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FOMC Preview

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What’s in Today’s Report:

  • FOMC Preview
  • Positive COVID News?

Futures are modestly lower again for the same reasons as Monday:  Global equity pressure following another sharp decline in Chinese shares (Hang Seng was down 4% again).

There was no new regulatory news from China overnight but fears remain and sellers remained aggressive.

There were no notable economic reports overnight.

Today there are three notable economic reports, Durable Goods (E: 2.1%), Cash-Shiller Home Price Index (E: 1.5%) and U.S. Consumer Confidence (E: 124.9) but unless there’s a major surprise from one or more, I don’t expect them to move markets and with the Fed looming tomorrow and key earnings after the close, today shouldn’t be too volatile.

On the earnings front, today is probably the biggest single day of earnings of the season, and key reports (mostly after the close) include:  AAPL ($1.00), AMD ($0.54), MSFT ($1.90), GOOGL ($19.89), UPS ($ 2.75), and MMM ($2.25).

Technical Update (Levels to Watch)

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What’s in Today’s Report:

  • Technical Update – Levels to Watch

Futures are moderately higher on momentum from Thursday’s rebound combined with a drop in industrial metals’ prices, which is helping to ease some anxiety on inflation.

Iron ore prices dropped sharply overnight as Chinese officials stated they would take measures to curb price increases in various industrial metals and that headline is pushing back on the “surging inflation” narrative (although it doesn’t change the inflation outlook).

There was no notable economic data overnight nor any important central bank speak (outside of the China metals news it was a quiet night).

Today we get several notable economic reports including Retail Sales (E: 1.0%), Industrial Production (E: 1.2%), and Consumer Sentiment (E: 90.3).  In general, the stronger the better for these reports but we’ll be watching the inflation expectations component of the Consumer Sentiment Index – if it runs “hot” expect a headwind on stocks.  There’s also one Fed speaker, Kaplan (1:00 p.m. ET), but he shouldn’t move markets.

Risks to the Stimulus Driven Rally

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What’s in Today’s Report:

  • Bottom line: Risks to the Stimulus Driven Rally

Stock futures are slightly lower this morning as investors weigh a continued rise in coronavirus cases and escalating geopolitical tensions against positive economic data.

China’s CFLP Manufacturing PMI rose to 50.9 vs. (E) 50.5 in June indicating an acceleration in the economic recovery.

China’s parliament passed a new national security law for Hong Kong o/n but specific details have yet to be released.

Today, there are two economic reports to watch: S&P Case-Shiller HPI (E: 0.5%) and Consumer Confidence (E: 90.0) as well as a slew of Fed speak to monitor: Williams (7:00 & 11:00 a.m. ET), Powell (12:30 p.m. ET), Bostic (2:00 p.m. ET), and Kashkari (2:00 p.m. ET).

Powell’s testimony before Congress, alongside Treasury Secretary Mnuchin, will be the “main event” today and as long as they reiterate their plans for stimulus measures to continue for the foreseeable future, stocks should be able to end the second quarter in a relatively quiet manner this afternoon.

Tom Essaye Quoted in Barron’s on March 6, 2019

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Chinese authorities have aggressively flooded the economy with cash since the start of the year. At this week’s National People’s Congress, the government also announced tax…Click here to to read the entire article.

Tom Essaye Quoted in Bloomberg on March 6, 2019

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“The outlook for China has been steadily improving for the past two months, and this MSCI announcement is another tailwind. Clearly this isn’t a risk-free trade and a lot can still…”

Click here to read the article.

Another Reason to Buy China

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What’s in Today’s Report:

  • A New Positive for Chinese Stocks
  • A Theory on the Copper Rally

Stock futures are modestly lower this morning after another mostly quiet night of news as investors look ahead to the remaining catalysts this week including US jobs data.

The only economic report overnight was Australian GDP which missed expectations (0.2% vs. E: 0.3%) and hit the Aussie dollar (-0.76%).

Oil prices are down over 1% this morning after the API reported a weekly build of +7.3M bbls late yesterday vs. (E) +1.6M bbls. A build of this size would largely offset last week’s bullish draw and could pressure the energy space (and drag risk assets lower too) if confirmed by this morning’s EIA report (10:30 a.m. ET).

Today, we get our first look at February jobs data with the ADP Employment Report (E: 180K) due out ahead of the bell. Then, International Trade figures will be released shortly thereafter (E: -$57.6B). Either release could move markets as growth concerns and the trade war remain two of the biggest influences on stocks right now.

Other than the weekly EIA report mid-morning, there are two Fed officials scheduled to speak over the lunch hour: Mester (12:00 p.m. ET) and Williams (E: 12:10 p.m. ET).

Market Outlook (After the Bounce)

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What’s in Today’s Report:

  • Market Outlook (After the Bounce)
  • Weekly Economic Cheat Sheet (Important First Looks at January Data)
  • Weekly Market Preview (All About Earnings)

Futures are sharply lower following more disappointing global economic data.

Chinese exports badly missed expectations falling –4.4% vs. (E) 4.8%, further stoking fears of a Chinese economic slowdown.  Data in Europe wasn’t much better, as Euro Zone Industrial Production fell –1.7% vs. (E) 0.5%.

Geopolitically, it was a generally quiet weekend as markets are looking past Trump’s economic threat to Turkey.

There are no notable economic reports today so focus will be on earnings, as the Q4 season officially kicks off with C ($1.55).  The key for this report (and all reports this season) will be the guidance and management commentary – and anything that downplays a slowing global economy will be welcomed by markets.

Tom Essaye on CNBC

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“In March, we had four areas of trade uncertainty: Mexico, China, Europe and Canada. I think Canada will be resolved and Europe and Canada are already resolved,” said Tom Essaye, founder of The Sevens Report. “Basically, we’ve got three of four resolved, but China is a big one.”

Essaye also said he would be surprised if stocks keep grinding higher without a resolution to U.S.-China trade relations.

Click here to read the entire article.

Chinese Data Recap and What it Means for Global Markets, July 18, 2017

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Chinese Economic Data

  • GDP held steady at 6.9% vs. (E) 6.8% in Q2
  • Fixed Asset Investment was 8.6% vs. (E) 8.4% in June
  • Industrial Production rose to 7.6% vs (E) 6.5% in June
  • Retail Sales rose to 11.0% vs. (E) 10.6% in June

Politics - Sevens Report (1)

Takeaway

The headlines tell the story of yesterday’s data dump in China. The reports were universally better than expected, but GDP was the report that warranted the most attention as the headline growth rate held steady at 6.9% rather than pulling back as expected.

Quarter-on-quarter growth jumped to 1.7% from 1.3%, which suggests that the Chinese economy is starting to stabilize towards the top end of the government’s target range of 6.5%-7%.

Looking ahead, the solid growth level seems to be sustainable, and not just a short-lived spike in economic activity. Without getting deep into the details, the growth is consumption driven, and new government policy and reforms are poised to help continue fueling solid growth into H2’17.

Bottom line, yesterday’s strong set of Chinese economic reports were welcomed by economists, as they underscored the positive outlook for the global economy going forward. But the reason the data did not ignite a more pronounced rally in global equities is the fact that growth in China has become more of an expectation, and global growth as a whole is no longer a great concern (as it was back in the summer of 2015).

Instead, very low inflation rates in the US and Europe are the most notable concern, and until those statistics begin to firm, weak inflationary pressures will be a drag on risk assets like stocks in the months ahead.

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China’s Inverted Yield Curve, June 28, 2017

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If A Yield Curve Inverts In China, Does It Signal A Looming Recession?

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China's Inverted Yield Curve

Last week, in our post, “Will Chinese Credit Impulse Impact Global Markets?“, I explained how China remains the largest macro threat to the rally as it begins to deflate its massive credit bubble, a credit bubble that has funded asset bubbles across geographies (Australian property, California property, Treasuries, stocks, etc.).

At this point, it’s just a risk, as there are no concrete signs that the Chinese economy is in trouble, although the Chinese bond market is signaling some caution.

First, it’s well known that inverted yield curves predict recessions. Here in the US, the inverted yield curve predicted the ’81, ’91, and ’00 recession, and the ’08 financial crisis (remember the yield curve inverted in ’05, and stayed that way until the Fed started cutting rates in late ’07).

So, it is noteworthy that the Chinese government bond yield curve is essentially flat, and in some cases has inverted. For instance, as of yesterday the three-year government bond was yielding 3.558%, higher than the 5 year at 3.524%. And, the 7 year was yielding 3.626%, higher than the 10 year, which yielded 3.56%. So, while not a total inversion, it is safe to say it’s flat.

Now, before we go running for the hills and sell stocks, we have to realize this is China, not US Treasuries. As such, liquidity distorts this picture somewhat. For instance, 10-year Chinese bonds are by far the most liquid, so they will move more than other issues. Still, this is not the type of yield curve that implies an economy that is healthy. Again, this matters because the last time we got a Chinese economic scare, it caused the S&P 500 to collapse 10% in a few days… not once, but twice in a six-month period.

Bottom line, I’m not saying get defensive, but I am saying that from a macro standpoint 2H ’17 is shaping up to be more bumpy than 1H ’17, and I want everyone to be prepared. We will be watching China closely for you.

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