Market Perspective for August 19, 2016

The late-summer slow season is upon us as traders and investors vacation in the run-up to Labor Day. Indexes hit new all-time highs during the week, though performance was largely flat following the release of the Fed’s July meeting minutes. Strong earnings reports from select retailers and surging energy prices supported the markets despite mixed economic data.

Although some policymakers advocated for an imminent interest rate hike, the Federal Reserve committee agreed once again to delay, citing a need for further data. On Tuesday, New York Federal Reserve President William Dudley endorsed a stronger economy in the second half of the year. Atlanta Federal Reserve president Dennis Lockhart echoed those sentiments, stating his confidence in an accelerating economic trend that could warrant a 2016 rate hike.

West Texas Intermediate (WTI) rose more than 10 percent this week in response to another weekly oil inventory drawdown and bullish traders continued squeezing oil shorts out of the market. The rally boosted shares of oil and gas companies such as Exxon Mobile (XOM), Chevron (CVX) and ConocoPhillips (COP), and the Energy Select Sector SPDR (XLE) gained 3 percent. With oil once again approaching $50 per barrel, there was less default pressure on loans in the energy space, benefiting the high-yield market.

A weaker U.S. dollar strengthened oil prices and boosted commodities. The 10-year U.S. treasury yield increased slightly, providing a slight headwind for dividend funds without overweight energy exposure. Rate-sensitive utilities and real estate struggled against rising rates, while banking shares moved higher.

Home Depot (HD) and Wal-Mart (WMT) both delivered strong earnings this week. Clothing retailer American Eagle Outfitters (AEO) also beat analysts’ expectations. These reports overshadowed weaker news from Lowe’s (LOW) and Target (TGT). Cisco (CSCO) also disappointed investors and announced it would lay off 8 percent of its global workforce as part of a restructuring effort.

The Consumer Price Index (CPI) was unchanged as lower gasoline prices moderated inflation. U.S. industrial production increased 0.7 percent in July, well ahead of expectations. Housing starts unexpectedly jumped to a five-month high. The Philly Fed survey came in higher than consensus estimates, offsetting the weaker-than-expected Empire State survey. U.S. Capacity Utilization was slightly higher than estimates. Thursday’s lower-than-expected weekly unemployment claims figures reinforced the strong labor market conditions. Reports from Asia indicate the Bank of Japan (BoJ) was likely to engage in further monetary easing in the near future, following a substantial decrease in Japanese trade data.

 

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