The Week In Review

5/27/16

The stock market ended the week on a higher note as the S&P 500 (+0.4%) navigated a ten-point range. Focal points for today's trade included commentary from Fed Chair Janet Yellen and key sector leadership from the heavily-weighted financial (+0.7%), technology (+0.6%), health care (+0.5%), and consumer discretionary (+0.5%) sectors. The Nasdaq Composite (+0.7%) ended ahead of the benchmark index (+0.4%) and the Dow Jones Industrial Average (+0.3%).

Global bourses traded on a flat note as investors adopted a wait-and-see stance ahead of scheduled remarks from Fed Chair Janet Yellen. For the most part, U.S. equities followed suit, as participants eyed potential policy rate implications ahead of the upcoming three-day holiday weekend. The benchmark index mounted a modest advance in the first half of trading as heavily-weighted financials (+0.7%), consumer discretionary (+0.5%), and technology (+0.6%) led.

Equity indices pulled back in the afternoon as participants ruminated over commentary from Chair Yellen, which fell largely in-line with what was conveyed in the FOMC Minutes from April. Ms. Yellen acknowledged a recent uptick in economic conditions, indicating that a rate hike is probably appropriate in the coming months.

The broader market climbed into the afternoon, lifting the major indices to new session highs. All ten sectors finished in the green with financials (+0.7%), technology (+0.6%), telecom services (+0.6%), consumer discretionary (+0.5%), and health care (+0.5%) leading the advance. Conversely, commodity-sensitive energy (+0.1%) and materials (UNCH) ended with the slimmest gains.

The economically-sensitive financial sector (+0.7%) outperformed as market participants continue to come to terms with the increasing probability that the market will see more rate hikes in the short term. On that note, the odds of a rate hike at the June meeting rose to 30.0% from yesterday's reading of 26.0%. For the week, the broader sector has gained 2.6%, compared to a gain of 2.3% in the benchmark index.

In the telecom services group (+0.6%), Verizon (VZ 50.62, +0.46) outperformed after headlines indicated that the company reached an agreement with striking workers. CWA and IBEW union members will vote whether to ratify the agreement and workers could potentially return to work next week.

The high-beta chipmakers demonstrated relative strength, evidenced by the 0.6% gain in the PHLX Semiconductor Index. In the broader technology group (+0.6%), Yahoo! (YHOO 37.82, +1.06) gained 2.9% as rumors circulated regarding potential bids for the web portal. Separately, Alphabet (GOOG 732.66, +8.54) outperformed after a judge ruled in the company's favor in a licensing dispute with Oracle (ORCL 40.07, +0.12).

Retail names gained in the consumer discretionary space (+0.5%) as Ulta Salon (ULTA 233.15, +19.46) and Big Lots (BIG 50.95, +6.29) rallied following better that expected quarterly reports.

The U.S. Dollar Index (95.75, +0.58) ended near its best level as the dollar extended gains against commodity currencies and the euro. The dollar gained 0.5% against the Canadian dollar (1.3040) while the single currency lost 0.7% against the dollar (1.1113).

The Treasury complex finished on a lower note as the yield on the 10-yr note rose two basis points to 1.85%.

Today's volume fell below the recent average as fewer than 816 million shares changed hands on the NYSE floor.

Today's economic data included the second estimate of Q1 GDP, Q1 GDP Deflator, and the final reading of the May University of Michigan Sentiment Index:

The second estimate for first quarter real GDP produced an upward revision to 0.8% growth on an annualized basis (from 0.5%).

That was slightly below the Briefing.com consensus estimate of 0.9% and it isn't going to generate a lot of applause for several reasons.

First, 0.8% growth is still weak. Secondly, personal consumption expenditures growth was left unchanged at 1.9%.

The third drawback was that the upward revision had a good bit to do with the change in private inventories, which was smaller than previously estimated.

With the second estimate, the change in private inventories subtracted 0.2 percentage points from growth versus 0.33 percentage points with the advance estimate.

The other driver behind the upward revision was gross private domestic investment, which subtracted 0.45 percentage points from growth in the second estimate versus 0.60 percentage points with the advance estimate.

Real final sales of domestic product, which exclude the change in inventories, were up 1.0% versus the prior 10-quarter average of 2.4%.

The final reading for the University of Michigan Consumer Sentiment survey for May was revised to 94.7 from the preliminary reading of 95.8.

The revised figure was below the Briefing.com consensus estimate of 95.5, yet it was still up nicely from the final reading of 89.0 for April and the 90.7 reading registered for May 2015.

The downward revision is owed entirely to the Index of Consumer Expectations, which was lowered to 84.9 from the preliminary reading of 87.5.

The Current Economic Conditions Index was revised up to 109.9 from the preliminary reading of 108.6.

It was noted in the report that there were only four prior months since the peak in January 2007 that the Sentiment Index was higher than in May 2016.

Interestingly, it was said the biggest uncertainty for consumers is not whether the Fed will hike rates in the next few months, but rather what government economic policies will look like under a new president; hence, consumers have placed an added emphasis on maintaining precautionary savings.

Bond and equity markets will be closed on Monday in observance of Memorial Day.

On Tuesday, Personal Income (Briefing.com consensus 0.4%), Person Spending (Briefing.com consensus 0.7%), and core PCE Prices (Briefing.com consensus 0.2%) for April will each cross the wires at 8:30 ET. Separately, the Case-Shiller 20-city Index for May (Briefing.com consensus 5.1%), May Chicago PMI (Briefing.com consensus 50.9), and May Consumer Confidence (Briefing.com consensus 96.2) will be released at 9:00 ET, 9:45 ET, and 10:00 ET, respectively.

S&P 500 +2.7% YTD

Dow Jones +2.6% YTD

Russell 2000 +1.7% YTD

Nasdaq Composite -1.5 YTD

To little surprise, the week leading into Memorial Day weekend saw below-average trading volume, but the reduced activity did not prevent the stock market from registering its second consecutive weekly advance. The rally lifted the S&P 500 into the neighborhood of this year's high as the benchmark index gained 2.3% for the week while the Nasdaq Composite (+3.4%) outperformed thanks to relative strength in technology and biotechnology.

The trading week was pretty quiet on the economic front, but a handful of reports that did cross the wires pointed to a potential rebound from the weakness at the end of the first quarter. April New Home Sales (619K, Briefing.com consensus 521K), April Pending Home Sales (+5.1%; Briefing.com consensus 0.6%), and April Durable Orders (+3.4%; Briefing.com consensus 0.6%) beat expectations while the second estimate of first-quarter GDP (+0.8%; Briefing.com consensus 0.9%) and the final reading of the Michigan Sentiment Index for May (94.7; Briefing.com consensus 95.5) were close to expectations, but missed.

Altogether, the economic data released during the past week kept the possibility of a summer rate hike alive. As a result, Fed officials that spoke since last Friday reminded investors that the FOMC is ready to raise rates if economic data does not take a turn for the worse. This message was consistent with remarks from two weeks ago that boosted the probability of a June hike from 8.0% to 30.0%.

Rate hike expectations, as indicated by the fed funds futures market, essentially held their ground throughout the week with the likelihood of a June hike remaining at 30.0%. However, expectations for a hike in July inched up to 62.0% from 55.0% at the end of last week.

The Dollar Index (95.75) enjoyed its fourth consecutive weekly rise, but the 0.4% increase represented the slowest weekly advance during the past month, which saw the index notch a fresh low for the year and climb 4.2% from that low point.