The U.S. equity markets diverged amid continued global economic optimism following an upward revision to Q3 GDP and optimistic signs of progress in the Senate’s tax reform bill. Treasury yields rose on the heels of a favorable economic outlook from Fed Chair Yellen, to the benefit of financials, but technology stocks tumbled, severely pressuring the Nasdaq. Crude oil prices were lower, extending losses ahead of tomorrow’s OPEC meeting and following mixed oil inventory data, while gold was lower and the U.S. dollar was little changed.
The Dow Jones Industrial Average (DJIA) rose 104 points (0.4%) to 23,940, the S&P 500 Index fell nearly a point to 2,626, and the Nasdaq Composite tumbled 88 points (1.3%) to 6,824 In heavy volume, 922 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.69 to $57.30 per barrel and wholesale gasoline lost $0.04 to $1.73 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.94 to $1,285.04 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 93.24.
The second look (of three) at Q3 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of growth of 3.3%, up from the first release’s 3.0% gain. The Bloomberg forecast called for an adjusted 3.2% pace of expansion. Q2 GDP grew by an unrevised 3.1% rate. Personal consumption came in at a 2.3% gain for Q3, lower than the preliminary estimate of a 2.4% increase, and compared to the expectations of a 2.5% increase. Personal consumption grew by an unrevised 3.3% in Q2.
On inflation, the GDP Price Index was revised to a 2.1% increase, versus expectations of an unrevised 2.2% gain, while the core PCE Index, which excludes food and energy, was adjusted to a 1.4% increase, compared to forecasts of an unrevised 1.3% rise.
Pending home sales rose 3.5% month-over-month in October, versus projections of a 1.0% rise, and following the negatively-revised 0.4% decline registered in September. Compared to last year, sales were 1.2% higher, versus estimates of a 3.0% gain. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected in October.
The MBA Mortgage Application Index declined 3.1% last week, following the prior week’s 0.1% gain. The decrease came as a 7.7% drop in the Refinance Index more than overshadowed a 1.8% increase in the Purchase Index. The average 30-year mortgage rate remained at 4.20%.
Today the Fed is garnering attention as Chairwoman Janet Yellen delivered her U.S. economic outlook to the Joint Economic Committee of Congress, noting the economic expansion is increasingly broad-based and she continues to expect gradual adjustments in the stance of monetary policy. However, she pointed out that although recent lower readings on inflation likely reflect transitory factors, it is possible that this year’s low inflation could reflect something more persistent.
Treasuries finished lower, as the yield on the 2-year note increased 2 basis points (bps) to 1.77%, the yield on the 10-year note gained 5 bps to 2.38%, and the 30-year bond rate rose 6 bps to 2.82%.
The yield curve has steepened somewhat after a recent bout of flattening that appeared to foster some market weariness, while the U.S. dollar dipped after a two-day rebound, extending a pullback as of late.
The markets shrugged off flared-up geopolitical concerns following yesterday’s missile launch by North Korea, aided by the positive global backdrop and signs of progress regarding the Senate’s tax reform bill, which is expected to be voted on later this week. The House passed its bill two weeks ago, with several key differences setting the stage for a complicated reconciliation process.
Schwab Center for Financial Research – Market Analysis Group
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