The Week In Review

7/15/16

The stock market ended an upbeat week on a flat note as the major averages consolidated after their recent rally to new all-time highs. The risk rally paused as investors ruminated over a positive reading of the June Retail Sales Report (+0.6%; Briefing.com consensus +0.2%) and a largely in-line June CPI Report (+0.2%; Briefing.com consensus +0.3%). Additional focal points impacting today's trade included a rebound in the dollar and the underperformance of the heavily-weighted consumer discretionary (-0.5%), financial (-0.2%), and technology (-0.2%) sectors. The S&P 500 (-0.1%) finished behind the Nasdaq Composite (-0.1%) and the Dow Jones Industrial Average (+0.1%).

Equity indices began the day on a higher note as the Dow Jones Industrial Average (18557.43) and the S&P 500 carved out fresh all-time highs (2169.05) in the first half-hour of trade. However, the broader market pulled back shortly after the benchmark index tested, but failed to clear technical resistance near the 2168/2170 price level. The move lower corresponded with a similar move in the heavily-weighted financial (-0.2%) sector. The economically-sensitive group yielded to selling pressure after quarterly reports from Citigroup (C 44.33, -0.12) and Wells Fargo (WFC 47.71, -1.23) elicited selling interest.

The major averages slipped through the afternoon as heavily-weighted risk sectors trimmed their weekly gains. Additionally, morning reports regarding a terror attack in Nice, France also likely dampened investor sentiment. The attack took place during a Bastille Day celebration and claimed more than 80 lives. The benchmark index found support near the 2157 area, closing slightly above that level. Six sectors finished in the red as consumer discretionary (-0.5%), financials (-0.2%), and technology (-0.2%) rounded out the leaderboard. On the flipside, materials (+0.4%), utilities (+0.3%), and telecom services (+0.2%) led the pack.

The consumer discretionary sector (-0.5%) displayed broad-based weakness as retailers, travel names, and media companies each contributed to its underperformance. In the retail sub-group, Tiffany & Co (TIF 61.30, -1.49) and Fossil (FOSL 28.66, -2.01) underperformed after European watchmaker Swatch (SWGAY 13.59, -1.14) cut its guidance for the year, projecting a 12.0% decline in net year-over-year sales. Elsewhere, Viacom (VIAB 44.28, -0.52) and CBS (CBS 55.85, -2.09) fell by a respective 1.2% and 3.6% after CBS was downgraded to "Sell" from "Neutral" at UBS.

In the financial sector (-0.2%) money center banks underperformed as quarterly results from Wells Fargo (WFC 47.71, -1.23) weighed on the sub-group. The company reported a bottom-line beat, but was unable to impress investors with its falling net interest margin. Conversely, U.S. Bancorp (USB 41.89, +0.64) jumped 1.6% after the bank reported that revenue rose 8.1% on a year-over-year basis. The broader sector trimmed its weekly gain to 2.6%, compared to a gain of 1.5% in the benchmark index.

The Dow Jones Transportation Average (-0.4%) underperformed the broader market as Delta Air Lines (DAL 39.98, -1.00) weighed. The stock stumbled 2.4% after being downgraded to "Hold" from "Buy" at Evercore ISI. Separately, rail names lagged as Union Pacific (UNP 93.98, -0.72) and CSX (CSX 28.52, -0.53) declined 0.8% and 1.8%, respectively. CSX was pressured after being downgraded to "Hold" from "Buy" at Stifel.

Biotechnology outperformed in the health care space (-0.1%), evidenced by the 1.5% gain in the iShares Nasdaq Biotechnology ETF (IBB 272.53, +4.06). In the ETF, Biogen (BIIB 260.30, +7.43) rallied 2.9% ahead of next week's earnings report on July 21. In the broader health care sector, Aetna (AET 118.63, -0.52) and Humana (HUM 158.89, -2.38) underperformed among health care providers.

The U.S. Dollar Index (96.53, +0.45) finished off its session high as the yen, euro, and pound each lost ground to the greenback. The dollar/yen pair ended flat at 105.39 while the single currency lost 0.5% against the buck (1.1062). Elsewhere, the dollar gained 0.4% against the Canadian dollar (1.2942) despite an uptick in oil. WTI crude ended its day higher by 0.6% ($45.94/bbl; +0.28).

Treasuries ended on a lower note as yields rose throughout the complex. The yield on the 10-yr note settled at 1.58%, rising four basis points. The yield on the 10-yr note rose 22 basis points from last Friday's settlement at 1.36%

Today's economic data included Empire Manufacturing for July, Retail Sales for June, CPI for June, Capacity Utilization, Industrial Production, Business Inventories for May, and the University of Michigan Sentiment Index for July:

Empire Manufacturing Survey for July registered in at 0.55, which was below the prior month's reading of 6.0 and the Briefing.com consensus estimate, which was pegged at 5.0.

The Retail Sales report for June showed solid consumer spending activity on goods. Total retail sales increased 0.6% (Briefing.com consensus +0.2%) following a downwardly revised 0.2% increase (from 0.5%) in May.

Excluding autos, retail sales increased 0.7% after increasing an unrevised 0.4% in May.

There were sales increases in nearly every category. The lone exceptions were clothing and clothing accessories (-1.0%) and food services and drinking places (-0.3%).

The strongest increase was seen in building material, garden equipment, and supplies dealers (+3.9%). Gasoline station sales (+1.2%) and nonstore retailer sales (+1.1%) were also drivers of the positive headline surprise.

Core sales, which exclude auto, gasoline station, building materials, and food services sales, rose a solid 0.5%.

The Consumer Price Index (CPI) for June showed a 0.2% increase for both total CPI (Briefing.com consensus +0.3%) and core CPI (Briefing.com consensus +0.2%), which excludes food and energy.

As expected, the index for energy drove the uptick in total CPI, jumping 1.3% on the back of a 3.3% increase in the gasoline index. That more than offset a 0.1% decline in the food index.

Core CPI, meanwhile, was pushed up primarily by a 0.3% increase in the shelter index and a 0.2% gain in the medical care services index, which helped offset a 1.1% decline in the used cars and trucks index.

On a year-over-year basis, total CPI held steady at 1.0%, but core CPI edged up to 2.3% from 2.2% in May.

The average annual rate for core CPI over the past 10 years has been 1.9%, so the above-average turn in core CPI shouldn't escape the Fed's attention.

Industrial production in June rose a better than expected 0.6% (Briefing.com consensus +0.2%) following an upwardly revised 0.3% decline (from -0.4%) in May.

In turn, the capacity utilization rate of 75.4% (Briefing.com consensus 75.0%) was also better than expected and marked an improvement from an unrevised 74.9% in May.

Notwithstanding the positive headline surprises for June, both industrial production and capacity utilization continue to run at relatively weak levels.

Total industrial production in June was 0.7% lower than its year-earlier level while the capacity utilization rate of 75.4% is 4.6 percentage points below its long-run average.

Manufacturing output was up 0.4% after declining 0.3% in May; mining output was up 0.2% on the heels of a 0.3% increase in May; and utilities output surged 2.4% after dropping 0.9% in May.

The gain in manufacturing, meanwhile, was pretty much owed to a 9.6% increase in motor vehicle assemblies. The output of manufactured goods other than motor vehicles was unchanged.

Mining output increased for the second straight month following declines in the previous eight months.

Total business inventories increased 0.2% in May, as expected, following an unrevised 0.1% increase in April.

Manufacturers' inventories (-0.1%) and wholesaler inventories (+0.1%) were already known. Retailer inventories were the only unknown and they increased 0.5% on the heels of a 0.1% decline in April.

The biggest drivers of the increase in retailer inventories were motor vehicle and parts dealers (+0.7%), general merchandise stores (+0.5%), and building materials, garden equipment, and supplies (+1.1%).

The total business inventory-to-sales ratio for May was unchanged at 1.40, yet that was still above the 1.37 ratio seen in the same period a year ago.

The preliminary University of Michigan Consumer Sentiment Report for July showed a drop in the Index of Consumer Sentiment to 89.5 (Briefing.com consensus 93.0) from the final reading of 93.5 for June.

The report notes that the downturn from June was driven primarily by heightened concerns about the prospects for the national economy that were mainly voiced by high income households.

Those concerns were exacerbated in the wake of the Brexit vote, which initially drove stock prices sharply lower.

The Current Economic Conditions Index fell from 110.8 in June to 108.7 in July. The latter is still above the 107.2 reading seen in the same period a year ago.

The Index of Consumer Expectations dropped from 82.4 in June to 77.1 in July, which is down from 84.1 in the year-ago period.

Monday's economic data will be limited to the NAHB Housing Market Index for July (Briefing.com consensus 0.2%) and Net Long-Term TIC Flows for May, which will be released at 10:00 ET and 16:00 ET, respectively.