The Dow declined over a relatively subdued holiday shortened week. Initially investors remained watchful ahead of the release of crucial economic data. Oil prices also continued to dampen sentiment as investors weighed the possible impact of an upcoming rate hike. Better-than-expected economic data helped the index to stage a turnaround on the penultimate day of the trading week. The Dow has lost 0.6% over the first three trading days of the week.
Last Week’s Performance
The index increased 0.3% on Friday after Fed Chair Janet Yellen’s comments at an awards ceremony at Harvard University raised rate hike chances. Yellen said "it's appropriate” to increase interest rates “gradually and cautiously” in the near future. She also said that “such a move,” possibly over the “coming months,” might be “appropriate." Increasing rate hike chances boosted financial stocks, which had a broader positive impact on key U.S. indexes.
The “second” estimate by the Bureau of Economic Analysis showed that first-quarter output of goods and services increased at an annual rate of 0.8%, lower than the consensus estimate of a 0.9% increase. However, first-quarter GDP data was revised upward from the previously estimated 0.5% rise.
The Dow gained 2.1% over the week, its best weekly increase since Mar 18. Investors were coming to terms with a possible rate hike in June following speculations that such a move may indicate steady economic growth. Rising rate hike chances boosted financial stocks and eventually had a broad-based positive impact on tech stocks.
Moreover, oil prices crossed the $50 a barrel mark during the week, which also pushed the key U.S. indexes upward. Baker Hughes Inc. BHI reported a decline in the U.S. rig count from 318 to 316 for the week ending May 27. Recent production disruptions in Libya, Canada and Nigeria and decline in U.S. commercial crude inventories and rig count also helped the price move upward.
Economic reports were also encouraging with new home sales posting its highest monthly percentage rise in 24 years. Also, pending Home Sales Index, durable orders and mortgage application volume increased while initial claims decreased.
The Dow This Week
Markets were closed on Monday for the Memorial Day holiday. The index lost 0.5% on Tuesday after investors adopted a cautious stance ahead of the release of major economic reports. Additionally, favorable housing and consumer spending data raised chances of a sooner-than-expected rate hike. Personal spending increased 1% in April, registering its highest percentage rise in nearly seven years and was higher than the consensus estimate of 0.7% rise.
Further, the U.S. Department of Commerce reported that the personal consumption expenditure price index (PCE) rose 0.6% in April, in contrast to March’s decrease of 0.1%
Decline in oil prices also had a negative impact on investor sentiment. Oil prices declined following comments from UAE Oil Minister Suhail bin Mohammed al-Mazroui and a stronger dollar. Al-Mazroui said that UAE is “optimistic” regarding the oil markets and “are seeing that the market is correcting upward.” His comments reduced possibilities of a production freeze.
The Dow gained 0.1% for the month of May, posting its fourth consecutive monthly increase. Meanwhile, FOMC’s minutes, higher-than-expected economic data and Fed officials’ comments boosted June rate hike chances, which weighed on investor sentiment.
However, immediate rate increase possibilities pushed financial stocks upward and eventually had a broad-based positive impact on markets. Oil prices rose in May, registering four straight monthly increases following multiple disruptions in global crude production.
The index gained marginally on Wednesday despite lackluster global manufacturing reports, following a late recovery in oil prices and higher-than-expected U.S. manufacturing data. As per Markit Caixin data, China’s manufacturing PMI declined from 49.4 in April to 49.2 in May. Also, Markit reported that manufacturing PMI of the Euro zone fell from 51.7 in April to 51.5 last month.
Oil prices curtailed most of their losses on reports that OPEC members are most likely to discuss capping crude production in a meeting to be held at Vienna. Moreover, the ISM manufacturing index increased from 50.8% in April to 51.3% in May, higher than the consensus estimate of 50.5%.
The index increased 0.3% on Thursday following encouraging U.S. private sector jobs data and gains in healthcare stocks. A report from Automatic Data Processing, Inc. ADP revealed that private sector employers added 173,000 jobs in May, which was higher than April’s readings. Also, job additions for April were revised up by 10,000 to 166,000.
Initial claims decreased 1,000 to 267,000 in the week ending May 28, posting the third straight weekly fall. The metric also remained below 300,000 for 65 consecutive weeks, its longest stretch since 1973. Also, the 4-week moving average came in at 276,750 last week, lower than 278,500 reported for the week ending May 21.
Earlier in the day, oil prices declined after OPEC members failed to come to any agreement regarding a crude production freeze in yesterday’s meeting in Vienna, which weighed on the energy sector.
However, oil prices made a late recovery to end in positive territory after the U.S. Energy Information Administration (EIA) reported that U.S. commercial crude oil inventories fell 1.4 million barrels to 535.7 million for the week ended May 27. This was in contrast to an increase of 2.4 million barrels reported by the American Petroleum Institute (API) a day earlier.
Components Moving the Index
The Boeing Co.’s BA business unit, Boeing Defense Space and Security, has won a fixed-price modification contract, worth $3.2 billion, from the U.S. Air Force to develop guidance systems for the Joint Direct Attack Munition (“JDAM”). Contracting activity is the Air Force Life Cycle Management Center, Hill Air Force Base, UT.
Per the contract, Boeing will provide “strap-on” inertial guidance kits that can gather guidance updates via Global Positioning System to enhance weapon precision for conventional inventory bombs of JDAM.
The contract covers foreign military sales. The deal was initially awarded on Oct 30, 2014, and had a value of $1.7 billion. Thereafter, it was increased by another $1.4 billion to account for the demand for warfighters and restocking depleted inventories.
Work is scheduled to be complete by Sep 29, 2020 and will be executed in St. Louis, MO. The contract will use fiscal 2015 and 2016 ammunition funds, and 2016 operations and maintenance funds.
Chevron Corporation CVX, one of the largest integrated energy companies in the world, is planning to divest its Thailand-based Arthit gas field stake valued at $500 million, going by Bloomberg. This reflects the company’s intention to sell some Asian properties as the business scenario has not been in favor due to the prolonged weakness in crude.
Per the report, Chevron might sell its 16% interest in the Arthit field to PTT Exploration & Production Pcl of Thailand. It is to be noted that PTT Exploration & Production is the operator of the field with an 80% interest. Other Asian properties that Chevron is willing to divest include an oil and natural gas field in Indonesia. The report also stated that the integrated player is planning to sell geothermal assets in Asia that could fetch the company almost $3 billion.
JPMorgan Chase & Co. JPM expects to see a mid-teens percentage increase in trading revenue in second-quarter 2016 compared with a weak year-ago period, as disclosed by Daniel Pinto, Chief Executive Officer of the Corporate & Investment Bank at JPMorgan.
According to Pinto, market activity was weak in the first two months of 2016. However, there was a lift in market activity in March and higher fixed-income client activity continued in the subsequent months. This is expected to result in improved trading revenue in the second quarter.
Microsoft Corporation MSFT announced a deal with Xiaomi on Wednesday per which it will sell 1,500 of its patents to the Chinese smartphone maker. As a part of this deal, Xiaomi will install Office, Skype and other Microsoft software on its phones and tablets. The financial terms of the deal are yet to be disclosed.
The deal is important for Xiaomi as it will now ease out its efforts toward acquiring intellectual property required to sell devices outside China. Weak patent protection was hampering Xiaomi’s efforts to expand beyond China. Xiaomi phone shipments reportedly dropped 9% in the first quarter in China while its market share was down to 12% from 13%.
Verizon Communications Inc. VZ has entered into a tentative deal with two workers’ unions whose members went to strike from Apr 13, 2016. Verizon and the striking unions, The Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW), have almost resolved their differences and nearly 36,500 workers in the company’s wireline and cable TV (FiOS Internet and TV) segment have resumed work from Jun 1, 2016. Union members will vote on the tentative contract by Jun 17.
Under the new contract, Verizon will provide a 10.9% pay rise to its unionized workers over a period of four years, a small increment in pension benefit and a promise to create nearly 1,400 new union jobs. This will include around 1,300 new call center jobs and about 70 wireless retail store employees. Importantly, the company agreed to reduce subcontracting and withdrew a proposal to relocate employees for extended periods. These were the main issues of the strike.
UnitedHealth Group Inc. UNH is calling it quits in the public exchange business in California, which is one of the key markets. The decision was prompted by continued deterioration in the company’s individual exchange business in that market.
This development comes after UnitedHealth’s recent announcement that it will exit unprofitable markets next year. The company will stop offering individual insurance coverage in most of the 34 states it currently operates in order to stem the losses.
Performance of the Top 10 Dow Companies
The table given below shows the price movements of the 10 largest components of the Dow, which is a price weighted index, over the last five days and during the last six months. Over the last five trading days, the Dow has lost 0.2%.
|
Ticker |
Last 5 Day’s Performance |
6-Month Performance |
|
MMM |
-1.3% |
+8.9% |
|
GS |
-1.7% |
-14% |
|
IBM |
+1.5% |
+10.5% |
|
HD |
-0.4% |
+1.1% |
|
BA |
-1.8% |
-12.9% |
|
UNH |
+1.7% |
+18.3% |
|
MCD |
-1.7% |
+6.9% |
|
TRV |
+1.2% |
+3.2% |
|
JNJ |
+0.6% |
+13.6% |
|
AAPL |
+2.4% |
-15.2% |
Next Week’s Outlook
Data from ADP as well as initial claims numbers show that the job market continues to exhibit strength. Other economic reports released recently were also encouraging in nature. But manufacturing numbers were the most important of these, since it reflects the newfound resilience of a long suffering sector. Next week is relatively bereft of major economic releases. In this event, it is likely that investors’ optimism about rate hikes and the fate of oil prices is likely to guide stocks.
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