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The Two Biggest Risks to the 2023 Year-end Rally

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The Two Biggest Risks to the Rally Until Year-end: Strengthen your market knowledge with a free trial of The Sevens Report.

What’s in Today’s Report:

  • The Two Biggest Risks to the Rally Until Year-end
  • Weekly Market Preview: Three Pillars of the Rally Remain Intact (For Now)
  • Weekly Economic Cheat Sheet – Service Sector Data in Focus

Stock futures are modestly lower with most global markets this morning amid renewed global growth concerns.

Economic data disappointed overnight with China’s Service PMI falling to a 2023 low of 51.8 vs. (E) 53.7 in August while the Eurozone Service PMI declined to 47.9 vs. (E) 48.3. The soft data rekindled global recession concerns putting risk-assets under pressure as we start the holiday shortened trading week.

Today, two second-tiered economic reports are due: Motor Vehicle Sales (E: 15.6M) and Factory Orders (E: -2.6%). But, neither are likely to meaningfully impact markets.

No Fed officials are on schedule to speak today. The Treasury will hold auctions for 3-Month, 6-Month, and 52-Week Bills late this morning. The results of the auctions could shed light on the market’s outlook for Fed policy plans in the months ahead. However, weak demand leading to a rise in short-duration yields will be viewed as hawkish which has the potential to put additional pressure on equity markets and risk assets today.

Risks to rally

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Is Soft Economic Data a Reason to Buy Stocks?

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What’s in Today’s Report:

  • An Easing of the Labor Market Is a Good Thing, But Be Careful What You Wish For…
  • Jobless Claims vs. the S&P 500 – An Ominous Chart
  • JOLTS Takeaways
  • Consumer Confidence Shows Measurable Deterioration in Current Family Financial Situations: Chart

Futures are slightly lower this morning as yesterday’s sizeable rally in the S&P 500 is digested ahead of more domestic jobs data while global markets were mixed overnight.

In Asia, PBOC officials met with leaders from the private sector regarding stimulus and development, but so far, government efforts have been underwhelming and Chinese markets ended little changed.

In Europe, some regional German inflation statistics came in hot, buoying government bond yields this morning which could weigh on equities if the trend continues into the U.S. session.

Today, focus will be on economic data early with the ADP Employment Report (E: 200K) and GDP report (E: 2.4%) due out ahead of the bell while Pending Home Sales (E: -0.4%) will be released shortly after the open.

There are no Fed speakers today, so investors will be looking for more evidence that supports a continued pause in the Fed’s rate hiking cycle (or peak rates already being in) and ultimately a soft landing. Anything that contradicts that narrative will be a headwind on equities and other risk assets today.

Tom Essaye Quoted in Barron’s on August 28th, 2023

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Stocks Open Higher Ahead of Busy Week for Economic Data

“This week will be more important than it appeared it would when we started August because of last week’s surprisingly soft flash PMIs, as there is a lot of important economic data this week,” argued Tom Essaye, president of Sevens Report Research. If it confirms that the economy is losing momentum and a hard landing is more likely than previously thought, it will pressure stocks,” he added.

Click here to read the full article.

 

Why Could CPI Be Poised to Drop Further?

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What’s in Today’s Report:

  • Why Could CPI Be Poised to Drop Further?
  • Chart: Zillow Observable Rent Index

U.S. stock futures are slightly higher this morning, tracking modest gains in global shares thanks to news that China is considering deeper rate cuts on deposits and mortgages while important economic data due later in the week remains in focus.

Economically, the German GfK Consumer Climate Index for September fell to -25.5 vs. (E) -24.3 underscoring widely held concerns about the future of the Eurozone economy.

Looking into today’s session, there are three economic reports due out this morning: Case-Shiller Home Price Index (E: 1.1%), Consumer Confidence (E: 116.5), JOLTS (E: 9.559M).

Markets will be looking for easing, but still healthy consumer confidence readings and a declining, but not collapsing JOLTS figure to support the thesis that the economy is slowing at a pace consistent with a soft landing. Data that is too strong or too weak will likely weigh on equities.

Additionally, there is a 3-Yr Treasury Note auction at 1:00 p.m. ET and if the outcome is weak pushing rates higher, that will create a headwind on risk assets.

Finally, there is one Fed official scheduled to speak today: Barr (3:00 p.m. ET). Considered a centrist, his comments will be closely scrutinized for any clues of a shift in policy expectations following Powell’s Jackson Hole speech Friday.

Why Have Markets Become Volatile?

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What’s in Today’s Report:

  • Why Have Markets Become Volatile?
  • Weekly Market Preview:  Are the Three Pillars of the Rally Under Attack?
  • Weekly Economic Cheat Sheet:  Key Growth and Jobs Data This Week

Futures are slightly higher following more small stimulus steps from Chinese authorities, as investors look ahead to an important week of economic data.

Chinese authorities reduced the stamp tax on stock investment, providing a small economic tailwind and boost to Chinese stock prices.

Economically, the only notable number was the EU Money Supply (M3) and the number was bad as M3 declined –0.4% vs. (E) 0.6%.

Today there are no notable economic reports so markets will focus on the tech sector to see if it can continue to stabilize after last Thursday’s ugly reversal.

Is Bad Economic Data Good For Stocks Now?

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What’s in Today’s Report:

  • Is Bad Economic Data Good For Stocks Now?  No.
  • EIA Analysis and Oil Market Update

S&P 500 futures are solidly higher thanks to strength in tech following very strong NVDA earnings.

NVDA beat earnings estimates and raised guidance on strong AI chip demand and the stock is up 8% pre-market and boosting Nasdaq and S&P 500 futures.

However, the “non-tech” parts of the market are flat to down as investors digest Wednesday’s disappointing economic data.

Today another AI driven rally in tech, following the NVDA earnings, should help support markets.  But, away from tech, markets will be focused on Jobless Claims (242K) and Durable Goods (E: -4.0%), and again the key here is stability, in that the data doesn’t show a sudden deterioration in activity (so spike in claims, drop in Durable Goods) or extreme strength (which would undo yesterday’s Treasury yield decline and weigh on the markets).

Sevens Report Analysts Quoted in MarketWatch on August 21st, 2023

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Oil prices settle lower to extend last week’s losses

Meanwhile, a consistent run of strong U.S. economic data has raised fears the Federal Reserve may need to push interest rates higher than previously expected and hold them there for longer than previously anticipated, while weekly government data last week showed a pullback in consumer fuel demand and a post-pandemic high in U.S. crude production, analysts at Sevens Report Research said in a note.

Click here to read the full article.

How to Explain the Current Pullback to Clients & Prospects

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What’s in Today’s Report:

  • How to Explain the Current Pullback to Clients & Prospects
  • Weekly Market Preview:  Will Treasury Yields Stabilize? (That’s the Key to Ending This Pullback)
  • Weekly Economic Cheat Sheet:  Important Growth Updates and Powell Speech on Friday

Futures are modestly higher thanks to more evidence of global disinflation and despite another round of underwhelming Chinese stimulus.

German PPI declined -6.0% y/y vs. (E) -5.1% y/y and that’s serving as a reminder that inflation is still falling globally.

In China, officials cut the Loan Prime Rate less than expected (-10 bps vs. (E) -15 bps) and while that will provide stimulus, it’s not alleviating concerns that the Chinese economy will be a headwind on global growth.

Today there are no economic reports and no Fed speakers (the Jackson Hole Fed conference is this week, so speakers will increase throughout the week culminating with Powell on Friday).  As such, Treasury yields will remain a short-term influence on stocks.  Yields and futures are higher this morning but if yields extend the rally throughout the day, don’t be surprised if stocks give back these early gains.

Pullback or Something More?

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What’s in Today’s Report:

  • Pullback or Something More?
  • EIA Analysis and Oil Market Update

Futures are slightly higher on better than expected CSCO earnings amidst an otherwise quiet night.

Earnings this week have been solid and that continued with CSCO results overnight (stock up about 3% pre-market) and that’s driving the bounce in futures.

Earlier this week HD, TGT and TJX all posted solid results and the earnings reinforced the $240 2024 S&P 500 earnings expectation (which helps with market valuation).

Today focus will be on economic data and the key reports are:  Jobless Claims (E: 240K), Philly Fed Manufacturing Index  (E: -10) and Leading Indicators (E: -0.4%).

Markets need Goldilocks economic data to stop rising Treasury yields while at the same time further downplaying hard landing worries.  If the data is “Too Hot” yields will rise and stocks will likely fall, while conversely, a sudden drop in activity will increase worries about a hard landing (and likely pressure stocks).  Numbers close to expectations are what investors need to help support stocks.

It’s Not How High Rates Go Anymore, It’s How Long They Stay There

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What’s in Today’s Report:

  • It’s Not How High That Matters Anymore, It’s How Long
  • Retail Sales & Empire State Manufacturing Survey Takeaways (Very Mixed Reports)
  • Chart – S&P 500 Violates 50 Day Moving Average for the First Time Since March

Stock futures are little changed this morning as new stimulus efforts by China help offset more negative global economic data and a hawkish leaning RBNZ meeting decision.

Chinese Home Prices fell -0.1% vs. (E) 0.0% prompting a cash injection and stronger currency fix by the PBOC which helped stabilize global risk assets overnight given the recent turmoil in the world’s second largest economy.

In Europe, U.K. Core CPI held steady at 6.9% vs. (E) 6.8% in July solidifying peak rate expectations of 6.0%, however bond yields are retreating modestly from the week’s highs which is helping stocks continue to stabilize today.

Looking into today’s session, we will get two economic reports this morning: Housing Starts (E: 1.455 million), Industrial Production (E: 0.3%) before focus will turn to the release of the July FOMC meeting minutes at 2:00 p.m. ET.

Bottom line, the market wants to see more “Goldilocks” data consistent with a soft economic landing and no evidence in the Fed minutes that suggests a more hawkish policy path than is currently expected (rate cuts beginning H1’24). Otherwise, volatility is likely to remain elevated with equities under pressure.