The Bulls Are Back In Town…..

Investors shrugged off yesterday’s massive reversal, pushing U.S. equities to fresh record highs despite negative reactions to earnings results from Dow member Goldman Sachs and Bank of America. Industrial production finished the best year since 2010, and while homebuilder sentiment dipped from an 18-year high, it remained firmly entrenched in positive territory. Meanwhile, the afternoon release of the Fed’s Beige Book showed continued economic growth and optimism. Treasury yields and the U.S. dollar were higher, as were crude oil prices, while gold slipped.

The Dow Jones Industrial Average (DJIA) surged 323 points (1.3%) to 26,115, the S&P 500 Index rose 26 points (0.9%) to 2,803, and the NASDAQ Composite jumped 75 points (1.0%) to 7,298. In heavy volume, 913 million shares were traded on the NYSE and 2.2 billion shares changed hands on the NASDAQ. WTI crude oil ticked $0.24 higher to $63.97 per barrel and wholesale gasoline added $0.02 to $1.86 per gallon. Elsewhere, the Bloomberg gold spot price declined $10.26 to $1,328.15 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 90.68.

The Federal Reserve’s industrial production report showed a 0.9% rise month-over-month (m/m) in December, well above the Bloomberg estimate of a 0.5% gain, and November’s downwardly revised 0.1% dip. Manufacturing production ticked 0.1% higher and mining output rose 1.6%, though utilities production jumped 5.6%. The Fed said industrial production posted its largest calendar-year gain since 2010. Capacity utilization rose to 77.9% from the prior month’s upwardly revised 77.2% rate, and compared to forecasts of 77.4%. Capacity utilization is 2.0 percentage points below its long-run average.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month dipped to 72, matching forecasts, from December’s 74 level, which was the highest since 1999. The index still sits decisively above the 50 mark, the point of separation for good versus poor conditions. The NAHB said builders are confident that changes to the tax code will promote the small business sector and boost broader economic growth. The NAHB added that it members are excited about the year ahead, even as they continue to face building material price increases and shortages of labor and lots.

Tomorrow, we will get a look at builder activity in December, with the release of housing starts and building permits. Starts are projected to decline 1.7% m/m to an annual rate of 1,275,000 units from November’s pace that was fueled by the strongest level of single-family construction in over a decade. Permits are forecasted to decrease 0.6% to an annual rate of 1,295,000 units. Additionally, weekly initial jobless claims are slated for release, forecasted to fall to a level of 249,000 from the prior week’s 261,000, as well as the Philly Fed Manufacturing Index, with economists expecting a level of 25.0 for January, down slightly from the 26.2 posted in December, but still well above the level of zero that separates expansion from contraction.

The MBA Mortgage Application Index increased 4.1% last week, following the prior week’s 8.3% jump. The solid growth came as a 4.4% rise in the Refinance Index was met with a 2.7% gain in the Purchase Index. The average 30-year mortgage rate gained 10 basis points (bps) to 4.33%.

Treasuries were lower, as the yield on the 2-year note was 2 bps higher at 2.04%, the yield on the 10-year note gained 4 bps to 2.58, and the 30-year bond rate moved up by 3 basis points to 2.85%. Treasury yields recovered from yesterday’s downside reversal, while the U.S. Dollar Index has recovered some after being bogged down as of late. Despite yesterday’s sharp reversal to the downside, the stock markets rebounded to post fresh record highs fueled by synchronized global economic growth and lingering U.S. tax reform optimism, while the markets continue to eye the ramp up of earnings season and signs that global central banks may be becoming a bit more hawkish. The Bank of Canada was the latest central bank to move a bit down the normalization path after announcing a 25 basis point rate increase to 1.25%, while raising its economic growth estimate but offering a dovish tone on the inflation guidance.

Schwab Center for Financial Research – Market Analysis Group

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