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Beyond the Numbers

Traders Looking Ahead To Powell’s Second Day On Capitol Hill
7/18/2018 9:01 AM

The major U.S. index futures are once again pointing to a roughly flat opening on Wednesday, with stocks likely to show a lack of direction after moving higher over the course of the previous session.

Traders may stick to the sidelines ahead of Federal Reserve Chairman Jerome Powell’s second day of testimony on Capitol Hill, with the central bank chief appearing before the House Financial Services Committee.

A positive reaction to Powell’s testimony before the Senate Banking Committee on Tuesday contributed to strength on Wall Street, as he offered an upbeat assessment of the U.S. economy.

Nonetheless, some negative sentiment may be generated in reaction to a report from the Commerce Department showing a sharp pullback in new residential construction in the U.S. in the month of June.

Stocks moved mostly higher over the course of the trading day on Tuesday after recovering from an initial move to the upside. With the gains on the day, the Nasdaq set a new record closing high and the S&P 500 reached its best closing level in well over five months.

The major averages pulled back off their highs going into the close but remained in positive territory. The Dow rose 55.53 points or 0.2 percent to 25,119.89, the Nasdaq advanced 49.40 points or 0.6 percent to 7,855.12 and the S&P 500 climbed 11.12 points or 0.4 percent to 2,809.55.

The strength that emerged on Wall Street came as Federal Reserve Chairman Jerome Powell offered few surprises in his semiannual monetary policy testimony before the Senate Banking Committee.

In his prepared remarks, Powell said the U.S. economy has grown at a solid pace so far this year and noted the latest data suggests economic growth in the second quarter was "considerably stronger" than in the first quarter.

The Fed chief also described recent inflation data as "encouraging," with consumer price inflation a little above the central bank's 2 percent target.

"Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years," Powell said.

With the strong job market, inflation close to the objective, and the risks to the outlook roughly balanced, Powell reiterated that the Fed believes gradually raising interest rates is "the best way forward."

"We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses," Powell said. "On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective."

Powell said the Fed will continue to weigh a wide range of relevant information and stressed that the central bank's policy decisions will depend on the economic outlook.

The Fed has raised rates twice this year to the current range of 1.75 to 2 percent and has signaled two more rate hikes before the end of the year.

On the U.S. economic front, the Fed released a report before the start of trading showing industrial production increased in line with economist estimates in June amid a rebound in auto production.

The report said industrial production climbed by 0.6 percent in June after falling by a downwardly revised 0.5 percent in May.

A separate report from the National Association of Home Builders showed homebuilder confidence has held steady in the month of July.

The report said the NAHB/Wells Fargo Housing Market Index remained unchanged in July after dipping to 68 in June. The unchanged reading matched economist estimates.

Chemical stocks showed a strong move to the upside over the course of the trading session, driving the S&P Chemical Sector Index up by 1.5 percent.

Significant strength was also visible among steel stocks, as reflected by the 1.5 percent advance by the NYSE Arca Steel Index.

Housing stocks also turned in a strong performance following the NAHB report, with the Philadelphia Oil Service Index climbing by 1.4 percent.

Semiconductor, brokerage, and biotechnology stocks also moved notably higher on the day, while oil service and real estate stocks moved to the downside.

Commodity, Currency Markets

Crude oil futures are falling $0.43 to $67.65 a barrel after inching up $0.02 to $68.08 a barrel on Tuesday. Meanwhile, after tumbling $12.40 to $1,227.30 an ounce in the previous session, gold futures are slipping $2.60 to $1,224.70 an ounce.

On the currency front, the U.S. dollar is trading at 112.77 yen compared to the 112.88 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is valued at $1.1625 compared to yesterday’s $1.1661.

Asia

Asian stocks ended mixed on Wednesday even as Federal Reserve Chair Jerome Powell's upbeat economic view bolstered investor confidence in the world's largest economy.

In testimony before the Senate Banking Committee, Powell on Tuesday offered a positive outlook for the U.S. economy and reiterated that gradually raising interest rates is "the best way forward." He also downplayed the potential negative fallout from the ongoing U.S.-China trade dispute.

China's Shanghai Composite Index fluctuated before closing down 9.69 points or 0.4 percent at 2,788.44. Hong Kong's Hang Seng Index eased 64.26 points or 0.2 percent to close at 28,117.42.

Meanwhile, Japanese shares closed at their highest levels in more than a month, led by gains by automobile and technology stocks. The Nikkei 225 Index rose 96.83 points or 0.4 percent to 22,794.19, its highest level since June 15th. The broader Topix Index closed 0.4 percent higher at 1,751.21.

Toyota Motor, Mazda Motor and Subaru all rose over 1 percent as the dollar hovered near a six-month high against the yen in response to Powell's comments. In the technology sector, Advantest advanced 1.5 percent and TDK added 1 percent.

Australian shares also rose, led by material stocks after BHP Billiton posted record annual output for fiscal 2018. The benchmark S&P/ASX 200 Index climbed 41.50 points or 0.7 percent to 6,245.10, while the broader All Ordinaries Index ended up 40.70 points or 0.7 percent at 6,329.10.

BHP shares jumped 3.3 percent, and rival Rio Tinto closed 0.4 percent higher. Financials also closed broadly higher, with the big four banks rising between 0.2 percent and 0.7 percent.

Fairfax Media jumped 3.3 percent on news the company and its rival News Corp. have agreed to use each other's printing networks under a deal that will deliver cost savings.

On the other hand, falling oil prices weighed on the energy sector, with Oil Search ending down as much as 2.2 percent. Gold miner Newcrest lost 2.1 percent after gold prices fell more than 1 percent overnight.

Europe

European stocks have gained ground on Wednesday as Federal Reserve Chair Jerome Powell's upbeat economic view bolstered investor confidence in the world's largest economy.

While the French CAC 40 Index has risen by 0.4 percent, the U.K.’s FTSE 100 Index and the German DAX Index are both up by 0.6 percent.

The British pound drifted lower to hit its lowest level in 10 months after U.K. inflation data missed forecasts.

The consumer price index unexpectedly came in flat at 2.4 percent year-over-year versus expectations for a 2.6 percent increase, raising questions over whether the Bank of England will deliver an August rate hike.

Elsewhere, final data from Eurostat showed Eurozone annual inflation accelerated in June, exceeding the European Central Bank's target of "below, but close to 2 percent".

The annual inflation rate rose to 2 percent from 1.9 percent in May, in line with the flash estimate released on June 29.

Novartis has moved notably higher after the Swiss drug major reiterated its full year outlook after reporting a surge in second quarter profits.

Telecommunications equipment company Ericsson has soared after swinging to a modest operating profit in the second quarter and pledging to deliver an operating margin of 10 percent by 2020.

ASML Holding has jumped as its second quarter earnings topped forecasts. Airline EasyJet has also rallied after lifting its full-year profit forecast.

On the flip side, Danish lender Danske Bank has tumbled after warning its 2018 earnings will be at the lower end of its previous guidance.

Electrolux has also dropped after its second quarter net income declined to 517 million Swedish kronor from 1.29 billion kronor in the year-ago quarter due to provisions related to a French competition probe.

Shares of Smiths Group have also slumped. The British engineering company warned that it expects a 2 percent drop in full-year revenue at its medical division.

Additionally, Premier Foods has tumbled after announcing it is considering selling some brands as part of turnaround plans.

U.S. Economic Reports

After reporting a sharp increase in new residential construction in the U.S. in the previous month, the Commerce Department released a report showing a much steeper than expected pullback in housing starts in the month of June.

The Commerce Department said housing starts plunged by 12.3 percent to an annual rate of 1.173 million in June after jumping by 4.8 percent to a revised rate of 1.337 million in May.

Economists had expected housing starts to drop by 2.2 percent to a rate of 1.320 million from the 1.350 million originally reported for the previous month.

Building permits, an indicator of future housing demand, also fell by 2.2 percent to an annual rate of 1.273 million in June after tumbling by 4.6 percent to a rate of 1.301 million in May.

The continued decrease came as a surprise to economists, who had expected building permits to climb to an annual rate of 1.330 million.

At 10 am ET, Federal Reserve Chairman Jerome Powell is due to deliver his second day of testimony on Capitol Hill, appearing before the House Financial Services Committee.

The Energy Information Administration is scheduled to release its report on oil inventories in the week ended July 13th at 10:30 am ET.

Crude oil inventories are expected to drop by 3.5 million barrels after plunging by 12.6 million barrels in the previous week.

At 2 pm ET, the Fed is due to release its Beige Book, a compilation of anecdotal evidence on economic conditions in the twelve Fed districts.

Stocks In Focus

Shares of Morgan Stanley (MS) are moving notably higher in pre-market trading after the financial giant reported better than expected second quarter results and raised its quarterly dividend.

Airline United Continental (UAL) is also likely to see early strength after reporting second quarter results that exceeded analyst estimates and raising its full-year guidance.

Shares of CSX Corp. (CSX) may also move to the upside after the railroad operator reported second quarter results that beat expectations on both the top and bottom lines.

On the other hand, shares of Sonic Automotive (SAH) may come under pressure after the automotive retailer warned its second quarter earnings were negatively impacted by lower than anticipated gross margins in certain key brands.

Chipmaker Texas Instruments (TXN) may also move to the downside on news its president and CEO Brian Crutcher has resigned due to violations of the company's code of conduct.

Shares of Alphabet (GOOGL) may also see early weakness after the company’s Google unit was fined a record $5 billion by European antitrust authorities.
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