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Beyond the Numbers

Disappointing Economic Data May Weigh On Wall Street
2/21/2019 9:03 AM

The major U.S. index futures are currently pointing to a modestly lower opening on Thursday following the release of some disappointing U.S. economic data.

The pullback by the futures came after a report from the Philadelphia Federal Reserve unexpectedly showed a contraction in regional manufacturing activity in the month of February.

A separate report from the Commerce Department also showed a smaller than expected increase in durable goods orders in January.

Meanwhile, the Labor Department released a report showing first-time claims for unemployment benefits fell more than expected in the week ended February 16th.

Optimism about trade talks between the U.S. and China may also help to limit any early selling pressure, with a report from Reuters saying the two sides have started to outline commitments in principle on the stickiest issues in their trade dispute.

While the U.S. and China remain far apart on demand for structural changes to China's economy, sources familiar with the negotiations told Reuters the broad outline of what could make up a deal is beginning to emerge from the talks.

A separate report from CNBC indicating Chinese authorities could be getting ready to implement more extensive stimulus measures in a bid to encourage economic growth may also help to limit any early downside by stocks.

Following the relatively lackluster performance on Tuesday, stocks continued to experience choppy trading on Wednesday. The major averages spent the day bouncing back and forth across the unchanged line.

Eventually, the major averages ended the day modestly higher. The Dow rose 63.12 points or 0.2 percent to 25,954.44, the Nasdaq inched up 2.30 points or less than a tenth of a percent to 7,489.07 and the S&P 500 edged up 4.94 points or 0.2 percent to 2,784.70.

The choppy trading came as traders digested the minutes of the latest Federal Reserve meeting, which provided further insight into the central bank's decision to change the forward guidance language and indicate a patient approach to raising interest rates.

The minutes described the Fed's discussions regarding changing the language in its statement from referencing "further gradual increases" in rates to a sentence indicating patience.

Meeting participants pointed to a variety of considerations that supported a patient approach to monetary policy as an appropriate step in managing various risks and uncertainties in the outlook.

The Fed said additional data would help policymakers gauge the trajectory of business and consumer sentiment, whether the recent softness in core and total inflation and inflation compensation would persist, and the effect of the tightening of financial conditions on aggregate demand.

Information arriving in coming months could also shed light on the economic impact of the prolonged government shutdown as well as the results of budget negotiations occurring in the wake of the shutdown, including the possible implications for the path of fiscal policy, the Fed said.

"A patient approach would have the added benefit of giving policymakers an opportunity to judge the response of economic activity and inflation to the recent steps taken to normalize the stance of monetary policy," the minutes said.

The minutes said a patient posture would also allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge.

In light of a range of uncertainties associated with global economic and financial developments, the Fed also decided that it was not useful to express a judgment about the balance of risks.

However, many participants observed that if recent uncertainty eases, the Fed would need to reassess the characterization of monetary policy as "patient" and might then use different statement language.

The minutes of the January meeting also showed officials discussed a plan to end the reduction of bonds on the Fed's balance sheet before the end of 2019

"Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year," the Fed said.

The central bank added, "Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve's balance sheet."

Traders also seemed reluctant to make significant moves as they wait for developments regarding the latest round of trade talks between the U.S. and China.

Officials from the U.S. and China are meeting in Washington this week as the world's two largest economies attempt to reach a long-term trade deal.

Most of the major sectors ended the day showing only modest moves, although tobacco stocks showed a substantial move to the upside.

Reflecting the rally by tobacco stocks, the NYSE Arca Tobacco Index spiked by 3.3 percent to its best closing level in over three months.

Chemical and steel stocks also saw considerable strength on the day, with the S&P Chemical Sector Index and the NYSE Arca Steel Index both advancing by 1.7 percent.

While some strength was also visible among banking, natural gas, and gold stocks, software, retail and biotechnology stocks moved lower.

Commodity, Currency Markets

Crude oil futures are falling $0.26 to $56.90 a barrel after climbing $0.83 to $56.92 a barrel on Wednesday. Meanwhile, an ounce of gold is trading at $1,338.50, down $9.40 compared to the previous session's close of $1,347.90. On Wednesday, gold rose $3.10.

On the currency front, the U.S. dollar is trading at 110.67 yen compared to the 110.85 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.1363 compared to yesterday’s $1.1338.

Asia

Asian stocks recovered from early weakness to end Thursday's trading mixed following a Reuters report that the United States and China are outlining agreements on the stickiest trade issues. Dovish signals from the U.S. Federal Reserve also lent some support.

Chinese shares gave up early gains to end modestly lower after a spokesman for China's Ministry of Foreign Affairs said the country would not use the yuan's exchange rate as a bargaining chip to deal with the trade dispute.

Investors also bet that Beijing will not resort to aggressive interest rate cuts to spur the slowing economy, despite stronger yuan and cooling inflation.

The benchmark Shanghai Composite Index dropped 9.42 points or 0.3 percent to 2,751.80, while Hong Kong's Hang Seng Index rose 115.87 points or 0.4 percent to 28,629.92.

Japanese shares rose for a fourth consecutive session as dovish signals from the Fed as well as optimism over U.S.-China trade talks helped investors shrug off weak manufacturing data.

Japan's manufacturing sector slipped into contraction in February, the latest survey from Nikkei revealed with a 32-month low manufacturing PMI score of 48.5. That's down from 50.3 in January.

The Nikkei 225 Index fluctuated before ending up 32.74 points or 0.2 percent at 21,464.23. The broader Topix closed marginally higher at 1,613.50.

China-related companies gained ground, with Yaskawa Electric rising 2.2 percent. Santen Pharmaceutical rose over 5 percent on share buyback news.

Australian markets fluctuated before ending near their day's highs as conglomerate Wesfarmers posted a record first-half profit, offsetting losses in the mining sector.

The benchmark S&P/ASX 200 Index climbed 42.70 points or 0.7 percent to 6,139.20, while the broader All Ordinaries Index ended up 38.80 points or 0.6 percent at 6,214.60.

Wesfarmers soared 6.9 percent after announcing a special dividend. Origin Energy and Oil Search rose 1-2 percent as oil prices hovered near 2019 highs.

Australia's flag carrier Qantas Airways advanced 1.9 percent after announcing a new A$305 million share buyback. Nine Entertainment jumped 7.2 percent after posting a steady half-year profit result.

Meanwhile, a stronger Aussie dollar on the back of upbeat jobs data weighed on the mining sector, with mining heavyweights BHP and Rio Tinto ending down less than half a percent each. Gold miners Evolution, Northern Star Resources and St Barbara plummeted 3-8 percent.

The jobless rate in Australia stood at a seasonally adjusted 5.0 percent in January, unchanged and in line with expectations. The economy added 31,900 jobs last month, blowing away forecasts for an increase of 15,000 jobs. The jump followed an increase of 16,900 jobs in December.

Seoul stocks recouped initial losses to end roughly flat on hopes for a trade deal between the United States and China.

Europe

European stocks are turning in a mixed performance on Thursday as weak earnings updates and mixed PMI data partly offsets investor optimism over progress in trade talks between the U.S. and China.

On the data front, the Eurozone manufacturing PMI dropped further to 49.2 in February, while the services PMI hit a three-month high of 52.3, survey from IHS/Markit Research showed.

A reading on French business activity topped forecasts, sending eurozone government yields higher across the board.

While the U.K.’s FTSE 100 Index has slumped by 1 percent, the French CAC 40 Index is just above the unchanged line and the German DAX Index is up by 0.3 percent.

French hotel giant Accor has moved significantly lower after reporting 2018 EBITDA in line with group's guidance.

Banking giant Deutsche Bank has also dropped in Frankfurt on a Wall Street Journal report that it has lost $1.6 billion over nearly a decade on a complex municipal-bond investment that it bought before the 2008 financial crisis.

Danish shipping group Moeller-Maersk has also slumped on concerns over its outlook for 2019.

TechnipFMC is also posting a notable loss after the oil services firm took charges relating to its subsea business, restructuring costs and historical investigations into the company.

Centrica has also tumbled in London after a warning that the U.K. government's cap on energy prices would hit its financial performance in 2019.

Defense giant BAE Systems has moved sharply lower. The company said a German ban on Saudi arms sales could hurt its financial performance.

On the other hand, Lender Barclays has rallied as it swung back to a profit in 2018. Public services provider Serco has also percent as it hiked its sales guidance for 2019.

Reinsurer Swiss Re has also shown a notable move to the upside after announcing a new share buyback.

U.S. Economic Reports

Reflecting a continued spike in orders for transportation equipment, the Commerce Department released a report on Thursday showing a significant increase in U.S. durable goods orders in the month of December.

The report said durable goods orders surged up by 1.2 percent in December after jumping by an upwardly revised 1.0 percent in November.

Economists had expected durable goods orders to soar by 1.5 percent compared to the 0.7 percent increase that had been reported for the previous month.

Excluding the jump in orders for transportation equipment, durable goods orders inched up by 0.1 percent in December after slipping by 0.2 percent in November. Ex-transportation orders had been expected to rise by 0.3 percent.

A separate report from the Federal Reserve Bank of Philadelphia showed regional manufacturing activity contracted for the first time since May of 2016.

The Philly Fed said its index for current manufacturing activity in the region tumbled to a negative 4.1 in February from a positive 17.0 in January, with a negative reading indicating contraction. The index had been expected to slip to 14.0.

First-time claims for U.S. unemployment benefits fell more than expected in the week ended February 16th, according to a report released by the Labor Department on Thursday.

The Labor Department said initial jobless claims dropped to 216,000, a decrease of 23,000 from the previous week’s unrevised level of 239,000. Economists had expected jobless claims to dip to 229,000.

At 10 am ET, the National Association of Realtors is scheduled to release its report on existing home sales in the month of January.

Existing home sales are expected to climb by 0.8 percent in January after plunging by 6.4 percent to a three-year low in December.

The Conference Board is also due to release its report on leading economic indicators in the month of January at 10 am ET. The leading economic index is expected to inch up by 0.1 percent.

At 11 am ET, the Energy Information Administration is scheduled to release its report on oil inventories in the week ended February 15th.

Crude oil inventories are expected to increase by 3.1 million barrels after climbing by 3.6 million barrels in the previous week.

The Treasury Department is also due to announce the details of next week’s auctions of two-year, five-year, and seven-year notes at 11 am ET.

Stocks In Focus

Shares of Avis Budget (CAR) are moving significantly higher in pre-market trading after the car rental company reported fourth quarter earnings that exceeded analyst estimates.

Specialty chemicals company Albemarle (ALB) may also see initial strength after reporting fourth quarter results that beat expectations on both the top and bottom lines.

Shares of Jack In The Box (JACK) could also move to the upside after the fast food restaurant chain reported better than expected fiscal first quarter results.

On the other hand, shares of Navient (NAVI) may come under pressure on news hedge fund Canyon Capital has withdrawn its initial expression of interest to acquire the student loan company.
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