Big Banks Come To The Fore After Fed Stress Test As The Market Climbs

As the week winds down, stocks find themselves coming off the biggest daily S&P 500 (SPX) gain since late April and the third-best one-day rally of the year. The question is whether the market can sustain that momentum with volume likely to tick lower ahead of the holiday.

The financial sector delivered the entire market a nice little tailwind Wednesday when the Fed gave the 34 largest banks permission to use extra cash for dividends and buybacks. It’s the first time since the financial crisis that the Fed has cleared all the big banks’ capital plans. These banks have passed the second part of the Fed’s annual stress test, meaning the Fed is confident they have the proper risk management procedures and healthy capital in place. The financial sector rose 1.6% Wednesday, and strength in U.S. banks appeared to translate into positive action early Thursday in Asian markets, though Europe put in a mixed performance.

The earnings picture has gotten a bit more active this week, though the main season is still a few weeks away. Nike Inc NKE reports after the close (see below), and this morning saw Walgreens Boots Alliance WBA beat Wall Street analysts’ earnings and sales estimates over its fiscal second quarter. The pharmaceutical chain earned an adjusted $1.33 a share, 3 cents higher than consensus. Sales of $30.1 billion exceeded estimates of $29.7 billion. 

WBA also canceled a proposed merger agreement with Rite Aid Corporation RAD but announced a new deal to buy more than 2,000 Rite Aid stores for $5.175 billion. With the change in presidential administrations, WBA found itself caught between shifting regulatory standards, and it might have seemed easier for the company to buy the stores rather than attempt a merger.

A third factor today could be the government’s final estimate for Q1 gross domestic product (GDP), which rose to 1.4%, from the previous 1.2%. The climb isn’t too dramatic, so it’s unlikely to have a big impact on today’s trading, but it does look like a step in the right direction even if the actual figure is pretty tepid. Additionally, the government’s estimates rose each time out. The Atlanta Fed’s GDP Now indicator stands at 2.9% for Q2.

U.S. bond yields moved up a tad early Thursday, with the 10-year yield pushing above 2.22%. Across the Atlantic, the euro jumped to its highest level since last summer vs. the dollar despite the European Central Bank (ECB) saying Wednesday that ECB President Mario Draghi’s Tuesday comments — which the news media had painted as hawkish and possibly favoring a pullback on stimulus — were misinterpreted.

The crunch in oil prices that took front-month U.S. futures down to 10-month lows earlier this month seems to be letting up a little, with oil now on a steady upswing and climbing back above $45 a barrel. Stockpiles data from the U.S. government gave oil futures a boost Wednesday, as gasoline stocks fell more than analysts had expected. Oil supplies rose, however, and remain bloated. Even at current price levels, oil remains relatively cheap, and a lot of this week’s rally appears to reflect short covering and some bargain hunting.

Watch for possible drops in volume later today and Friday as people start preparing for the holiday. Some of the rally yesterday could be holiday-related as well, as sometimes the market posts rallies heading into holidays.

FIGURE 1: SOFT DOLLAR The U.S. dollar continued its slide against a basket of foreign currencies, including the British pound and the euro, which rose to an 11-month high on positive comments from ECB president Mario Draghi. The greenback index is down about 7 1/2% since the start of 2017. Data source: Intercontinental Exchange. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Nike Time

Nike (NKE) is scheduled to trot out its Q4 earnings after the close today, and the conference call could be worth listening to for investors to get a better sense of the company’s future distribution system and its partnership with Amazon (AMZN). Just a couple weeks ago, NKE introduced a new company alignment called the Consumer Direct Offense, which it hopes will allow it to “better serve the consumer personally, at scale.” As part of the restructuring, NKE announced it will cut 2% of its global workforce (1,000 jobs), reduce the styles it offers by 25%, and make other changes with the goal of improving innovation, speed to market and its direct connection to consumers.

Many companies in the consumer discretionary sector have had similar focuses as consumers increasingly shop online, and companies work to figure out an optimal omni-channel strategy. NKE is expected to report earnings of $0.49 per share on revenue of $8.6 billion, according to third-party analyst consensus estimates. Comparing that to the same period a year ago, revenue is forecasted to grow 4.5% while earnings remain flat.   

Inflation Back in Focus

Friday morning puts a key inflation metric on the table —the PCE Price Index for May. This is one the Fed is said to watch pretty closely, and in April, the year-over-year reading retreated to 1.7% from 1.9% in March, placing it well under the Fed’s 2% inflation target. The question going into Friday is whether this inflation slowdown was temporary or more prolonged. The Personal Income component of the report is also worth a look, because last time out it showed a pretty solid increase in wages and salaries. It could be interesting to see if the low unemployment rate is starting to drive wages upward at a steadier pace.

Once the PCE data hits, remember to check the market’s estimates for future rate hikes to see if there’s an impact. As of Thursday morning, the futures market predicted about a 57% chance of another hike by the end of the year. The Fed’s June meeting minutes, due next Wednesday, could give investors a better sense of the Fed’s balance sheet plans.

Data Dump Ahead of Weekend

The host of data Friday also includes Chicago PMI and Michigan sentiment. Consumer confidence released earlier this week remained near decade highs, so we’ll see if the Michigan sentiment number bounced back after an initial June reading showed weakness compared with previous months. Chicago PMI reached two-year highs last time out at 58.3, with new orders especially strong. In all, these data should provide investors plenty to think over as they enjoy their pre-July 4 weekend cookouts.