Buoyed by energy and financial stocks, the major indices reached new 2016 highs this week. Part of the move in energy was driven by traders positioning ahead of OPEC’s meeting in Doha, Qatar on April 17. There’s high hopes that an agreement to freeze production will be reached.
JPMorgan Chase (JPM) rose more than 4 percent after beating earnings estimates by 7 percent. Although Bank of America (BAC) reported an 18 percent decline in trading profit, management indicated a strong demand for consumer and commercial loans in the United States. Bank of America’s earnings reinforce our view that regional banks will perform well this year. Unlike large banks with trading and investment banking divisions, the regional banks get the bulk of their profits from lending. Wells Fargo (WFC) reported a 7 percent slide in quarterly profits as the bank increased its loan reserves. Shares were up more than 3.5 percent on the week. In addition to solid earnings, some lingering concern over oil-related loans was alleviated by the rising price of crude this week.
Shares of Alcoa (AA) gained nearly 8 percent on the week despite a poor earnings report as investors bet on a recovery in China and commodity prices. Shares of Delta Air Lines (DAL) rallied as much 4 percent during the week after beating estimates by 2 cents, nearly tripling earnings from the year ago quarter, but shares gave up some of those gains on Friday. Railroad CSX Corp (CSX) met earnings estimates, but missed on revenue. The decline in energy prices has weighed on CSX and other rail transport companies, but the drop in coal shipments as part of the government’s “war on coal” has stung the most. Coal producer Peabody (BTU) declared bankruptcy this week, joining several other major coal producers that have filed for chapter 11 bankruptcy this year.
Investors sifted through a wide range of mixed economic reports this week. China reported several positive data points for March. Reflecting higher food prices, the Chinese Consumer Price Index (CPI) rose 2.3 percent on a year-over-year basis. The Chinese Producer Price Index (PPI) declined for the 49th consecutive month, but the decline narrowed and prices increased from February to March. The country’s exports increased 11 percent, higher than expected. GDP growth in the first quarter was reportedly 6.7 percent. Fixed asset investment, industrial production and retail sales also were higher than expected.
A decline in auto sales lowered U. S. retail sales by 0.3 percent in March. Consensus expectations were for a 0.1 percent increase from the previous month. Ex-auto, retail sales increased 0.1 percent, which reflects stronger-than-expected non-auto retail sales. The domestic Producer Price Index (PPI) unexpectedly fell 0.1 percent. Estimates were for a 0.3 percent increase due to higher energy costs, but this was more than offset by a decline in the cost of services. Along with a pickup in wage growth, the Federal Reserve Beige Book released Wednesday indicated continued economic expansion. Friday’s Empire Index, which covers economic activity in the New York Fed’s region, was much higher than expected. Weekly unemployment claims fell to their lowest level since 1973 reinforcing the ongoing strength in the domestic job market.
Several Federal Reserve officials delivered prepared remarks during the week. They expressed optimism regarding the fundamentals of the U.S. economy. Economic strength is leading to higher consumer price inflation, but prices are being tempered by weakness overseas. Investors still expect the Fed to raise rates later this year, and officials gave no reason to change that view this week. During an interview Wednesday, Chair Janet Yellen reiterated that the Fed is unlikely to make any sudden or dramatic moves in the near future due to the uncertain global economic environment. The International Monetary Fund (IMF) cut its world growth forecast this past Tuesday and Singapore’s central bank surprised markets with an easing in monetary policy, citing the weak economy. The dovish positions at the Fed and other central banks, along with positive earnings guidance and economic reports, provides support for the current bullish trend in stocks.