Did WTI Crude just put in a triple top?


After a strong rally over the past several weeks, WTI Crude has stalled, and on the charts looks like it may have put in another “lower high” in the $96/bbl. area.  Generally most of the smart people I know in the energy patch are bulls and expect $100 to be taken out before too long, and I’m in no position to argue with them—but that chart pattern would make me a bit nervous if I were an energy bull.  A  break of $98 is needed to re-affirm the bullish trend.


WWFD (What Will Fed Do) is Now the Driving Force of Markets


Last Week

Last week was very quiet economically speaking, although what little data there was generally beat expectations. The majority of the data last week was internationally focused.

In Europe, the composite PMIs (manufacturing and service), German manufacturers orders, industrial production, and exports all were better than expectations.  The bottom line out of Europe last week was the data implied a slight uptick in economic growth, although most of the releases are pretty minor ones.  The fact that they were watched was more a result of the very quiet calendar, rather than for insight into the EU economy.

In China, trade balance beat estimates, although the export data looked somewhat suspect and people were generally discounting it.  The big print of the week, Chinese CPI, was a bit higher than expected, but PPI was lower so it was considered a wash.

There was only one notable release last week domestically and that was jobless claims, which again were positive and moved to new lows, implying continued incremental improvement in the labor market (claims are at their lowest level since January 2008).

The real focus last week, however, was on central banks, and specifically whether the Fed was more seriously considering tapering the current QE program than was generally believed.  Speculation on that caused stocks to stall late in the week and caused the U.S. dollar to surge higher.  Also, speculation is boiling over about what the ECB does next, and the growing expectation that they will “do more” was furthered last week by comments from various ECB officials.

This Week

There is more data this week than last, although it still shouldn’t be classified as a “busy” week.  Importantly, the market will likely trade more off central bank expectations than the absolute data itself, so we need to be looking at economic data through the prism of “what will it make the central bank do.”

Given that, we may be facing this perverse “good data is bad for the risk assets” situation as in the very short term the market seems a bit spooked by the Fed considering “tapering” QE.

In Europe it’s the same sort of thing, only the market has priced in, to a point, the expectation of the ECB doing “more.”  If the economic data is stronger than expected, then we might see the market react negatively.

In that vein, inflation data this week (CPI and HICP, which is the euro inflation index, both released Thursday) will be pretty important.  At this point, the Fed seems borderline dismissive of the dis-inflation creeping into the economy, but that may not be the case if CPI declines further.  So, a low CPI reading will be dovish (and probably positive for risk assets), while higher CPI will be hawkish.  In Europe, disinflation is seen as the main catalyst pushing the ECB to “do more,” so it the same thing—low HICP will be dovish while high HICP will be hawkish.

Elsewhere, retail sales (today) will be closely watched as the consumer lately has shown some signs of exhaustion due to higher payroll taxes and healthcare costs. Any further evidence of that trend won’t be welcomed by the market.  We also get our first look at May economic activity via the Empire and Philly Fed manufacturing surveys (Wed/Thurs).  Again these data points are important because the market is watching to see if the slowdown in growth in late March and April is merely temporary.

Other numbers to keep an eye on are industrial production (Wed) and another round of housing data kicks off Thursday with Housing Starts.  In Europe, this week looks pretty quiet, as industrial production and the German ZEW survey (both Tues) are the only releases to watch.

So, this week the market will be looking at the data in the context of:  1) Is the economic slowdown in the U.S.  only temporary, and is May data starting to pick back up and 2) What will the data mean for central bank’s propensity to reduce or expand accommodation.  Keep those two things in mind this week as the data is released.


Boring But Important: Junk Yields Sink Below 5%

Generally speaking, I consider something in a bubble when it meets three criteria:  First, there has to be some “game-changing event” that occurs that alters people’s behavior.  Second, a buying frenzy develops that pushes normal asset allocation practices out the window and prices to unreasonable levels.  Third, the fundamentally weakest part of the market sees massive inflows of investment and typical risk/reward relationships are ignored as greed sets in.

It’s no secret I think we’re in a bond bubble:  The Fed crushing rates to 0% and starting QE was the game-changing event that altered people’s behavior (the first criteria).  Treasurys have seen massive inflows at the expense of other assets, and given the fundamentals are now (most would admit) overvalued (the second criteria).  Finally, junk bonds are being bought with both hands, and yesterday the average yield on junk bonds fell below 5% for the first time ever, as yield-starved investors throw money into low-rated companies in an effort to generate income (the third criteria).

Some will justify the low yields based on the fact that investment grade bonds yields are also very low, and the spread between the two isn’t compressing substantially.  But, it is compressing, and if we use our common sense, we can see that risk isn’t being accurately priced at these absolute yield levels in junk bonds (a triple B– company is still just as risky on a ratings basis as it was when junk yields were higher).

Bubbles are all about the suspension of the proper pricing of risk—and I believe we’re seeing it in the junk market.    I’m not saying that junk bonds yields trading below 5% is akin to subprime loans trading where they were in the heights of the real estate bubble, but I’m just pointing out that, in my mind, all the criteria of a bubble have now been met by the bond market.

I don’t know when it’ll pop any better than anyone else—I just think it’s worth pointing out that the warning signs here are getting louder, and the “smart” money is quieting moving towards the door.  Food for thought.


Is the gold rally capped?


Gold:  Since December of last year, the 23 & 30 day moving averages have capped any rally, and they look to be doing so again.  $1440 is critical support at this point.


Is Dis-Inflation Good For Stocks?

Yesterday was a pretty quiet day in the markets, but one consistent theme that showed up in economic data releases was something we’ve been ahead of the curve on here—and that’s the creep of dis-inflation and potential for deflation (Bloomberg had an article on it yesterday, link here), and I might add two weeks after we started pointing out the commodity crash was forecasting deflation).

Of particular note yesterday, then, was the latest release of the PCE Price Index, which is contained in the Personal Income and Outlays Report.

The PCE Price Index is a measure of inflation – but this one is extra important, because the PCE Price Index is widely assumed to be the Federal Reserve’s favorite measure of inflation.  For March, the PCE Price Index rose only 1% year over year, with the “Core” PCE Price Index rising just 1.1% year over year (core excludes energy and food prices).

1% year-over-year inflation sounds great – but it isn’t.  In fact, it’s something to be worried about.  The Fed wants the year-over-year change in the PCE price index to be around 2%; that’s the level that is seen as healthy inflation.

But, 1% year-over-year increases in PCE Price Index is close to disinflation, which is really one step away from outright deflation – and that is really, really bad for the markets, economy, and risk assets.

The reason stocks were up yesterday is because that low reading on the PCE Price Index is seen as making the Fed continue its QE program for the foreseeable future.  With inflation running so low, the view is that there’s no way the Fed would tighten policy and risk sparking deflation.

This trend is not exclusive the U.S.  Yesterday, German CPI showed a 0.5% month-over-month decline in prices, and year over year, CPI rose just 1.2%.  In Spain, prices rose just 1.5% year over year, falling sharply from last month’s 2.6% year-over-year gain.  All of these year-over-year increases are 1) heading in the wrong direction, meaning the are going lower each month, and 2) well below the 2% inflation considered healthy by the ECB.

Markets have rallied since last week, despite the bad economic data, because it’s assumed the ECB and Fed will become even more accommodative to combat growing dis-inflation and potential deflation.  So, we’re back to this perverse logic where increasing signs of deflation (which is really bad) is somehow good for stock prices in the immediate term because it promises constant QE and interest rate cuts.

But, while it has supported markets for over a week, this is not what we want.  More QE is not good for the market in the medium/longer term.  We have had enough QE!  We need old-fashioned economic growth now—and the longer we go on without it, the greater the negative risks of QE programs become.

Getting bullish of stocks now, because of the prospects of more QE in reaction to a growing global deflation problem, is like hoping you catch pneumonia so you can stay home from school because you’re unprepared for a test.  Yes—it solves the immediate problem in that you skip the test, but the risks of something bad happening simply aren’t worth it.  The key to substantially higher stock prices over the medium term and longer term, and an economy that can actually grow at more than a snails pace for more than a few weeks, is less QE and more inflation—not more QE and deflation.

Four Major Market Moving Events to Watch This Week


Last Week

Economic data was almost universally disappointing last week, although it obviously didn’t have the expected effect on the market (more on why below).

The big numbers of last week, the global flash PMIs, all either missed expectations (China, U.S. and Germany) or met low expectations and remained below 50 (EMU), signaling contraction.  The flash manufacturing PMIs certainly showed that the slowdown in growth in the global economy seen in March has so far carried over into April.

The durable goods number was also soft, as new orders for non-defense capital goods ex. aircraft (NDCGXA) increased slightly in March, but only after February data was revised lower.  This implies that along with the consumer, businesses scaled back spending and investment in March.

In Europe, the German IFO survey also missed expectations, and between that and Germany’s weak manufacturing PMI, evidence is mounting that shows the mighty German economy is finally being dragged down by the rest of Europe.

Finally, Q1 U.S. GDP was a bit of a mixed bag.  Negatively, the headline showed 2.5% annual growth in Q1 vs. (E) 3%, and final sales of domestic product, which is GDP less inventories, rose 1.5%.  (It’s helpful to exclude inventories because big inventory accumulation subtracts from next quarter’s GDP as de-stocking occurs).

Positively, PCE, personal consumption expenditures, beat estimates at 3.2%, so the consumer kept spending in Q1, although that’s being discounted a bit because of the soft March retail sales data.

So, bottom line on GDP is we remain in a very slow growth economy, just as we’ve been for the last several years.

This Week

This is a very important week, plain and simple.  First, final readings of global manufacturing PMIs are released Tuesday night (China) and Wednesday morning (Europe & U.S.).  While some of the power is taken out of these numbers given the flash estimates from last week, they will still move markets.

Second, it’s jobs week.  Friday brings the April jobs report, but before then we’ll have the ADP report Wednesday, and weekly claims and the Challenger layoff report Thursday.

Third, and most importantly, the Fed, ECB and Bank of England all have interest rate meetings Wednesday (Fed) and Thursday morning (ECB and BOE).

These meetings are the most important events of the week.  Markets didn’t decline on the weak economic data from last week due to the perception (and expectation in the case of the ECB) that central banks are going to either stay the course with current QE programs and other accommodation, or become more accommodative.  That expectation makes the weak data from March/April somewhat irrelevant, because if CBs stay “easy” or get “easier” it’s assumed that the weak economic data will just be a bump in the road of a greater recovery.

The ECB in particular will be the most watched CB this week.  A 25-basis-point rate cut is fully priced in at this point, so at a minimum that’s what the market is expecting.  I’ll preview it more when we get closer, but the ECB better reveal unconventional easing measures or strongly hint they are on the way, otherwise there will be some substantial disappointment.

At the Fed, the tide appears to be turning with regard to the discussion about ending QE this year.  Given the soft economic and inflation data recently, the market will be looking for some “dovish” commentary from the Fed about being committed to keeping QE on as long as necessary.

As stated, this week is very important from a macro perspective.  The bad economic data was overlooked last week because of expectations for central banks; now they need to deliver (or the data needs to get better).

The Russell 2000 and Dow Transports are Fast Approaching


The Russell 2000 and Dow Transports are fast approaching the pre-selloff levels from last week, so a break above 6143 in the Dow Transports and 938 in the Russell 2000 would be significant.  The SXPP could rally for a while before it even gets to the downtrend, given the absurd weakness in that index, but nonetheless if the rally continues that’s worth noting.

The Real Reason Stocks Rallied Yesterday

Economic data has been the main driver of the market lately, and yesterday pretty much all the economic data we received missed expectations. Chinese, EMU, German and U.S Flash Manufacturing PMIs all either declined from last month and missed expectations, or stayed at the same levels as last month but still signaled contraction in the manufacturing sector.

So, with the economic data so bad—why did stocks rally yesterday?

The answer is changing market expectations of Europe. Keep in mind that the market is a discounting mechanism—it’s always trying to factor in future occurrences in today’s prices. Yesterday, the markets expectations of some potential future events in Europe trumped the reality of weak economic data.

In particular, the market rally yesterday, which was led by European markets, was based on the fact that there is a growing belief (supported by some evidence) that Europe will abandon its multi-year campaign of austerity for PIIGS countries (which has led to stagnant economic growth in the EMU) and instead focus on fostering economic growth.

Additionally, yesterday’s bad economic data in the EMU was seen as increasing the chances of the ECB cutting rates next week, which the market views as a economic positive for the region.

All this relates back to the markets main concern and the catalyst for the recent correction, which is the stalling of global economic growth and the creeping of deflation, which is emanating from Europe.

The reasoning for yesterday rally goes something like this:

If Europe abandons austerity and starts to foster economic growth, and if the ECB not only cuts interest rates but also does additional, unconventional easing measures like a new LTRO or even QE, then the ECB will finally join the Bank of Japan, Bank of England and Fed in being ultra accommodative and directly combating deflation and spurring economic growth.

If this actually happens, and the EU and the ECB actually follow through with measures designed to stimulate growth, then it is a bullish game changer—and in that scenario you would want to buy European markets with both hands, similarly to how we should have bought the S&P at the start of QE2 and how we bought DXJ when Abe was elected. It’s very, very similar—if it comes to fruition.

Keep in mind, though, there are a lot of “ifs” that are assumed in that statement—and while several articles are hailing the end of austerity in Europe and calling for a rate cut, those of us who have traded this crisis from the beginning are well aware of European Leader’s multiple “false starts” with regards to taking steps to resolve the crisis.

From a “how do we know” standpoint, we should continue to watch the SXPP (STOXX Basic Materials Index) to see if it can bottom, and the ECB meeting next week to see 1) If they even do a rate cut (its not certain) and 2) If they reference any unconventional measures are being considered.

I for one will continue to be cautious, as there will be plenty of money to be made being long Europe if and when the tide turns and the EU and ECB are ready to embrace economic growth.

This Chart Shows Why Stocks Are Rallying

Bunds Spanish Spread

The U.S. Economy Showing Signs of a Slowdown – Again. Here’s What to Watch This Week.


Last Week

The main takeaway from last week, from a data perspective, is that the slowdown in domestic growth we saw in March is extending into April.  Pretty much every data point from last week showed a slowdown in economic activity.

The Empire Manufacturing Survey and Philly Fed Index, two of the first data points from April, both missed expectations, and importantly the New Orders component for both declined, implying more weakness ahead.

The other two big data points of the week, Industrial Production and Housing Starts, also showed some moderation in the pace of growth, despite the headlines for both numbers beating expectations (IP was higher because of utility output, while housing starts beat because of multi-family starts, neither which are really positive).

Finally, jobless claims were “OK” but importantly they have broken the downtrend they were in throughout late February/early March, implying the positive momentum in the jobs market has stalled.

Finally, the most damaging data this week came on Monday, when Chinese GDP missed expectations, and industrial production and retail sales were also weak.  Plus, housing prices continued to rise in major metropolitan areas, increasing the likelihood of more measures being announced to curb rising property prices.

Bottom line is that one of the major concerns of the market, and one of the reasons for the fall in equity prices this week, has been the return of another “Spring dip” in economic activity, and data this week only reinforced that fear.

This Week

The focus remains on global economic growth this week and by far the most important numbers will be the Flash Manufacturing PMIs out tonight and tomorrow.  Chinese PMI comes tonight and the EU and US figures will be released Tuesday morning.

Even without the PMIs it is a relatively busy week from an economics perspective.  The second most important number behind the PMI is Durable Goods, out Wednesday. Retail sales lately have disappointed, implying some softening in consumer spending, so business spending will be closely watched to see if it too is declining.

The first look at Q1 ‘13 GDP is Friday, although this number, which will be good, isn’t quite as important as you would think because the focus now is on the moderation of growth in March and now April (GDP reflects the entire quarter, so Jan/Feb will skew the number higher than what the economy is currently doing).

Weekly jobless claims will be watched to see if the downtrend from February/March can resume, and there’s existing and new home sales (Monday and Wednesday), which will give us a bit more color into the state of the housing market (the numbers should show continued strength in pricing and low inventories).

Internationally, away from the Flash Manufacturing PMIs early in the week, it’s somewhat quiet.  There is a Bank of Japan meeting Thursday, but after the “shock and awe” from the April meeting, not much new is expected. UK GDP is released Thursday as well.

Bottom line is that economic growth remains the key issue in markets.  The Flash manufacturing PMIs are by far the most important number of the week, and depending how they go, it may well decide whether this correction stalls or accelerates.