Markets Hug Flat Line In Early Going As Investors Digest Earnings, Economic Data

The markets looked slow in the early going with little movement in either direction as investors digest earnings and economic data coming out throughout the session.

This also could be another big week of tax bill discussions, which might lead to volatility in the markets. Both the House and the Senate continue to make some tough decisions about their differing frameworks as they cobble out a final bill to put toward a vote. Lawmakers say they are aiming to get the structure in place before Thanksgiving.

The Producer Price Index (PPI), out earlier today, stood at a 0.4% rise, higher than Wall Street’s expectations at 0.2% increase in the core PPI, according to the Commerce Department. The core PPI excludes food and energy prices, which tend to be more volatile, and the Federal Reserve considers it a better gauge of longer-term inflationary pressure.

Also out this morning were Q3 earnings from Home Depot Inc HD. As Wall Street analysts predicted, HD outpaced profit and sales estimates, and raised its full-year forecasts. Hurricanes Harvey and Irma helped, boosting same-store sales by $282 million, as did other disasters such as the wildfires in the west and earthquakes in Mexico, HD said. Home-improvement retailers typically ring up robust pre- and post-emergency storm-related sales. However, margins tend to get squeezed because of higher costs, and HD said its operating profit got hit by about $51 million from hurricane-related expenses.

Shares advanced immediately after the announcement, but shifted gears to move marginally to the downside. There’s likely to be more clarity on the forecast after the earnings call.

Speaking of earnings, more than 65% of the companies that already have reported quarterly results have outpaced Wall Street’s expectations. That’s higher than the norm, which is about 56% beating projections.

In the early going, the three major benchmarks were treading slightly to the downside. Yesterday, the Dow Jones Industrials ($DJI) and the S&P 500 (SPX) recovered after a pullback at the open and managed to avoid their third straight session of losses, but just barely. Both hugged the flat line throughout most of the day, as did the Nasdaq Composite (COMP). When the session settled, all three benchmarks were up by 0.10% or less. Today’s session might be more of the same, judging by the flat trading early on. But there’s still plenty of day ahead, so stay tuned.

Yesterday, General Electric Company GE stock took another hit after the blue chip chopped its dividend in half to $0.12 a share—a widely anticipated move but probably still jarring to investors who depend on the dividend as income. This apparently is part of a turnaround the company has been talking about since August, when John Flannery became its new chief executive. GE said it is also laying off 25% of its corporate headquarters staff and cutting costs by as much as $400 million.

Calling next year a “reset” year, GE guided 2018 earnings down to $1.00 to $1.07 a share. This is the second time since the Recession that GE has been forced to shave its dividend because it wasn’t making enough money to cover it, and only the third time in the company’s 125-year run. It’s also one of the biggest dividend cuts in the history of the SPX, according to Dow Jones Indices.

In a presentation to investors about its transition, GE said it will unload about $20 billion worth of businesses in the next couple years. Likely on the chopping block are its transportation business, which makes locomotives and rail equipment, as well as its iconic light bulb business, some analysts said, as GE has chosen to focus on aviation, power and health-care technology.  

Shares finished at $19.02 down 7%, touching their lowest level in five years. GE stock has been the worst performer on the Dow, falling more than 25% over the last three months and down about 40% on a year-to-date basis. In pre-market trading, shares were flat.

It might be worth noting here that although GE was the talk of the day, the indexes managed to fight the negativity to end to the upside Monday. Shares of McDonald’s Corporation MCD and Procter & Gamble Co PG advanced about 1%.

Elsewhere, Treasury notes pared earlier declines after the PPI was announced, with the 10-year at 2.393%, still below the 2.4% resistance level. Yields continued to narrow, with the two-year at 1.683%. Yields move in opposite directions of their prices. When yield curves flatten it reflects the little difference between the rates for short-term and long-term bonds.

Meanwhile, the Volatility Index (VIX), Wall Street’s so-called fear gauge that tracks 30-day options on the SPX as a measure of expectations of market instability, climbed to 11.5, still a relatively low level historically, and edged up early today.

Crude oil prices lost their upward mojo and mostly stayed flat with Brent still above $63 a barrel and West Texas Intermediate crude also in the $56 a barrel range. Prices were little moved in the early going.

FIGURE 1: GE CUTS DIVIDEND. General Electric (GE) shares tumbled to a five-year low yesterday after the industrial giant chopped its dividend in half amid a sweeping turnaround. GE shares have been the worst Dow performer this year, off some 40% on the year. Data source: CME Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Deficit Widens

The federal government welcomed in a new fiscal year with a sharply higher deficit than it did a year ago, according to the U.S. Treasury Department. The October deficit was $63.2 billion, up 37.9% over the year-ago deficit as government spending expanded. At least some of the higher spending was attributed to hurricane relief.

The October number, released yesterday, prompted economists to revise their expectations of a full-year deficit. Wells Fargo is projecting a fiscal-year 2018 deficit of $750 billion and a 2019 deficit of $900 billion; JPMorgan Chase & Co JPM sees it at $675 billion in 2018 and $909 billion in 2019. The bigger 2019 estimates include money to cover expected tax cuts.

Speaking of Tax Cuts

Don’t cut mine, say 400 American millionaires and billionaires, according to the Washington Post. These wealthy people are sending a letter to Congress this week urging Republican lawmakers not to put a knife to their taxes, the paper reported.

“We urge you to oppose any legislation that further exacerbates inequality,” according to the letter on the Responsible Wealth site. “Tax reform should be, at a minimum, revenue neutral—without using gimmicks like dynamic scoring. We are deeply concerned that revenue loss would lead to deep cuts in critical services such as education, Medicare and Medicaid, and would hamper our nation’s ability to restore investments in our people and communities.” Stay tuned to this one.

On the Fed Beat

We now know who the new Federal Reserve Chair will be (Jay Powell), but last week’s announcement that Federal Reserve Bank of New York President William Dudley will retire next year will leave open what Wall Street widely considers the second-most important Fed Reserve job. Besides overseeing supervision of the big money center New York banks, the New York Fed president serves as vice chair of the Federal Open Markets Committee.

The Fed has been under increased scrutiny to better diversify its presidents, according to CNBC. Of the 135 regional bank presidents in the Fed’s history, only six have been women and three have been nonwhites. The New York Fed said yesterday that it has hired two separate firms to conduct a six- to nine-month search for a candidate. Separately, starting today, there are seven Fed speeches on the dockets this week. Fed Chair Janet Yellen is at a European Central Bank conference in Frankfurt.

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