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Inflation Vacation: Weaker Price Growth in April Helps Lend Positive Tone

May 9, 2018

(Wednesday Market Open) Inflation apparently took a breather last month, possibly helping set up Wall Street for more strength Wednesday. The Dow Jones Industrial Average ($DJI) has risen three sessions in a row amid rallies in the financial and energy sectors.

The April producer price index (PPI) rose just 0.1%, below Wall Street analysts’ consensus for a 0.3% rise. Though it’s just one month and consumer prices are due tomorrow, the number could potentially reduce concerns about inflation that have some investors on edge.

Financials might get another boost today after bullish Citigroup (C) news (see below), while energy shares drew more vigor from President Trump’s decision to leave the Iran agreement. Conventional wisdom is that  financials, energy, and info tech all help drive broader rallies. If all three of these sectors start to lead, the market could be set up for a nice little run.

Disney In Spotlight

On the earnings front, Disney (DIS) reported after the close Tuesday and beat Wall Street analysts’ consensus estimates for earnings and revenue driven in part by the success of “Black Panther.” Studio revenue rose more than 20% in the quarter. All of the company’s segments beat revenue estimates, for that matter. Even media and networks, which has been a drag for DIS lately, did a little better than expected.

The DIS earnings came after media reports that Comcast (CMCSA) is trying to put the money together for an all-cash bid for assets 21st Century Fox (FOXA) has agreed to sell to Disney. DIS stock fell slightly in pre-market futures trading, maybe because some people are a bit anxious about the CMCSA bid. Some of those assets include the Star Wars films and the Titanic movie. After the close today come earnings from FOXA, so we’ll see if executives there add perspective.

Other than FOXA, major earnings are a little sparse today, but Nvidia (NVDA) reports tomorrow. In place of big company results, investors might have an eye Wednesday on the weekly U.S. oil stockpiles report, which has taken on more significance in the wake of yesterday’s decision by President Trump to leave the Iran nuclear agreement.

$70 Crude and 3% 10-Year Rate: Two Lines in the Sand

As many analysts and investors expected, President Trump’s Iran decision dominated market news Tuesday, with Trump announcing at mid-afternoon that the U.S. would exit the nuclear agreement struck between the countries in 2015. Crude oil was in the spotlight, having fallen earlier in the day on talk the U.S. might stay in the deal. When the actual news came, crude oil — along with many energy stocks — spun an impressive comeback. Crude scrambled back above $70 a barrel, which remains a key psychological level. The question is whether it can stay there. 

In fact, $70 and 3% are the two numbers that might continue to keep people on their toes. The 10-year yield has toyed with 3% for a couple of weeks, and oil has traded above and below $70. If both levels get eclipsed, that might help re-ignite inflation concerns that weighed on the market earlier this year. The 10-year yield sat right at 3% early Wednesday, so we’ll see if that starts making anyone nervous.

Sector Snapshot: Energy, Infotech, Financials Up; Defensive Sectors Lag

The energy sector could be one beneficiary of the administration’s Iran decision, with many firms getting a lift Tuesday as it became apparent the U.S. would withdraw. The interesting thing here is that the latest TD Ameritrade Investor Movement Index® showed that TD Ameritrade investors were net sellers of energy shares in the most recent period. That might have been a case of some investors paring their risk in this sector.

Speaking of paring risk, it looks like some of the defensive sectors are getting passed over this week. The biggest losers Tuesday were utilities and telecom. That, along with a flare-up of strength in the financials and info tech, appear to show investors getting a bit more comfortable with risk than they were over the last month when caution was the watchword. It’s a little too soon, however, to say that things have really turned around, and the S&P 500 Index (SPX) did finish slightly lower Tuesday.

Looking at other sectors so far this week, financials were kind of a pleasant surprise for anyone who had waited for this sluggish part of the market to find some traction. Citigroup (C) had a particularly strong day Tuesday after ValueAct, an activist investor, announced it was taking a $1.2 billion stake in the company. Shares of C rose more than 3%, and the entire financial sector seemed to get a corresponding lift. It appeared to be a case of one stock lifting a sector, and it also raised the question whether this news about C might be the tip of the iceberg in terms of the financial sector attracting institutional investors. That could definitely be something investors might be watching going forward as the financial sector continues to languish slightly.

As financials have sagged this year, we’ve seen Goldman Sachs (GS) and some other big banks show their nimbleness in moving with the times. GS, for instance, has made its cryptocurrencies desk larger but pared back its equities desk considerably. With algorithms and automation, banks' trading desks can often cover the spectrum with fewer traders.

In other sectors, there could be more fallout from the Iran deal news. For instance, the Associated Press reported Treasury Secretary Steven Mnuchin saying that Boeing's (BA) licenses to sell billions of dollars in commercial jets to Iran will be revoked.

Dollar Index


The U.S. dollar index (candlestick) keeps on gaining and posted new highs for the year Tuesday. Meanwhile, crude (purple line), which often sinks when the greenback rises, is keeping up its strong pace as well. It appears oil’s fundamental issues including the Iran deal and Venezuelan supplies might be trumping the traditional oil/dollar relationship, for the moment. Data source: ICE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Greenback Gets Greener: The dollar continued its feverish ascent early this week, hitting new highs for the year as the dollar index climbed above 93 on Tuesday. Remember it fell below 89 earlier in 2018 after spending some time above 100 in early 2017. It’s possible that strength in the dollar — partly a function of growing concerns about possible economic softness in Europe — is one factor keeping gold and crude oil from making big gains over the last few days. A strong dollar can sometimes weigh on gold prices, and gold just hasn’t had much traction lately. That also might be a function of falling volatility that signals less fear in the market, and the fact that investors often gravitate toward gold when geopolitical fears are high. One interesting thing Barron’s pointed out is how unusual it is to see the dollar moving higher at the same time as oil. Typically they move opposite one another. However, recent bullish oil supply news out of Venezuela, along with the evolving Iran deal situation, probably means oil is less tied to the dollar now than it normally might be.

Gas Pains for CPI?: The monthly government inflation reports are a two-headed monster. Today we got the producer price index (PPI) and tomorrow brings the consumer price index (CPI), both of which could be closely watched by investors sniffing for any signs of price pressure in the economy. Consensus among analysts is for a 0.3% CPI rise in April, according to That compares with a decline of 0.1% in March. However, in tomorrow’s report, it’s arguably more important than usual to watch the core number, which strips out energy and food. That’s because energy prices probably rose pretty sharply in April as gasoline hit $3 a gallon across much of the country. Also, investors might be keeping an eye on year-over-year CPI, which rose 2.4% in March. That’s above the Fed’s 2% inflation target. Any big move higher might have some investors thinking about the possibility of four rate hikes this year instead of three.

Checking for the Fed’s Next Move It could be interesting to compare rate hike expectations measured by the futures market now and in a couple of days after the inflation data get absorbed. Going into the PPI report, CME Fed funds futures showed a 100% chance of a rate hike by the middle of June. It’s a bit unusual to see 100% odds a month ahead of the next Fed meeting, but it does give a sense about how confident investors are in their forecast and how well the Fed has foreshadowed its next move. Odds of the next hike by September are also pretty high at around 80%, while chances of a fourth hike by the end of the year stand at about 45%. That’s up a touch from where the odds were after last Friday’s jobs report. The question is whether it’s going to move up toward recent highs near 50% after the inflation numbers or back toward recent lows near 40%.

Good Trading,

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