeat about current conditions, led by attitudes pertaining to business and labor market conditions.
• The Advance report for International Trade in Goods for January showed a deficit of $74.4 billion (Briefing.com consensus -$72.2 billion), up from a revised deficit of $72.3 billion in December (from -$71.6 billion).
• The Case-Shiller 20-city Index increased 6.3% in December (Briefing.com consensus +6.4%), while the November increase was left unrevised at 6.4%.
• The FHFA Housing Price Index rose 0.3% in December (Briefing.com consensus +0.4%), while the November increase was revised to 0.5% from 0.4%.

On Wednesday, investors will receive another sizable batch of economic data: the weekly MBA Mortgage Applications Index will be released at 7:00 AM ET, the second estimate of fourth quarter GDP (Briefing.com consensus +2.5%) will be released at 8:30 AM ET, the Chicago PMI for February (Briefing.com consensus 64.5) will be released at 9:45 AM ET, and Pending Home Sales for January (Briefing.com consensus +0.4%) will be released at 10:00 AM ET.

• Nasdaq Composite: +6.2% YTD
• S&P 500: +2.6% YTD
• Dow Jones Industrial Average: +2.8% YTD
• Russell 2000: +0.1% YTD