ECB Rate Decision, June 9, 2017

/in /by

How to trade ECB Rate Decision—cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. Start your free two-week trial today. 

The ECB Decision left rates unchanged, and made no changes to the QE program, as expected.

ecb rate decision

ECB Rate Decision Takeaway

The ECB met expectations Thursday, as they changed the risk assessment to “balanced,” and also removed the potential for lower interest rates going forward.

Overall, it was an anticlimactic meeting as the committee took another step towards the eventual end of QE, but gave no indication that the end of QE or rate hikes would occur sooner than was currently expected. As a result, the market largely yawned at the decision.

The euro dipped slightly on the news, despite it being a technical “hawkish” shift, and that’s because this result was already priced into the euro above 1.12. Thus, we saw a classic sell-the-news reaction.

Going forward, with the euro at current levels, whether the rally continues will depend more on US and EU economic data than anything else, as central bank policies for both the Fed and ECB are well known (the Fed should hike next week, and stick to the current guidance of three hikes for 2017).

From a bond standpoint, German bund yields dipped slightly following the statement, again a sell-the-news reaction. However, Treasury yields bounced slightly, mainly due to how short-term oversold they are. Bottom line, the ECB interest rate decision did not provide any sur-prises, and it will not cause Treasury yields to embark on a rally. Whether yields can rally from here will depend on economic data.

From an equity standpoint, I do not view this decision as negative for European stocks, and I remain bullish on European stocks via HEDJ and EZU. It’ll take a material uptick in US economic data for the euro to begin to weaken materially vs. the dollar over the next few months, but even if that doesn’t happen, the positive economic growth and continued QE should continue to put a tailwind behind EU stocks.

UK General Elections — What the Outcome Could Mean for US Markets, June 8, 2017

/in /by

The focus on this event is magnified because of Brexit, but the bottom line is that it’s unlikely to move global markets. Still, I wanted to provide a basic primer so no one is blindsided if there is election-inspired volatility.

Today’s election will be for the House of Commons. Polls and most betting sites have the Conservatives (the Tories) holding an outright majority over the second-largest party, Labour.

Positive If: Conservatives increase their majority. Magic number: 330 seats. If the Conservatives win more than 330 seats, their majority should expand and it will give the Conservatives a clear mandate on Brexit negotiations, and on economic and monetary policy. Since markets like continuity, this is likely the most positive outcome for stocks near term (although to be clear, I don’t expect a big Tory victory to cause a legit global rally).

Neutral If: Conservatives hold an outright majority. Magic number: 325 seats (technically they need about 322 seats, as most people expect five seats in Parliament to remain vacant as they will be won by Sinn Féin in Northern Ireland, and they don’t exactly like to participate in British rule). This would be a step backwards, and make negotiating Brexit and implementing post-Brexit policy more difficult (but it wouldn’t be a bearish game changer for UK stocks).

Negative If: The Conservatives can’t secure an outright majority. Magic number: <322. This outcome would lead to a very weak majority government from either the Conservatives or Labour, and it would not be positive near term as there would be no mandate for Brexit negotiations or the implementation of economic policy. In this outcome (which is a low probability), the pound would likely get hit hard, as would UK stocks, although I don’t expect that it would be a global headwind beyond the very short term.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. Start your free two-week trial of The Sevens Report today.

Why Bond Yields Are Important (A Plain-English Primer), June 7, 2017

/in /by

For more than two months, I’ve been talking about the increasingly concerning macro signals being sent by the bond market. During that time, stocks have traded great, hitting new highs amidst minimal volatility.

So, it’s logical to ask why I and many other analysts continue to point out these signs of non-confirmation of the rally from the bond market. After all, it hasn’t caused a problem in stocks, yet. But, I guarantee it will cause a problem (and potentially a painful one) if bond yields keep falling… it’s just a question of when.

Given that, I wanted to take a moment and explain more fully, and in plain English, why I’m watching the bond market so closely, and exactly what the bond market is saying about future economic growth and inflation.

First, I watch the bond market because it’s a better predictor of future 1) economic growth, 2) inflation, and 3) interest rate levels, compared to stocks or most economists estimates. Case in point, the bond market told us the financial crisis was coming when the yield curve inverted over a year before the turmoil, and well before Fed Chair Bernanke said subprime was “well contained.”

The joke is that bonds are more accurate because the smartest people on Wall Street always end up on the fixed-income desks (it’s why we call it the “smart market”). And while that may be true (and I can say that as I was an equities guy), in reality bonds are better forecasters of these variables because A) The bond market is much larger and more liquid then the stock market, and B) Stock prices, at their core, are just discounted estimates of corporate cash flows, and there are a lot of variables that go into those future cash flows that are very company specific.

Conversely, in the bond market, everything trades off a spread to Treasuries, and Treasuries price off expectations for 1) growth, 2) inflation and 3) future interest rate levels. Point being, there are less variables in the bond market, and the market is more liquid. That equals more efficiency.

Right now, that more efficient market is screaming that future economic growth and inflation will be disappointing, and that the Fed is going to hike rates, regardless.

The disappointing economic growth and inflation can be extrapolated from the decline in the 10- and 30-year Treasury yields. They fall because markets expect lower longer-term economic growth and inflation, which equates to a lower rise in interest rates over the longer term. After a brief bump in late ’16, the 10- and 30-year yields are telling us that the slow-growth economy is here to stay (so around 2% GDP growth).

However, in the short term, 2-Year Treasury yields are the best bond proxy for bond market expectations for the Fed funds rate, and that keeps rising (the 2-Year Treasury yield has risen from 1.2% to 1.32%). So, what the long end of the curve is saying is that rates may not go as high as we thought at the start of 2017 because of poor growth and low inflation. However, the short end of the curve (2-year yields) are saying that right now, the Fed will continue to hike rates.

More specifically, maybe Fed funds will be 1.5% in a year (so 2-year yields rise) but it’ll only get to 3% over the next four years (so 10- and 30-year rates fall). I’m making those numbers up, but you get the point.

Why does this matter to stocks? Because the short term aside, neither you nor I want to be overweight stocks at 18X earnings in a slow-growth and rising rate environment.

Think of it this way: From 2015 to 2016, earnings growth was flat and stocks went nowhere and volatility was high. Then, last year, earnings growth started to be revised higher, and stocks have rallied.

If the bond market is right about economic growth prospects and interest rate hikes, then that will hit expected earnings growth, and stocks will fall.

From a “how to play it” standpoint, the blueprint is clear. Defensive, higher-yielding equities like consumer staples (XLP) and utilities (XLU) (two of the best-performing sectors in 2017). Additionally, international exposure (Europe via HEDJ, EUZ) and emerging markets (IEMG).

Conversely, this set up will be very bad for banks, and the current selling is just the beginning if yields correctly forecast slowing growth. Finally, while they’ve held up well, it’s unlikely tech will be able to continue to rally longer term.

Bottom line, the signals in the bond market are important because they are telling us lower growth and inflation are coming, but with higher interest rates. That is a very bad set up for stocks at such stretched valuations, and that’s why we’re watching the bond market so closely.

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if The Sevens Report is right for you.

Three Momentum Indicators to Watch, June 6, 2017

/in /by

The Sevens Report is everything you need to know about the market, in your inbox by 7am each morning in seven minutes or less. Sign up for your free, no obligation, two-week trial today.

In Monday’s Sevens Report, we talked about how momentum, more so than anything else, is driving this rally in stocks. And while momentum is clearly a powerful force, it can also be fickle. When momentum dissipates, there are usually air pockets underneath the market (see August 2015).

The trick to outperforming, then, is knowing when momentum is waning, and we want to identify three momentum indicators we’re watching to stay ahead of that move. Those momentum indicators are: Two tech sub-sectors (FDN and SOXX), the NYSE Advance/ Decline Line, and Market Sentiment.

Momentum Indicator #1: Sentiment Indicators.

Starting with the latter, it’s important to realize that momentum and sentiment, while related, are different. Momentum refers to a state of market psychology where higher prices themselves become the biggest bullish force, as underinvested people and portfolio managers chase stocks higher and aggressively buy any dip out of fear of underperforming. Unlike sentiment, strong momentum is not, by itself, a contrarian indicator (like overly bullish or bearish sentiment indicators).

That said, in today’s market, a very bullish sentiment indicator could be a sign of an impending loss of momentum, as the bullish reading implies that everyone is “all in” on stocks, leaving a lack of capital on the sidelines that can “chase” stocks higher.

Right now, despite new highs in stocks, there are few signs that sentiment is near the highs. In fact, sentiment remains remarkably depressed for how strong the market has been in 2017.

The AAII Investors Sentiment Survey showed just 26.9% bulls vs. the historical average of 38.5%. The TMI Group Market Sentiment Index revealed just 49.8% bulls (the scale goes to 100) while the Citi Panic/Euphoria Model remains comfortably in “Neutral” range.

Point being, if bullish sentiment is a sign of an impending loss of momentum in stocks, we’ve got a long way to go.

Momentum Indicator #2: FDN & SOXX.

One of the reasons I look at sector trading every single day is because every rally is driven by a few sectors, or what I and others call “leadership” sectors. When these leadership sectors falter, that usually implies an impending loss of momentum.

Since late 2016, semiconductors have been the biggest leadership sector in the markets. They rallied big during the Q4 ’16 rally, and they are up big so far in 2017 (SOXX up 22%). While other sector leadership shifted from late ’16 to ’17 (banks and small caps to utilities, consumer staples and super-cap internet) semiconductors have continued to scream higher.

Similarly, as I and others have noted, nearly half of the 2017 S&P 500 rally can be attributed to just a few stocks: AAPL, AMZN, MSFT, FB, GOOGL. Those stocks are heavily weighted in the super-cap internet ETF FDN, and as such, that is also a leadership sector in 2017.

So, these are two important sectors to watch as any possible breakdown will imply a loss of momentum. It happened in the spring of ’14 when the then leadership sector biotech broke down and caused a pullback. It also happened before the pullback in August ’15 when the “FANG” stocks (leaders at the time) topped out in July— a month before the stock market fell.

Right now, the uptrends in FDN and SOXX are in good shape, but we will be looking for a violation of those uptrends as a clue the market may be about to lose momentum.

Momentum Indicator #3: NYSE Advance/Decline Line.

I’m not a huge fan of multiple measures of market breadth, but I do watch the advance/decline line, as it gives insight into buyer enthusiasm (i.e. the level of momentum). And, it has been an accurate leading indicator in these types of markets (the A/D Line topped out in April 2015, a month before the market topped in May).

Right now, the A/D line just hit a new high. But, once again, we’re looking for any signs of a trend break as a sign that momentum is waning.

Bottom Line

You’ll never hear me say that fundamentals don’t matter, because they do over the medium/longer term, and that’s what most of us are focused on. Yet we’re also judged in the short term by our clients and our competition, so getting both right is important.

Momentum in stocks remains higher still, but getting the break right, before our competition, will be the key to outperforming. With stocks this extended, a sharp, nasty and painful pullback is lurking somewhere out there. We’re focused on making sure you avoid it, and we’ll update you when any of these momentum indicators begin to break down.

Skip the jargon, arcane details and drab statistics from in-house research, and get the simple analysis that will improve your performance with the Sevens Report. Start your free trial today.

Weekly Market Cheat Sheet, June 5, 2017

/in /by

The Sevens Report is the daily markets cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Last Week in Review:

Until Friday’s jobs report, the economic data last week was mildly encouraging, as multiple economic reports showed a mild bounce in activity during May. Unfortunately, that momentum was lost thanks to Friday’s jobs report, which missed estimates on virtually every level.

As we start a new week, the outlook on the economy remains as it’s been for two months. The absolute levels of activity are generally “ok,” but there is a decided lack of positive momentum. And though stocks continue to hit all-time highs, they are now well beyond any sort of fundamental foundation (i.e., this is not the same quality rally we saw in Q4 ’16/Q1 ’17) and that is a growing concern.

From a Fed standpoint, it’s unlikely that Friday’s jobs report will result in no hike at the June 15 meeting, although the issue is a bit more in doubt. Nonetheless, the expectation is still for a 25-basis-point rate hike.

Looking more specifically at last week’s data, the jobs report was the big (negative) surprise. Every measure of the jobs report missed expectations. May job adds were 138k vs. (E) 195k, and the unemployment rate fell to 4.3% vs. (E) 4.4% (but that was because of a 0.2% drop in the labor participation rate). Average hourly wages rose 2.5% vs. (E) 2.6% yoy, and the revisions were negative at -66k.

So, like most recent data, while the absolute level of employment remains “ok” (138k isn’t a bad number) the momentum and direction remain a concern… especially with markets so stretched on a valuation basis.

Looking outside of the jobs report, as mentioned, last week’s data was mildly encouraging. May ISM Manufacturing PMI (54.9 vs. (E) 54.6), May Auto Sales (16.7M vs. (E) 16.9M), and March Core PCE Price Index (0.2% vs. (E) 0.1%) all basically met or slightly beat expectations, implying
initially that there was some bounce back in both inflation and economic growth (which is critical to a continued reflation rally).

Unfortunately, that data was undermined by the jobs report, and as we start June legitimate doubts still linger about whether the economy is starting to lose momentum. Those doubts are not big enough to hit stocks yet, but I’ll remind everyone that stocks had a delayed reaction to the uptick in economic growth during the late summer/early fall of 2016.

This Week’s Preview:

As is typically the case for the week following PMIs and the jobs report, the economic calendar will be mostly quiet except for a few releases this week.

First, today’s global composite PMIs are already out, and the big number of the week domestically will come at 10:00 a.m. via the ISM Non-Manufacturing PMI. Again, given the sour taste the jobs report left at the end of last week (at least from an economic standpoint), a “beat”
here will be welcomed.

Outside of that ISM Non-Manufacturing PMI, the next most important event will be Thursday’s ECB meeting, where the central bank is widely expected to give a mildly hawkish signal by saying that risks to growth and inflation appear “balanced.” In Fed speak, that statement means a rate hike is coming, but in ECB speak it just means that the ECB is beginning to prep the market for tapering of QE, which should begin in early 2018.

Normally, the ECB meeting wouldn’t move US markets, but if the ECB surprises hawkishly or dovishly it will impact Treasury yields, which will improve or make worse the gap between yields and stocks.

Finally, the latest Chinese data comes Thursday night via CPI and PPI. China remains out on the relative macroeconomic back burner, but trends there aren’t encouraging. The May Caixin Manufacturing PMI dropped below 50 for the first time in months, joining a nowgrowing
list of other disappointing economic data.

Meanwhile, the Chinese yuan is starting to experience volatility again, as it has surged in the last few weeks to a multimonth high vs. the dollar (adding a bigger headwind to the Chinese economy). To be clear, China is not a macro risk that warrants caution, yet. However, the trend isn’t going in the right direction, and we will continue to watch that region for you.

 

Get the simple talking points you need to strengthen your client relationships with the Sevens Report. Everything you need to know about the markets delivered to your inbox by 7am each morning, in 7 minutes or less. 

Tom Essaye on “The Bell” Podcast with Charles Nenner of Goldman Sachs and Adam Johnson

/in /by

Bullseye Brief with Charles Nenner, Tom Essaye, Adam Johnson

Thanks to Adam Johnson for having me on his podcast “The Bell” again last week. We talked with Goldman Sachs Strategist Charles Nenner on Cycles, Shorts, and Sunspots. We also talk about the data deluge, incredibly high credit scores, and the very busy week in economic data. Plus, find out who’s shorting Costco… and why? What’s the secret to retail?


Get a free two-week trial of Tom Essaye’s Sevens Report—everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.

Subscribe to The Bell:

Subscribe on iTunes:
http://apple.co/2pxsTIM

Subscribe on Stitcher:
http://bit.ly/2pySjTw

Subscribe on Google Play:
http://bit.ly/2peLMR9

Jobs Report Preview, June 1, 2017

/in /by

For a second-straight month, the risks to tomorrow’s jobs report are balanced. A “Too Hot” number will increase the possibility of more than three rate hikes in 2017 while a “Too Cold” number will fan worries about the pace of economic growth, and the ability of economic growth to push stocks materially higher from current levels.

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if The Sevens Report is right for you with a free two-week trial.

“Goldilocks” Jobs Report Preview:

“Too Hot” Scenario (Potential for More than 3 Rate Hikes in 2017)

 >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase.

A number this hot will guarantee a June rate hike, but more importantly it would likely reignite the debate over whether the Fed will hike more than three times this year. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

“Just Right” Scenario (A June Rate Hike Is Guaranteed, But the Total Number of Expected Hikes for 2017 Remains at Three)

125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase.

This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

< 125k Job Adds.

Given the recent unimpressive economic reports, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Likely Market Reaction: Withheld for Sevens Report subscribers—sign up for your free two-week trial to unlock.

Bottom Line

This jobs report isn’t important because it will materially alter the Fed’s near term outlook (it’d take a massive miss to do take a June hike off the table). Instead, it’s important because if it prints “Too Cold” it could send bonds and bank stocks through their 2017 lows. And while I respect the fact that stocks have been able to withstand that underperformance so far in 2017, I do not think the broad market can withstand material new lows in yields and bank stocks.

The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets.

Weekly Market Cheat Sheet, May 29, 2017

/in /by

The Sevens Report is the daily markets cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Weekly Market Cheat Sheet May 29

Last Week in Review:

Economic data continued to underwhelm last week, and while for now, the lack of strong data isn’t preventing stocks from making incremental new highs. Beyond the short term, if we are going to see a material move higher from here, economic data needs to get better, period.

The two most important reports last week were the May Flash Manufacturing PMI and the April Durable Goods report, and both underwhelmed. The May flash manufacturing PMI dropped to 52.5, the lowest reading since of 2017, while Durable Goods was, as usual, a bit of a misleading number.

The headline on Durable Goods was better than expected at -0.7% vs. (E) -1.0%. We dismiss the headline because it’s massively influenced by the timing of airplane orders. Instead, we focus on New Orders for Non-Defense Capital Goods, Ex- Aircraft. That is the purest look at business spending and investment in the Durable Goods report, and there the results were a disappointment. NDCGXA was flat vs. (E) 0.2% increase while the March data was revised lower (from 0.2% to 0.0%).

Bigger picture, these soft business spending/investment numbers raise the question as to whether all this policy uncertainty regarding corporate taxes (will rates be cut, and what changes will occur with the deductibility of interest, etc.?) is starting to restrain business investment. To be clear, there’s no data that says it is being restrained, yet. However, it is a legitimate concern the longer we go with no clarity on taxes.

The other notable report from last week was the revision of Q1 GDP, and on the whole it was positive. Headline Q1 GDP was increased to 1.2% from 0.7%, and consumer spending (PCE) rose to 0.6% vs. (E) 0.3%. To be clear, that’s still pretty anemic consumer spending… but at least the numbers got a touch better.

Finally, turning to the Fed, the market traded slightly dovish last week after the release of the May FOMC minutes. In particular, worries about whether we’re losing upward momentum on inflation, combined with similar comments from Philly Fed President Harker a week ago, resulted in a slightly dovish move in currencies and bonds. But to be clear, the expectation for a June hike remains very high, and it’ll likely take a very soft core PCE Price Index (out today), and a bad wage number in Friday’s jobs report to put that June hike in doubt.

This Week’s Preview:

With the amount of economic data coming this week, it would be a busy week even if we had five days to absorb it all. So, it will be an especially busy week given we’ve got just four trading days this week.

First, it’s jobs week, so we get the ADP Jobs Report on Thursday (a day later due to Memorial Day), Jobless Claims on Thursday, and the government jobs report on Friday. We will send our standard “Jobs Report Preview” in Thursday’s report. As has been the case for virtually all of 2017, the wage numbers are almost as important as the actual jobs number itself, as signs of further deterioration could lead to a dovish Fed while a strong number could put upward pressure on the expected number of hikes in 2017 (from three to four).

Right behind the jobs report in importance this week is the May final manufacturing PMI, out Thursday. Obviously, with the disappointing flash PMI, a slightly better number this week will help inject a bit more confidence into the state of economic momentum here in the US.

And while the US number is important, the most important manufacturing PMI this week may be China, which comes tonight. Very quietly, Chinese data has been softening, and if we get a surprisingly bad number that could send a macro shock through markets.

Turning to inflation, our focus there will be a bit more acute this week given the FOMC minutes and Harker’s comments from last week. That means that today’s Core PCE Price Index, which is contained in the Personal Income and Outlays report, will be important. If it shows evidence of moving down further from the Fed’s 2.0% yoy target, that will create a dovish response from markets and sink Treasury yields further (which will be a negative for stocks).

Bottom line, the jury is still very much “out” on the current momentum in the US economy. In an absolute sense, data remains “ok,” but we are not seeing the acceleration everyone thought we would when the reflation trade was roaring back in Dec/Jan. If data continues to underwhelm, it will become a headwind on stocks beyond the short term… and again, that’s a point that is very important not to miss. We need better data to make this rally sustainable above 2400.

Get the simple talking points you need to strengthen your client relationships with the Sevens Report. Everything you need to know about the markets delivered to your inbox by 7am each morning, in 7 minutes or less. 

OPEC (and NOPEC) Meeting Takeaways, May 26, 2017

/in /by

Help your clients outperform markets with The Sevens Report. Get a free two-week trial—start today.

Oil trade over the last week was a classic case of “buy the rumor, sell the news,” as the speculative rally that carried WTI up to the $52 mark came completely unwound yesterday after OPEC announced that they would extend the cuts nine months, but not deepen them. WTI futures finished down a staggering 4.85% on the day.

The oil market ran higher this week into the meeting as expectations shifted from a six-month extension of current policy to a nine-month extension late last week. With that shift in expectations came a surge of speculative bets that if OPEC was willing to extend cuts longer, they might also be willing to deepen them.

OPECSo, a potential deeper cut began to get priced into the market amid the flurry of buying leading up to the meeting. Unfortunately for the bulls, it was just more of the same cuts through March 2018. The reason the market responded unfavorably to this outcome is pretty simple; the cuts haven’t worked so far, as global stockpiles remain near record highs.

Here is a quick refresher of the OPEC deal:

OPEC’s Goal: Higher oil prices.

OPEC’s Objective: Bring global stockpiles down from a record 3 billion bbls to the five-year average of 2.7 billion.

OPEC’s Task: Impose individual quotas totaling a production cut of -1.8M bbls (including Non-OPEC producers) from October 2016 levels to help the market rebalance.

OPEC’s Dilemma: Both Russia and Saudi Arabia want higher oil prices (as they always do), specifically because of upcoming elections and the Aramco IPO. But, with higher oil prices comes increased competition from US shale producers, who are ultimately taking market share from those imposing quotas overseas.

The bottom line here is that yesterday’s OPEC meeting was a disappointment to the market. Oil retraced all of the gains from the last week, as the market does not believe that “more of the same” is going to have a significant effect on stockpiles in the coming months… especially in the face of a nearly +600K bbls increase in US production so far in 2017. Looking into US fundamentals, there has been a slight, bullish shift in the data as oil inventories have been drawn down seven-straight weeks, and the pace of lower 48 production increases have moderated. But the data trend has been “less bearish” rather than outright bullish.

On the charts, there was a bearish, one-day reversal in both the active futures contracts as well as the notable calendar spreads. That’s a very bearish technical development with regard to the near term direction of oil.

While OPEC and their NOPEC friends say they are willing to “do all it takes” to support a balancing of the oil market, traders don’t believe them. The reason why is because if that were the case, they would have already cut production further. The fact that they’re hesitating to cut production shows that they are not willing to do all it takes, and that their main concern is with revenue.

Looking ahead, the single-biggest thing to watch remains US production. If US output continues to climb, it will not only offset cuts by overseas producers, it will increase OPEC angst about losing market share to the US. Recall that the rise of shale production is the reason OPEC crushed prices in 2014 with an “open spigot” policy. Looking ahead, nothing has changed with regard to OPEC member outlook on market share, which means every extra barrel being produced in the US increases the odds of cheating from cartel members.

Potential Medium-Term Bullish Catalysts:

1) Demand unexpectedly rises this summer amid economic growth and increased consumer spending (a big “if”), resulting in a decline in global stockpiles. It is worth noting that stocks are still pricing in strong growth, so this isn’t that big of a reach.

2) Geopolitics. If tensions rise with Russia, North Korea, or any Middle East nation, a flight to safety move into oil could push futures to new 2017 highs.

Potential Medium-Term Bearish Catalysts:

1) OPEC and NOPEC quota compliance falls. With every barrel of market share the cartel and friends forfeits to the US, the odds of compliance issues rise. If one producer begins to cheat, as Iraq apparently already has, then it will become much more likely that others will follow.

2) The trend of rising US production begins to accelerate again after moderating over the last few weeks. No matter how you spin it, rising US production is bearish for global oil prices, as it both offsets oil cuts by overseas producers and lowers morale among OPEC members because of the self-inflicted loss of market share that could induce cheating.

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if The Sevens Report is right for you with a free two-week trial.

Weekly Market Cheat Sheet, May 22, 2017

/in /by

The Sevens Report is the daily markets cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Economic and Investing Cheat Sheet - May 22

Last Week in Review:

There weren’t many economic reports last week, and the data we did get was mixed. In sum the data did nothing to remove the growing feeling that the US economy is losing momentum.

First, the initial look at May data in the form of the Empire State Manufacturing Index badly missed at -1.0 vs. (E) 8.0, but the Philly Fed Business Outlook Survey on Thursday contrarily blew away expectations (38.8 vs. E: 19.6). The net effect is that it put more focus on this week’s flash manufacturing PMI to give us a true look at the pace of manufacturing activity in May.

In the US housing market, the Housing Market Index beat expectations on Monday (70 vs. E: 68), but Housing Starts data on Tuesday whiffed (1.172M vs. E: 1.256M).

The most encouraging report last week was Industrial Production, which beat estimates of 0.4% with a headline print of 1.0%. But, a lot of that “beat” came from auto manufacturing, and activity in that sector has almost certainly peaked (remember Ford is cutting employees amidst more challenging sales environments). Point being, the Industrial Production beat is likely a one off, not the start of a trend.

Rounding things out with the labor market, weekly jobless claims fell 4K to 232K, as the general trend lower remains very well defined. Continuing claims fell to a 29-year low while its four-week moving average fell to a 43-year low. This encouraging report was especially notable because the data was collected from the week corresponding with the survey week for the May jobs report, and the strong print suggests that May could be another very strong month for the labor market. Bottom line, economic data last week did not materially change our outlook for the markets.

This Week’s Preview:

This will actually be a relatively busy week of economic data, as we get the flash manufacturing PMIs, Fed minutes from the May meeting, and other important economic reports.

The most important report this week will be Wednesday’s May flash manufacturing PMI. This will be the first major data point for May and it needs to show stabilization and, better yet, acceleration for stocks to rally.

Second in importance this week will be the FOMC minutes. Markets have priced in a slightly more dovish Fed given the soft inflation data recently, but markets have overestimated the Fed’s dovishness throughout 2017. If the minutes are hawkish, that could push yields and the dollar higher (which would be stock positive).

Meanwhile, there are two reports on housing data, New Home Sales and Existing Home Sales due out on Tuesday and Wednesday, respectively. Investors would welcome a rebound after last week’s soft Housing Starts report.

Finally, both the second look at Q1 GDP and Durable Goods Orders will be released Friday morning. The latter will be closely watched as the gap between soft and hard data remains a concern, and a strong revision to GDP and a good Durable Goods number will help close that gap. Bottom line, economic data remains the key to reigniting the reflation trade (remember, it’s #1 in my list of four events needed to restart the rally). So, the market needs good data and a confident/hawkish Fed for stocks to again test recent highs.

Get the simple talking points you need to strengthen your client relationships with the Sevens Report. Everything you need to know about the markets delivered to your inbox by 7am each morning, in 7 minutes or less.