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Is This the Fed’s Fault?

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What’s in Today’s Report:

  • Selloff Update (Some Positive News Yesterday)
  • If This The Fed’s Fault?
  • Two Economic Canaries in the Coal Mine

Futures are rebounding as global markets bounce following solid economic data and confirmation of the Trump/Xi meeting at the G-20.

Economic data was solid overnight as Chinese exports beat estimates, rising 14.5% vs. (E) 8.2%, while Eurozone Industrial Production rose 1% vs. (E) 0.5%.  Both numbers are helping to improve sentiment.

Today we get bank earnings and JPM already released results and beat estimates, while we wait for WFC (E: $1.17) at 8:00 a.m.    Economically we get Consumer Sentiment (E: 99.5) and there are two Fed speakers, Evans (9:30 a.m. ET) and Bostic (12:30 p.m. ET) but none of that should move markets.

Instead, we can expect markets to continued to digest the recent pullback.  The tech sector showed some hints of stabilization yesterday but it’ll need to rally if we’re going to get a material bounce in stocks today.  Bigger picture, strong earnings from industrial and multi-nationals (which won’t be possible till next week at the earliest) remains the “fix” to this market pullback.

Are Banks About to Break Out?

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Banks were again the highlight, as BKX rose 0.83%, and that pulled the Financials SPDR (XLF) up 0.72%. The bank stock strength came despite the decline in yields, which we think is notable. In fact, over the past several trading days, bank stock performance has decoupled from the daily gyrations of Treasury yields, and we think that potentially signals two important events.

Regardless, this price action in banks is potentially important, because this market must be led higher by either tech or banks/financials. If the former is faltering (and I’m not saying it is), then the latter must assume a leadership role in order for this really to continue.First, it implies bank investors are starting to focus on the value in the sector and on the capital return plans from banks, which could boost total return. Second, it potentially implies that investors aren’t fearing a renewed plunge in Treasury yields (if right, that could be a positive for the markets).

Bottom Line

This remains a market broadly in search of a catalyst, but absent any news, the path of least resistance remains higher, buoyed by an incrementally dovish Fed, solid earnings growth, and ok (if unimpressive) economic data.

Nonetheless, complacency, represented via a low VIX, remains on the rise, and markets are still stretched by any valuation metric. Barring an uptick in economic growth or inflation, it remains unclear what will power stocks materially higher from here. For now, the trend remains higher.

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