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A Critical Time for the Yield Curve

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What’s in Today’s Report:

  • A Critical Time for 10s-2s
  • Empire State Manufacturing PMI Takeaways

There is a clear risk-on tone in markets this morning with stock futures sharply higher amid optimism that China will ease regulation on the tech sector (the Hang Seng rallied 3%) while economic data surprised to the upside.

Economically, the Q1 Eurozone GDP Flash came in at 5.1% vs. (E) 5.0% Y/Y which helped ease recently elevated concerns about global growth which may have been overdone.

Looking into today’s session, focus will be on economic data early with several reports due to be released including: Retail Sales (E: 0.7%), Industrial Production (E: 0.4%), Housing Market Index (E: 75). Investors will be looking for solid data that helps further ease fears about a potential slowdown in the economy.

There are also multiple Fed speakers today: Harker (9:15 a.m. ET), Powell (2:00 p.m. ET), Mester (2:30 p.m. ET), and Evans (6:45 p.m. ET). Powell will be the main focus but the market will want to see officials collectively strike a less hawkish tone if we are going to see these early gains in equities hold.

Bottom line, the overnight rally in equity futures came on very light volume and it should not be surprising to see the market gravitate back towards yesterday’s levels this morning as investors assess the new economic data and slew of Fed speakers. But with good news flow, we could see the relief rally resume today.

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Dow Theory Update (Bearish)

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What’s in Today’s Report:

  • Dow Theory Update (Bearish)
  • VIX Analysis Update

Futures are moderately higher following positive China COVID news.

Chinese authorities said they hoped to end all lockdowns in Shanghai by May 20th as cases continue to fall.  If the Chinese economy can fully reopen in the coming weeks that will remove a big headwind from stocks.

Economically, EU Industrial Production wasn’t as bad as feared, as IP fell –1.8% vs. (E) -2.0%.

Today the focus will be on the inflation expectations contained in the Consumer Sentiment (E: 63.7) report and if five-year inflation expectations can decline from 3%, that will be another anecdotal signal that inflation pressures have likely peaked (and it should add incrementally to this morning’s rally).     We also get two Fed speakers, Kashkari (11:00 a.m. ET) and Mester (12:00 p.m. ET), but we don’t expect them to move markets (look for them to reiterate the current Fed mantra of two more 50 bps hikes).

Tom Essaye Quoted in CNBC on May 9th, 2022

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10-year Treasury yield rises to its highest level since November 2018

To start the year, we knew that central bank tightening would make for a challenging market, but that has been compounded by two surprise events: The Russia/Ukraine war (no one expected that in January) and Chinese lock-downs (it’s quasi-shocking the Chinese are still adopting these policies and crushing their economy)…wrote Tom Essaye of The Sevens Report. Click here to read the full article.

Tom Essaye Quoted in Barron’s on May 5th, 2022

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The Dow Lost More Than 1,000 Points as Wednesday Gain Vanishes

China’s PMI this morning was horrific, that underscores that the Chinese economy is a huge drag on global growth right now. It’s a risk to keep inflation high…said Tom Essaye, founder of Sevens Report Research. Click here to read the full article.

Why Stocks Dropped Last Week (And What It Means for Markets)

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What’s in Today’s Report:

  • Why Stocks Dropped Last Week
  • Weekly Market Preview:  A Key Earnings Week (Results Need to be Good)
  • Weekly Economic Cheat Sheet (Inflation in Focus Again this Week)

Futures are moderately lower on concerns about economic growth as COVID cases rose again in China while hopes for a diplomatic solution in Ukraine have all but faded.

China is continuing with its “zero COVID” policy and with cases rising again markets are fearing more shutdowns, perhaps in Beijing, which is a negative for global growth.

Russian President Putin essentially eliminated a diplomatic solution to the war, ensuring a further drawn-out conflict, which will also be a headwind on global growth.

Today there are no economic reports and no notable Fed speakers, but worries about global growth are the reason stocks dropped last week, so markets need some positive news on growth to stabilize in the near term.

On the earnings front, this is a very important week and while the most important reports don’t come out until later this week, two reports we’ll be watching today are KO ($0.58) and WHR ($4.90).

FOMC Preview

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What’s in Today’s Report:

  • FOMC Preview

Stock futures are modestly lower this morning as investors continue to monitor the war in Ukraine and rising tensions between the U.S. and China surrounding the conflict.

Geopolitically, a new round of talks is scheduled between Russia and Ukraine today while the U.S. has warned China over providing Russia with military support.

Economically, several Chinese data points handily beat estimates overnight but the data was overshadowed by a sharp rise in Covid-19 cases in various regions of the country while European data came in below estimates this morning. With geopolitics still dominating news wires and the Fed meeting coming into focus, however, none of the data materially moved markets overnight.

Today, there are two economic reports to watch ahead of the bell: PPI (E: 1.0%, 10%) and Empire State Manufacturing Index (E: 8.0), and with the March FOMC meeting getting underway, the inflation data will be closely watched and could cause a dovish/hawkish reaction across asset classes ahead of tomorrow’s announcement.

Bottom line, Ukraine headlines will still move markets today and any progress towards a ceasefire will be well-received however expect a sense of Fed paralysis to increasingly grip the markets as the day goes on and traders position into the first rate hike in years.

Updated Near-Term Market Outlook

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What’s in Today’s Report:

  • Updated Near-Term Market Outlook
  • Weekly Economic Cheat Sheet

U.S. stock futures are trading higher with European shares amid renewed hopes of a ceasefire in Ukraine while Asian markets declined overnight on new Covid-19 lockdowns.

Geopolitically, Russia continued with aggressive military attacks against Ukraine over the weekend but diplomatic negotiators noted solid progress in ceasefire discussions which is helping risk assets bounce this morning.

There are no economic reports today and no Fed officials are scheduled to speak.

The Treasury will hold an auction for both 3-month and 6-month Bills at 11:30 a.m. ET today which may shed some light on the market’s current outlook for near-term Fed policy. And if shorter duration rates rise in the wake of the auctions, that could weigh on stocks as the Fed meeting comes into focus.

Bottom line, markets are still very much focused on Russia and Ukraine right now and for stocks to meaningfully bounce today, we will need to see real progress towards a ceasefire. Conversely, a deteriorating situation in Ukraine could see stocks retest multi-month lows to start the week today.

Tom Essaye Quoted in Barron’s on February 22, 2022

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The Russia Issue Is Hurting the Stock Market. How Things Could Get Worse.

Regarding Ukraine, investors will await the announcement of new sanctions from the west against Russia, and depending on how severe they are, it could add to the selling pressure on stocks…wrote Tom Essaye, founder of Sevens Report Research.  Click here to read the full article.

 

Early Earnings Season Takeaways

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What’s in Today’s Report:

  • Early Earnings Season Takeaways

Futures are modestly higher as China made two surprise interest rate cuts overnight, helping stocks bounce from Wednesday’s late-day declines.

China’s central bank made two small surprise interest rate cuts overnight which helped Asian stocks rally (Hang Seng up 3%) and that’s pushing U.S. futures higher.

Today focus will be on economic data and earnings, and for stocks to extend the early morning rebound we need to see stable data and solid earnings (meaning no extreme cost pressures).  Economically, the key report today is the  Philly Fed Manufacturing Index (E: 19.1).  If it suddenly plunges as Empire did on Tuesday, that will slightly increase anxiety about the economy.  We’ll also be watching Jobless Claims (E: 207K) and Existing Home Sales (E: 6.40M).

On the earnings front, the key report today is NFLX ($0.82) after the close, but we’ll also be watching:  AAL (-$1.54), TRV ($3.86), UNP ($2.60), CSX ($0.41) and PPG ($1.19).  If margins are much weaker than expected, look for more earnings-related volatility.

What Could Go Right in 2022

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What’s in Today’s Report:

  • What Could Go Right in 2022

S&P 500 futures are trading at a fresh record high as investors shrug off rising COVID cases while global markets rallied following fresh monetary stimulus from China.

The PBOC injected 200B yuan to help meet end-of-year demand for cash, the largest injection since October which is easing liquidity and adding to risk-on money flows.

Japanese Industrial Production surged 7.2% vs. (E) 1.8% in November, bolstering hopes that the economic recovery is regaining momentum.

This morning, there are two reports on the housing market due to be released: Case-Shiller Home Price Index (E: 1.0%), FHFA House Price Index (E: 0.7%) but neither should move markets.

There are no Fed speakers today but there is a 5-Year Treasury Note auction at 1:00 p.m. ET that could impact that bond markets and potentially equities but with the calendar otherwise pretty clear, a continued “Santa Claus rally” appears to be the path of least resistance for equities this week.