The new trading week begins with the major equity averages at or near record highs. In fact, the blue-chip Dow Jones Industrial Average and the broader S&P 500 Index set fresh all-time highs on Friday. The NASDAQ Composite and the small-cap Russell 2000 also turned in strong performances, with the latter climbing more than 2% during the bullish session. Powering stocks higher were a benign report on producer (wholesale) prices and a solid start to third-quarter earnings season (see below). The equity futures are indicating a mixed start to the trading day, with some modest profit taking in store for the Dow index of 30 bellwether companies. Investors also should note that the bond market is closed today in observance of the Columbus Day holiday.
On Friday, the September Producer Price Index (PPI) report showed that the pace of price growth at the wholesale level eased further last month, with the PPI and the core PPI, which excludes the more-volatile energy and food components, falling both on a month-to-month and one-year basis. This helped quell some concerns about inflation reaccelerating after the companion September Consumer Price Index (CPI) report was hotter than expected. The price data did not change the narrative that the Federal Reserve will cut the federal funds rate at the November Federal Open Market Committee (FOMC) meeting, but now the consensus is calling for a quarter-point reduction. Recent commentary from senior Fed officials also has been less dovish than just a few weeks ago. In fact, Atlanta Fed President Raphael Bostic said on Friday that a pause on the interest-rate front can’t be ruled out either.
Meanwhile, we did get some inflation data from overseas last night. Specifically, China’s Consumer Price Index was up 0.4% in September, which was weaker than forecast. Likewise, that nation’s Producer Price Index fell 2.8% year on year, compared with the consensus estimate of a decline of 2.6%. China’s deflationary pressures have brought calls for Beijing to deliver a bigger package of measures to lift the economy. The softer data comes as China’s volatile equity and bond markets await detailed information on Beijing’s stimulus plans, after China’s Ministry of Finance on Saturday pledged more spending, but gave little information on the scope of the plan. The China news is putting downward pressure on global oil prices this morning.
Turning back to the homeland, with prevailing sentiment calling for a 25-basis-point reduction to the federal-funds rate next month, the attention of Wall Street is likely to shift to third-quarter earnings season. It got off to a good start on Friday, with big money center banks JPMorgan Chase (JPM) and Wells Fargo (WFC) both posting better-than-expected earnings per share. On the top line, JPMorgan also beat expectations, but Wells Fargo fell short of forecasts. That was the primary reason why JPM shares performed better than WFC shares and the former’s performance played a big role in the Dow-30 producing a gain of more than 400 points to end last week.
Tomorrow morning will bring the latest quarterly results from bank industry peer Bank of America (BAC), which has been in the news recently as Berkshire Hathaway (BRKB) (led by famed investor Warren Buffett) has reduced its equity stake in BAC. In general, earnings season will start to heat up later this week and we think solid profit growth, at the very least, will be needed from the S&P 500 companies to justify the elevated price-to-earnings multiple for the Index. The consensus is calling for mid-single-digit earnings growth for the S&P 500, which would mark the fifth-straight quarter of year-over-year growth for the Index. Wall Street will be looking closely at the latest quarterly results from video streaming giant and original content producer Netflix (NFLX) after the close of trading on Thursday afternoon. NFLX shares are up nearly 50% year to date.
Investors also will have to wait until the end of this week for the economic news to pick up. On Thursday, we will get three important reports from the business beat, including data on September retail sales and industrial production and capacity utilization. The final trading session of this week will bring a report on housing starts and building permits. The retail sales and residential construction data will likely be closely monitored by the Federal Reserve for signs about how the consumer is faring. - William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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