Rudd’s MarketView

Summary

The S&P 500 and Nasdaq hit record closing highs on Thursday, due in no small part to gains in the consumer discretionary sector after strong reports from Best Buy and other retailers. The discretionary index was up 0.9 percent, while the S&P 500 retail index gained 1.6 percent, its best day since Dec. 7.

Best Buy rose 21.5 percent, hitting a record high and making it the top gainer on the S&P, after its comparable sales unexpectedly rose last quarter. Tommy Hilfiger owner PVH was the second-largest S&P gainer with a 4.8-percent rise to a near 6-month high on strong results. Sears gained 13.5 percent after posting its first quarterly profit in nearly two years.

The reports follow mixed results this reporting period from other retailers, some of which continue to be hurt by competition from Amazon. At the same time, they helped to give major indexes a sixth straight day of gains, more than making up for last week’s selloff.

The CBOE Volatility Index, the most widely followed barometer of expected near-term stock market volatility, fell to a two-week low of 9.72 during the session.

Minutes from the Federal Reserve’s May 2-3 meeting, released Wednesday, continued to bolster sentiment. They showed policymakers view an interest rate hike coming soon, but that they agreed to hold off until it was clear a recent slowdown in the economy was temporary.

Fed officials also proposed a plan to wind down its $4.5 trillion of debt securities, including a limit on how much would be allowed to fall off the balance sheet each month.

Limiting gains, the S&P energy index was down 1.8 percent following a nearly 5-percent decline in crude oil prices. OPEC agreed to extend output cuts, but not by as much as the Street had been hoping for.

Losing ground were shares of General Motors, down 1.8 percent to $32.60. GM was accused in a lawsuit of rigging hundreds of thousands of diesels with devices, similar to those used by Volkswagen, to ensure they pass emissions tests.

Approximately 6.4 billion shares changed hands on the major domestic equity exchanges, a number that was below the 6.8 billion share daily average for the past 20 trading days, according to Thomson Reuters data.

Jobless Insurance Claims Up Slightly

The number of new claims for unemployment benefits rose slightly last week and the four-week moving average of claims hit a 44-year low, suggesting a further tightening of the labor market that could encourage the Fed to raise interest rates next month.

The economy’s brightening prospects were, however, dimmed somewhat by other data on Thursday showing the goods trade deficit widening in April and inventories decreasing, prompting analysts to pare their second-quarter GDP growth estimates.

According to a report released by the Labor Department 0n Thursday morning, initial claims rose by 1,000 applications to a seasonally adjusted 234,000 applications for the week ended May 20. The increase followed three straight weeks of declines.

It was the 116th straight week that claims were below 300,000, a threshold associated with a healthy labor market.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 5,750 to 235,250 last week, the lowest level since April 1973.

The labor market is near full employment, with the jobless rate at a 10-year low of 4.4 percent.

Labor market strength supports the view that an abrupt slowdown in economic growth in the first quarter was probably temporary. Gross domestic product increased at a 0.7 percent annualized rate in the first quarter, the weakest performance in three years.

Minutes of the Fed’s May 2-3 policy meeting, which were published on Wednesday, showed that while policymakers agreed they should hold off hiking rates until there was evidence the growth slowdown was transitory, “most participants” believed “it would soon be appropriate” to raise borrowing costs.

Data on the labor market, retail sales and industrial production suggest the economy regained momentum at the start of the second quarter. However, expectations of a sharp rebound in GDP growth were tempered after the Commerce Department reported on Thursday that the goods trade deficit rose 3.8 percent to $67.6 billion in April amid a decline in exports. At the same time, both wholesale and retail inventories fell 0.3 percent last month.

Thursday’s claims report also showed the number of people still receiving benefits after an initial week of aid rose 24,000 to 1.92 million in the week ended May 13.

Still, the so-called continuing claims have now held below 2 million for six straight weeks. The four-week moving average of continuing claims dropped 16,000 to 1.93 million, the lowest level since January 1974.

The continuing claims data covered the survey period for May’s unemployment rate. The four-week average of continuing claims decreased 76,750 between the April and May survey weeks, indicating further improvement in the unemployment rate.

The jobless rate has dropped by four-tenths of a percentage point this year.

Crude Prices Down Sharply

Crude prices fell 5 percent on Thursday as the extension of output curbs by OPEC and other producing countries was a disappointment to those looking for larger cuts, leading to the biggest daily percentage slide in crude prices since early March.

At Thursday’s meeting in Vienna, OPEC and some non-OPEC producers agreed to extend supply cuts of 1.8 million barrels per day (bpd) until the end of the first quarter of 2018.

Brent crude settled down $2.50, or 4.6 percent at $51.46 a barrel. West Texas intermediate futures ended at $2.46 lower, or 4.8 percent, at $48.90 a barrel, breaking below $50 for the first time all week. It was the largest percentage decline for both benchmarks since March 8th. Since then, trading has been volatile.

While OPEC’s move Thursday had been expected, some oil market investors had hoped producers would agree to longer or deeper cuts to drain a global glut of crude supplies. OPEC’s move was greeted by a sell-off. The day’s volumes of 1.1 million contracts of WTI were the highest since the Nov. 30 session, when OPEC first announced cuts.

The global crude glut has persisted even after OPEC agreed to cut production in the first half of the year. Futures markets activity shows a reduced expectation for the market to balance.

Saudi Arabia’s energy minister, Khalid al-Falih, said fellow ministers did not see a need to reduce oil output further. “We considered various scenarios, from six to nine to 12 months, and we even considered options for a higher cut. But all indications discovered that a nine-month extension is the optimum,” he said. The cartel next meets in November.

Oil at $50 a barrel has encouraged more of our domestic shale output, since production costs are down from a few years ago. That has had a growing effect on global supplies.

U.S. oil production is up more than 10 percent since mid-2016 to more than 9.3 million bpd. Rising domestic. production could completely replace OPEC’s output cuts of 1.2 million bpd by year-end, according to RBN Energy.


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