Equity Win Streak Ends…..

U.S. equities snapped a string of gains, as Fed rate hike worries resurfaced following a host of upbeat economic reports that gave the U.S. dollar and Treasury yields a boost, with the 10-year note back above 3.00% and at its highest level since 2011. Retail sales for April were upbeat, regional manufacturing output surprisingly improved, and homebuilder sentiment notched its first gain for the year. Elsewhere, crude oil prices continued higher, and gold tumbled.

The Dow Jones Industrial Average (DJIA) fell 193 points (0.8%) to 24,706, the S&P 500 Index declined 19 points (0.7%) to 2,711, and the NASDAQ Composite lost 60 points (0.8%) to 7,352. In moderate volume, 797 million shares were traded on the NYSE and 2.1 billion shares changed hands on the NASDAQ. WTI crude oil moved $0.35 higher to $71.31 per barrel and wholesale gasoline was unchanged at $2.20 per gallon. Elsewhere, the Bloomberg gold spot price fell $21.24 to $1,292.26 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% higher at 93.27.

Advance retail sales for April rose 0.3% month-over-month (m/m), matching the Bloomberg forecast, while March’s figure was upwardly revised to a 0.8% gain. Last month’s sales ex-autos were up 0.3% m/m, versus expectations calling for a 0.5% rise and the favorably revised 0.4% gain seen in the previous month. Sales ex-autos and gas grew 0.3% m/m, compared to estimates of a 0.4% gain and March’s upwardly revised 0.4% increase. The retail sales control group, a figure used to help calculate GDP, was 0.4% higher, in line with projections, and the prior month’s 0.4% rise was adjusted to a 0.5% increase. Nine of the thirteen categories were higher, led by a solid gain in sales at apparel stores, which posted the largest gain since March of last year, per Bloomberg, while nonstore retail sales—which includes online shopping—were respectably higher and furniture store activity was up nicely. Sales of electronics and appliances, health and personal care, food services, and sporting goods all dipped.

The Empire Manufacturing Index showed output from the New York region unexpectedly accelerated and moved further into solid expansion territory (a reading above zero) for May. The index rose to 20.1 from April’s unrevised 15.8 level, with forecasts calling for a 15.0 reading.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month improved for the first time this year to 70, from April’s downwardly revised 68 level, versus expectations for a 69 reading. A reading of 50 separates good and poor conditions. The NAHB said tight housing inventory, employment gains and demographic tailwinds should continue to boost growing consumer demand for single-family homes. However, the NAHB noted that the record-high cost of lumber is hurting builders’ bottom lines and making it more difficult to produce competitively priced houses for newcomers to the market.

Treasuries were lower, as the yield on the 2-year note increased 3 basis points (bps) to 2.57%, while the yields on the 10-year note and the 30-year bond rose 7 bps to 3.07% and 3.20%, respectively. Treasury yields gained ground, with the 10-year note back above the 3.00% mark and hitting the highest level since mid-2011, while the U.S. dollar has regained some upward momentum to highs not seen since December.

The Fed continues to signal a gradual pace of rate hikes with subdued inflation reports being met with economic and earnings fronts that remain solid. Also, the markets continue to grapple with global trade and geopolitical uncertainties, as well as the recent surge in crude oil prices to multi-year highs.

Schwab Center for Financial Research – Market Analysis Group

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