On 17 May, 2016 – Fed speak drives US stocks lower

Better than anticipated economic data raised the spectre of a possible Fed rate increase.
United States
United States markets were down Tuesday as investors sifted through new economic reports and company earnings. Seven of the 10 sectors of the S&P were lower. Shares of utilities and consumer goods companies dropped the most after the market made sizable gains the previous day. The Dow Jones industrials were down 1.0 percent, the S&P retreated 0.9 percent and the Nasdaq was 1.3 percent lower.
Stocks declined after several Fed speakers opined that an interest rate increase was on the table for the upcoming June FOMC meeting. Adding to speculation tighter policy may come as early as next month, Fed presidents Dennis Lockhart (Atlanta) and John Williams (San Francisco) said today that at least two interest rate increases may be warranted this year, while the Robert Kaplan (Dallas) said an increase may be needed in the not-too-distant future.
Consolidated Edison and Kraft Heinz were down. Lending Club, which forced out its founder last week, dropped after the Justice Department opened an investigation and the company raised new concerns about funding. Pandora Media advanced after the hedge fund Corvex Management raised its stake and began pushing for a sale. Corvex said that putting the company on the block was the best answer to rising competition from Spotify and Apple.
Home Depot shares declined even though it topped profit and revenue expectations and raised its outlook for the year. The home improvement industry has been one of the few bright spots for retail this quarter. Agilent Technologies was up after the company, which makes scientific instruments, reported second quarter results that were better than expected. Earnings per share, adjusted for one-time gains and costs, came to 44 cents compared with expectations of 39 cents. TJX Companies advanced after the company reported first quarter earnings of 76 cents per share, 6 cents more than expected. TJX, the owner of TJ Maxx stores and Marshalls, also reported higher than expected sales.
April consumer prices were up 0.4 percent on the month and the largest gain in more than three years. Compared with the year before, overall prices rose 1.1 percent. April industrial production posted the biggest increase since November 2014 after dropping the previous two months. Industrial output, which includes factories, mines and utilities, rose 0.7 percent from March. Still, production is modest with factories operating at 75.3 percent of capacity, well below their long-run average. April housing starts climbed 6.6 percent to a seasonally adjusted annual rate of 1.17 million units. Beazer Homes and Hovnanian Enterprises advanced.
These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing was down US$8.75 to US$1,277.00. Copper futures were down 0.1 percent to US$2.09. WTI spot crude was up 71 US cents to US$48.43. Dated Brent spot crude was up 41 US cents to US$49.38. The US dollar was up against the Swiss franc and the Canadian dollar. However, it declined against the pound and the Australian dollar. It was virtually unchanged against the euro and yen. The Dollar Index was slipped 0.05 percent. The yield on US Treasury 30 year bond was down 1 basis point to 2.58 percent while the yield on the 10 year note was up 1 basis point to 1.76 percent.
Europe
Even though European markets got off to a strong start Tuesday, the majority of the markets ended in negative territory after early gains eroded. UK inflation slowed unexpectedly in April, while US consumer prices increased slightly more than anticipated. Financial stocks climbed on optimism that Greece and its lenders will seal a final accord on long-desired debt relief by May 24. Mining and resource stocks also rose on continued strength in commodity prices. However, automakers were among the weakest performers. The FTSE added 0.3 percent while the CAC, DAX and SMI retreated 0.3 percent, 0.6 percent and 0.2 percent respectively.
According to the Bundesbank, Germany’s economic growth is set to continue in the second quarter but lose some momentum given the possibility of a further decline in oil prices dampening purchasing power and the weaker outlook for exports. The bank also said that the consistently upbeat labor market and rising income expectations along with stable prices will keep consumption activity buoyant. But the unlikely prospect of a further drop in oil prices leads them to believe that the sizeable purchasing power gains in the past two quarters will dwindle.
Automakers BMW, Daimler, Volkswagen, Peugeot and Renault declined. Commerzbank gained but Deutsche Bank was lower. Crédit Agricole, BNP Paribas and Société Générale finished higher. In London, Taylor Wimpey surged after upgrading its profit guidance and promising investors larger payouts until 2018. Vodafone advanced after the company notched up its first growth in annual revenue and earnings since 2008 driven by international growth and investment. HSBC increased on a broker upgrade. Land Securities Group gained after the company recommended a final dividend of 10.55 pence per share taking the total dividend for the year to 35.0 pence per share, an increase of 9.9 percent.
UK April CPI reading eased to a gain of 0.1 percent on the month and 0.3 percent from a year ago, slowing unexpectedly on weak air fares and clothing prices. Factory costs continued to decline due to a fall in petroleum product prices. Factory gate prices decreased 0.7 percent on the year after dropping 0.9 percent in March.
Asia Pacific
Asian stocks mostly gained Tuesday thanks to a weaker yen, a jump in oil prices and a rebound in US markets overnight. The US gains were led by technology stocks and helped to offset worries over China’s economy. Energy stocks were among the big gainers across the region as oil extended sharp overnight gains on worries about supply outages and declining US output.
The Shanghai Composite was down 0.3 percent on speculation that Beijing will not resort to large stimulus measures to boost growth. The Hang Seng however, rallied 1.2 percent. China will push forward supply-side reforms to counter ongoing economic headwinds and address outstanding issues such as excess capacity, state television quoted President Xi Jinping as saying on Monday after April’s weak data.
The Nikkei added 1.1 percent in thin trading as oil prices climbed and the yen retreated ahead of a G7 meeting eased concerns about corporate profit outlook. This was also ahead of the first estimate of first quarter GDP due Wednesday. Energy explorer Inpex and Japan Petroleum both rallied. Sumitomo Bakelite jumped after forecasting higher profit for its fiscal 2016. Apple suppliers Japan Display and Minebea advanced after Warren Buffett’s Berkshire Hathaway disclosed a $1.07 billion stake in Apple. Toyota Motor was up on a Nikkei report it plans to build a new plant in Malaysia. Banking and insurance firm Sony Financial Holdings tumbled after its fiscal year profit fell 20 percent.
Both the S&P/ASX and All Ordinaries were up 0.7 percent. However banks lagged after minutes from the May 3 Reserve Bank of Australia policy meeting revealed the board had to be persuaded to cut the cash rate to a record low 1.75 percent. Stronger metal prices lifted miners BHP Billiton and Fortescue Metals Group. Santos, Oil Search and Woodside Petroleum also advanced. ANZ Bank rose after it unveiled plans to cut around 200 jobs from its local workforce. Rival Commonwealth and Westpac gained while NAB shares retreated on going ex-dividend.
The Kospi was virtually unchanged (up 0.15 point). The Sensex added 0.5 percent for the day.
Global Stock Markets

Please remember, the value of investments and the income from them can do down as well as up. Funds that invest in overseas markets may be subject to currency fluctuations. Investments in small and emerging markets can be more volatile than other overseas markets. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.
Looking forward*
Japan posts its first estimate of first quarter gross domestic product. The UK releases its April labour market report and the Eurozone reports final April harmonized index of consumer prices. In the US, the Federal Reserve publishes minutes of its last FOMC meeting and releases the weekly EIA petroleum status report.
*Note — all releases are listed in local time.

Source: Fidelity

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