Posts

Weekly Market Cheat Sheet, July 24, 2017

/in /by

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if The Sevens Report is right for you with a free two-week trial.

Last Week in Review

The economic calendar picks up this week beginning with the flash PMI today (9:45 a.m. ET), as we continue to get an initial look at the July data. So far, the data has been a bit underwhelming as both the Empire and Philly Fed surveys came in light last week.

As far as hard data goes, Durable Goods comes out Thursday, and the preliminary second-quarter GDP number comes out Friday.

Housing data also picks up this week, and after last week’s mixed results (remember the Housing Market Index missed but Housing Starts was solid) economists will be looking for a better read on the current status of the real estate market. The two big reports this week are Existing Home Sales on Monday, and New Home Sales on Wednesday. However, the S&P CoreLogic Case-Shiller HPI also will be worth watching (due out Tuesday). If the housing data is more in line with the strong Housing Starts data we saw last week, that will be an underlying positive for the economy and supportive for risk assets near term.

Turning to the central banks, the FOMC meets Tuesday and Wednesday, and the meeting will be concluded with an announcement on Wednesday at 2:00 p.m. There are no material changes expected to come from the meeting, and it would be a shock if rates were not left unchanged. There is no press conference or forecasts released with this meeting, but language in the statement will be closely watched for any further clues on the Fed’s plans to reduce the balance sheet, or on when rates will be raised. Right now, expectations are for a December hike, but based on the trend in other central bank rhetoric the risk is for a dovish development due to the complete lack of inflation acceleration.

This Week’s Preview

Economic data was thin last week, but we did get our first look at July data in the form of regional Fed outlook surveys as well as a few reports on the housing markets.

Beginning with the Fed surveys, the Empire State Manufacturing Survey was released on Monday, and despite the bad headline it was not a terrible report. The headline missed estimates (9.8 vs. E: 15.0), but the forward looking New Orders component remained solidly above 13. The reason the report was not that bad was the fact that it had started to run hot at unsustainable level recently, and was due for a dip. And the correction we saw in the June data wasn’t too deep, and the details remained encouraging.

The Philly Fed Survey out on Thursday was not as bad a miss as the Empire data on the headline (19.5 vs. E: 22.0), but the details definitely dimmed the outlook for the Mid-Atlantic manufacturing sector. The forward-looking component of the report, New Orders, fell more than 20 points to just 2.1. The survey Philly data last week finally started to show a decline in enthusiasm from the extremely strong survey reports we’ve seen since the election. If these reports are foreshadowing a pullback in the broader US economy, that would be very bad for stocks, as solid growth is still priced into the market at current levels.

Housing data was mixed last week as the Housing Market Index missed expectations, but Housing Starts and Permits were very solid. Data on the real estate market has been all over the place recently, and it will take more data to try to decipher where the trends actually are in the sector. But if the strong Starts and Permits data from last week are any indication (this is a more material data point than the Housing Market Index) that will be a sign of confidence in the US economy.

Lastly, jobless claims were very solid last week as new claims fell back towards a four-decade low. The very positive weekly report was significant, because the data collected corresponds with the survey week for the July BLS Employment report. So, based on jobless claims alone we can expect another very strong official employment report early next month.

Time is money. Spend more time making money and less time researching markets every day.

Goldilocks Jobs Report Preview, July 6, 2017

/in /by

Goldilocks Jobs Report Preview: What Will Make the Report too Hot, too Cold, or Just Right?

Given the Fed’s newfound confidence in inflation and economic growth, the bigger risk for stocks will be if tomorrow’s number comes in “Too Cold,” and further implies the economy is losing momentum into a hiking cycle.

However, while a “Too Cold” scenario would likely be the worst outcome for stocks, “Too Hot” wouldn’t be ideal, either, as it would cause a resumption of the reflation trade we saw in June.

So, there are two-sided risks into tomorrow’s jobs report, and if it’s outside of the “Just Right” scenario, we will either see some important sector rotation, or a broader market movement.

 

jobs report

“Too Hot” Scenario (Potential for Two More Rate Hikes in 2017)

• >250k Job Adds, < 4.1% Unemployment, > 2.9% YOY wage increase. A number this hot will open the discussion for another rate hike, likely in September or November.

Likely Market Reaction: We should see a powerful reengagement of the “reflation trade” from June… (withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Just Right” Scenario (Confirms expectations of September balance sheet reduction & December rate hike)

• 125k–250k Job Adds, > 4.1% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would reinforce the current expectation of balance sheet reduction in September, and one more 25-bps rate hike in December.

Likely Market Reaction: This is the most positive outcome for stocks… (withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Too Cold” Scenario (Economic Growth Potentially Stalling)

• < 125k Job Adds. The key to a sustained, longer term breakout in stocks is stronger economic growth that leads to higher interest rates, and a soft number here would further undermine that outcome, and imply the Fed is hiking rates into an economy that is losing momentum.

Likely Market Reaction: (Withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Again, given the Fed and other central banks newfound hawkishness, this is the worst outcome for stocks over the coming weeks and months.

Bottom Line

This jobs report isn’t important because it will materially alter the Fed’s near-term outlook. Instead, it’s important because if it prints “Too Cold” it could send bonds and bank stocks through their 2017 lows. And while I respect the fact that stocks have been able to withstand that underperformance so far in 2017, I don’t think the broad market can withstand new lows in yields and banks.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

Market Implications of Fed Vice Chair Dudley’s Optimistic Statements

/in /by

Get the simple talking points you need to strengthen your client relationships—start your free trial of The Sevens Report now.

What are the market implications the optimistic statements from Fed Vice Chair (and President of the Federal Reserve Bank of New York) William Dudley’s optimistic statements this week?

Fed Vice Chair Dudley reiterated and bolstered Fed Chair Yellen’s “steady as she goes” message on rate increases last week, again dismissing low inflation as not a big enough problem to stop the Fed from continuing to hike.

Additionally, Dudley was optimistic about economic growth, saying he was “confident” the current economic expansion had plenty left in the tank.

Bottom line, Dudley reiterated that the Fed is committed to raising interest rates and removing accommodation, and that caused a mildly “hawkish” reaction across currencies and bonds.

It also helped push stocks higher (although stocks were already in rally mode). So, our general Fed outlook remains the same: Balance sheet reduction starting in September, and a rate hike in December.

However, in order for the hawkish tone from the Fed to get the Dollar Index and yields moving higher, we’ll have to see actual improvement in the economic data, and that remains elusive. As such, the market remains skeptical about future rate hikes, despite the Fed’s warnings (Fed fund futures are pricing in just a 20% chance of a September hike, and 40% chance of a December hike). So, the Fed has some work left to do on reestablishing its hawkish credibility after years of ultra-dovishness.

The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Start your free two-week trial today.

FOMC Preview and Projections plus the Wildcard to Watch, June 13, 2017

/in /by

FOMC Preview: Get the simple talking points you need to strengthen your client relationships with a free trial of The Sevens Report.

The Fed meeting is more important than any other this year, for the simple reason that it could either exacerbate the glaring discrepancy between stocks and bond yields (which would be negative for risk assets medium term), or it could help close the gap (which would be positive for risk assets).

Specifically, the bond market has quietly been pricing in the expectation of a “dovish hike” for this meeting via the decline in yields. That “Dovish Hike” means the Fed does hike rates 25 basis points, but makes the statement dovish enough that it doesn’t cause longer-dated yields (i.e. 10- and 30-year Treasuries) to rise. If the Fed executes on that expectation, then we will see the 10-year yield dip and likely test the 2017 lows of 2.14%, and again that is a problem for stocks over the medium/ longer term.

Looking at the actual meeting itself, whether it meets expectations, is dovish, or is hawkish, will depend not only on the rate hike, but also the inflation commentary and any guidance regarding “normalization” of the balance sheet.

What’s Expected: A Dovish Hike. Probability (this is just my best guess) About 70%. Rates: It would be a pretty big shock if the Fed didn’t hike rates tomorrow, so a 25-basis-point hike to 1.25% is universally expected. Statement: In paragraph one, the Fed should include some additional soft language regarding inflation, noting that it’s been soft for a few months. However (and this is important), the Fed should still attribute sluggish inflation to “transitory factors,” implying Fed members are still confident they will hit their 2% inflation goal. Dots: No change to the 2017 dots (so, still showing three hikes as the median expectation). Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Dovish If: No Hike or a Very Dovish Hike. Probability (again, my best guess) About 10%. Rates: It’s widely expected that Fed will hike rates, but there’s always a possibility of a surprise. More likely, the Fed will hike 25 bps and accompany it with a very dovish statement. Statement: The Fed changes the characterization of risks from “balanced” to “tilted to the downside,” or some similar commentary, thereby signaling rate hikes are off the table again. This is a very unlikely, but possible change. More likely is the Fed adding considerable language regarding concerns about lower inflation. Dots: A reduction of the dots to reflect just two rate hikes in 2017. Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Hawkish If: We get a regular hike, not a “Dovish” Hike. Probability About 20%. Rates: The Fed Hikes Rates 25 basis points. Statement: The Fed does not add softer language regarding growth or inflation in the first paragraph, and instead just largely reprints the May statement, which was dismissive of the recent dip in inflation and growth. Dots: The dots remain the same or even increase one rate hike in 2017 (this is unlikely, but possible). Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Wild Card to Watch: The Fed Balance Sheet

The market fully expects the Fed to elaborate on when and how it intends to reduce its balance sheet (i.e. the holdings of Treasuries it has purchased over the years through the QE program).

I covered why the balance sheet is important back in April (a link to that report is here) but the bottom line is that when and how the Fed begins to reduce its balance sheet (the term “normalize” is just Fed speak for “reduce Treasury holdings”) could be a substantially hawkish influence on the bond market, regardless of rate hikes.

Specifically for tomorrow, the key detail the market will be looking for is at what level of interest rates does the Fed begin to reduce its Treasury holdings. The number to watch here is 1.5%. It’s widely expected that at 1.5% Fed funds, the Fed will begin to reduce its balance sheet. If we get one more rate hike this year, then that puts balance sheet reduction starting in early 2018 (likely March).

For a simple reference, if the Fed statement or Yellen at her press conference reveals the Fed will reduce holdings before 1.5%, that will be hawkish. If it’s revealed that the Fed will reduce holdings after rates hike 1.5% that will be dovish.

Bottom Line

This Fed meeting is likely the most important of the year (so far), not just because we will get updated guidance on expected rate hikes and the balance sheet, but also because it comes at a time when we are at a tipping point for bond yields (if they go much lower and the yield curve flattens, more people will start talking recession risk). We also are potentially seeing a shift in stock sector leadership (from defensives/income to cyclicals/ banks), so understanding what the Fed decision means for rates will be critically important going forward. You’ll have our full analysis, along with practical takeaways, first thing Thursday morning.

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if The Sevens Report is right for you with a free two-week trial. 

Weekly Market Cheat Sheet, June 12, 2017

/in /by

The Sevens Report is the daily markets cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Weekly Market Cheat Sheet

Last Week in Review:

There were only a few economic releases last week and the Fed circuit was silent ahead of this week’s Fed events.

The headline of the ISM Non-Manufacturing PMI was largely in line with expectations at 56.9 for May, and the details matched as well. The one outlier was a sharp dip in the prices category, which fell to 49.2 from 57.6. It was the first sub-50 reading in 13 months. And while the one number by itself is not very alarming, pairing it with other soft price data of late, including the weak unit labor cost on Monday, inflation data is beginning to gain some attention. For now, it is just something to monitor and will not have a material effect on Fed policy yet.

Looking overseas, the EBC decision was the big event last week. As expected, rates were left unchanged and there were no changes in the QE program. The ECB changed their risk assessment to “balanced” and also removed the potential for lower interest rates going forward. Overall, the meeting was anti-climactic as a step was taken towards eventually ending QE, but no update on the timeframe was offered.

This Week’s Preview:

Focus will be on central banks this week as the Fed takes center stage Wednesday, the BOE is Thursday and the BOJ is Friday. The Fed will obviously attract the most attention as a rate hike is expected, but the outlook for future policy has grown cloudier. The market will be looking for any clues as to the number of rate hikes remaining in 2017, or whether the committee’s sentiment towards the economy has changed in recent months. We will have our full FOMC Preview in tomorrow’s Report.

As far as economic data goes, CPI and Retail Sales will both be released pre-market ahead of the FOMC on Wednesday (which we will provide a preview for, as always).

Later in the week we get the first look at June data from the Philly Fed Business Outlook Survey and the Empire State Manufacturing Survey as well as Industrial Production data for May. The latter will be important to see if the recent bounce in manufacturing data has continued at all in Q2 or not. Lastly on Friday, Housing Starts data for May will provide the latest update on the housing market.

Overseas, there are some important releases to watch beginning on Tuesday night with Chinese Fixed Asset Investment, Industrial Production, and Retail Sales all due at 10:00 p.m. ET. There are several second-tiered reports that may move market modestly if there are any surprises, but the only other report overseas really worth watching is the Eurozone HICP (their CPI) to see if inflation is firming at all or actually rolling over as some individual European country reports have shown (German CPI was -0.2 vs. E: -0.1% in May).

Get the simple talking points you need to strengthen your client relationships with the Sevens Report. Everything you need to know about the markets delivered to your inbox by 7am each morning, in 7 minutes or less. 

Weekly Market Cheat Sheet, May 29, 2017

/in /by

The Sevens Report is the daily markets cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Weekly Market Cheat Sheet May 29

Last Week in Review:

Economic data continued to underwhelm last week, and while for now, the lack of strong data isn’t preventing stocks from making incremental new highs. Beyond the short term, if we are going to see a material move higher from here, economic data needs to get better, period.

The two most important reports last week were the May Flash Manufacturing PMI and the April Durable Goods report, and both underwhelmed. The May flash manufacturing PMI dropped to 52.5, the lowest reading since of 2017, while Durable Goods was, as usual, a bit of a misleading number.

The headline on Durable Goods was better than expected at -0.7% vs. (E) -1.0%. We dismiss the headline because it’s massively influenced by the timing of airplane orders. Instead, we focus on New Orders for Non-Defense Capital Goods, Ex- Aircraft. That is the purest look at business spending and investment in the Durable Goods report, and there the results were a disappointment. NDCGXA was flat vs. (E) 0.2% increase while the March data was revised lower (from 0.2% to 0.0%).

Bigger picture, these soft business spending/investment numbers raise the question as to whether all this policy uncertainty regarding corporate taxes (will rates be cut, and what changes will occur with the deductibility of interest, etc.?) is starting to restrain business investment. To be clear, there’s no data that says it is being restrained, yet. However, it is a legitimate concern the longer we go with no clarity on taxes.

The other notable report from last week was the revision of Q1 GDP, and on the whole it was positive. Headline Q1 GDP was increased to 1.2% from 0.7%, and consumer spending (PCE) rose to 0.6% vs. (E) 0.3%. To be clear, that’s still pretty anemic consumer spending… but at least the numbers got a touch better.

Finally, turning to the Fed, the market traded slightly dovish last week after the release of the May FOMC minutes. In particular, worries about whether we’re losing upward momentum on inflation, combined with similar comments from Philly Fed President Harker a week ago, resulted in a slightly dovish move in currencies and bonds. But to be clear, the expectation for a June hike remains very high, and it’ll likely take a very soft core PCE Price Index (out today), and a bad wage number in Friday’s jobs report to put that June hike in doubt.

This Week’s Preview:

With the amount of economic data coming this week, it would be a busy week even if we had five days to absorb it all. So, it will be an especially busy week given we’ve got just four trading days this week.

First, it’s jobs week, so we get the ADP Jobs Report on Thursday (a day later due to Memorial Day), Jobless Claims on Thursday, and the government jobs report on Friday. We will send our standard “Jobs Report Preview” in Thursday’s report. As has been the case for virtually all of 2017, the wage numbers are almost as important as the actual jobs number itself, as signs of further deterioration could lead to a dovish Fed while a strong number could put upward pressure on the expected number of hikes in 2017 (from three to four).

Right behind the jobs report in importance this week is the May final manufacturing PMI, out Thursday. Obviously, with the disappointing flash PMI, a slightly better number this week will help inject a bit more confidence into the state of economic momentum here in the US.

And while the US number is important, the most important manufacturing PMI this week may be China, which comes tonight. Very quietly, Chinese data has been softening, and if we get a surprisingly bad number that could send a macro shock through markets.

Turning to inflation, our focus there will be a bit more acute this week given the FOMC minutes and Harker’s comments from last week. That means that today’s Core PCE Price Index, which is contained in the Personal Income and Outlays report, will be important. If it shows evidence of moving down further from the Fed’s 2.0% yoy target, that will create a dovish response from markets and sink Treasury yields further (which will be a negative for stocks).

Bottom line, the jury is still very much “out” on the current momentum in the US economy. In an absolute sense, data remains “ok,” but we are not seeing the acceleration everyone thought we would when the reflation trade was roaring back in Dec/Jan. If data continues to underwhelm, it will become a headwind on stocks beyond the short term… and again, that’s a point that is very important not to miss. We need better data to make this rally sustainable above 2400.

Get the simple talking points you need to strengthen your client relationships with the Sevens Report. Everything you need to know about the markets delivered to your inbox by 7am each morning, in 7 minutes or less. 

Weekly Market Cheat Sheet, May 22, 2017

/in /by

The Sevens Report is the daily markets cheat sheet our subscribers use to keep up on markets, leading indicators, seize opportunities, avoid risks and get more assets. Get a free two-week trial with no obligation, just tell us where to send it.

Economic and Investing Cheat Sheet - May 22

Last Week in Review:

There weren’t many economic reports last week, and the data we did get was mixed. In sum the data did nothing to remove the growing feeling that the US economy is losing momentum.

First, the initial look at May data in the form of the Empire State Manufacturing Index badly missed at -1.0 vs. (E) 8.0, but the Philly Fed Business Outlook Survey on Thursday contrarily blew away expectations (38.8 vs. E: 19.6). The net effect is that it put more focus on this week’s flash manufacturing PMI to give us a true look at the pace of manufacturing activity in May.

In the US housing market, the Housing Market Index beat expectations on Monday (70 vs. E: 68), but Housing Starts data on Tuesday whiffed (1.172M vs. E: 1.256M).

The most encouraging report last week was Industrial Production, which beat estimates of 0.4% with a headline print of 1.0%. But, a lot of that “beat” came from auto manufacturing, and activity in that sector has almost certainly peaked (remember Ford is cutting employees amidst more challenging sales environments). Point being, the Industrial Production beat is likely a one off, not the start of a trend.

Rounding things out with the labor market, weekly jobless claims fell 4K to 232K, as the general trend lower remains very well defined. Continuing claims fell to a 29-year low while its four-week moving average fell to a 43-year low. This encouraging report was especially notable because the data was collected from the week corresponding with the survey week for the May jobs report, and the strong print suggests that May could be another very strong month for the labor market. Bottom line, economic data last week did not materially change our outlook for the markets.

This Week’s Preview:

This will actually be a relatively busy week of economic data, as we get the flash manufacturing PMIs, Fed minutes from the May meeting, and other important economic reports.

The most important report this week will be Wednesday’s May flash manufacturing PMI. This will be the first major data point for May and it needs to show stabilization and, better yet, acceleration for stocks to rally.

Second in importance this week will be the FOMC minutes. Markets have priced in a slightly more dovish Fed given the soft inflation data recently, but markets have overestimated the Fed’s dovishness throughout 2017. If the minutes are hawkish, that could push yields and the dollar higher (which would be stock positive).

Meanwhile, there are two reports on housing data, New Home Sales and Existing Home Sales due out on Tuesday and Wednesday, respectively. Investors would welcome a rebound after last week’s soft Housing Starts report.

Finally, both the second look at Q1 GDP and Durable Goods Orders will be released Friday morning. The latter will be closely watched as the gap between soft and hard data remains a concern, and a strong revision to GDP and a good Durable Goods number will help close that gap. Bottom line, economic data remains the key to reigniting the reflation trade (remember, it’s #1 in my list of four events needed to restart the rally). So, the market needs good data and a confident/hawkish Fed for stocks to again test recent highs.

Get the simple talking points you need to strengthen your client relationships with the Sevens Report. Everything you need to know about the markets delivered to your inbox by 7am each morning, in 7 minutes or less. 

FOMC Preview and the Next Rate Hike, May 2, 2017

/in /by

Get the simple talking points you need to strengthen your client relationships with a free two-week trial of The Sevens Report.

There is virtually no chance the Fed will hike rates at tomorrow’s meeting, as the chances were slim before the recently disappointing economic data. Now, those chances have declined to near zero. The key question tomorrow is: Just how forcefully will the Fed telegraph the next rate hike?

The answer to that question, taken in the important context of the recent slowing of economic momentum, will decide whether the FOMC decision pushes stocks higher, or whether we see a retracement of the recent gains.

May FOMC Meeting Preview + Next Rate Hikes

Hawkish If: The Fed clearly signals a rate hike is coming in June. Right now, Fed fund futures are pricing in about a 70% chance the Fed does hike rates, but that’s not a consensus expectation, yet. If the Fed specifically points to the “next” meeting in tomorrow’s statement (as it did in the fall of 2015 and 2016) as the likely date of the next rate increase, you will see markets react hawkishly as a June rate hike is not a foregone conclusion. Additionally, if the Fed is still intent on hiking rates in June despite recent economic data disappointments, that might imply a Fed that is more hawkish than previously expected.

Likely Market Reaction: Withheld for subscribers. Unlock with a free two-week trial of The Sevens Report.

Meets Expectations If: The Fed slightly downgrades the assessment of the economy in paragraphs one and two, but also says any slowing of activity is likely only temporary (it’s the temporary part that is the key). Markets expect the Fed to acknowledge the modest loss of economic momentum, but not to make too big a deal out of it.

Likely Market Reaction: Withheld for subscribers. Unlock with a free two-week trial of The Sevens Report.

Dovish If: The Fed materially downgrades economic commentary in paragraph one and downgrades the outlook on inflation, and in doing so materially reduces the chances for a June rate hike. Specifically, to be dovish we would need to see 1) A downgrade of both the growth and inflation language in paragraph one, plus no mention of it being temporary. The net effect would be to remove the expectation for a June rate hike.

Likely Market Reaction: Withheld for subscribers. Unlock with a free two-week trial of The Sevens Report.

Wildcard to Watch

Fed Balance Sheet. As we have covered, the reduction of the Fed’s balance sheet is an important but under reported topic that could result in a more-hawkish-than-anticipated Fed. Specifically, the major questions facing the Fed regarding the balance sheet are:

1) When will the Fed begin to reduce the balance sheet (2017 or 2018)?

2) What securities will the Fed stop buying (just Treasuries or Mortgage Backed Securities, too)?

3) How will the Fed stop reinvesting proceeds (all at once, or gradually)?

How these questions are answered will determine whether the Fed balance sheet is a hawkish influence on markets (yields up, stocks potentially down).

I (and almost everyone else) do not expect the Fed to touch on this in this week’s meeting. However, if the Fed does address this topic, it will come in paragraph five of the statement. Any change there will likely have hawkish implications on markets tomorrow, but again any changes are unlikely.

Join hundreds of advisors from huge brokerage firms like Morgan Stanley, Merrill Lynch, Wells Fargo Advisors, Raymond James and more… see if The Sevens Report is right for you with a free two-week trial. 

Did Trump Just Kill The Reflation Trade? April 13, 2017

/in /by

Did Trump Just Kill The Reflation Trade? An excerpt from today’s Sevens Report.

Trump - YellenPresident Trump, in an interview with the WSJ yesterday, appeared to change his policy on the Fed and interest rates. Specifically, Trump said he thought the dollar was getting too strong, that he favored a low interest rate policy, and he was open to keeping Yellen as Fed Chair. It was the second two comments that caught markets attention and caused a “dovish” response in the dollar and bond yields (both of which fell).

The reason these comments were a surprise was because it was generally expected Trump wouldn’t keep Yellen and was in favor of a more hawkish Fed Chair and appointing more hawkish Fed governors (there are currently three vacancies on the Fed President Trump can fill).

So, the market was expecting Trump to be a hawkish influence over the coming years, but yesterday’s comments contradict that expectation.

Going forward, from a currency and bond standpoint (the short term reaction aside) I do not see Trump’s comments as a dovish gamechanger for the dollar or rates. Yes, near term it appears the trend for the dollar is sideways between 99.50ish and 102 while the 10-year yield has broken below support at 2.30%.

But, I don’t see Trump’s comments sending the dollar back into the mid 90’s, nor do I see them sending the 10 year yield below 2%.

I also don’t expect this dovish reaction to be a material boost for stocks, because dovish isn’t positive for stocks any more (in fact the comments are causing the stock sell off this morning—more on that in minute).

Bigger picture, the longer-term path of the dollar and bond yields will be driven by growth, inflation and still ultra-accommodative foreign central banks.

Better economic growth (either by itself or with policy help) is the key to the longer-term direction of the dollar and rates (and we think that longer-term trend remains higher).

However, in the near term, his comments sent the 10 year yield decidedly through support at 2.30%, and that is causing stocks to drop as Treasury yields continue to signal that slower growth and lower inflation are on the horizon. And, since the market has rallied since the election on the hopes of better growth and higher inflation (i.e. the reflation trade) this drop in yields is hitting stocks.

The violation of support in the 10 year yield at 2.30% is important and a potentially near term bearish catalyst for stocks. If the ten year yield doesn’t stabilize and make some effort to rally over the next few days, a test of 2300 or 2275 in the S&P 500 would not shock me.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. Get your free 2-week trial at the Sevens Report.

Last Week and This Week in Economics, April 3, 2017

/in /by

“Last Week and This Week in Economics”—an excerpt from today’s Sevens Report: everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.

Last Week

Sevens Report - April 3, 2017 - This Week and Last WeekEconomic data was sparse again last week, but what data did come beat expectations (although it didn’t do a lot to bridge the gap between survey-based indicators and hard economic data). Still, the numbers did continue to be enough to offset growing Washington noise.

Consumer confidence was the highlight of the week, and it blew away expectations. The number rose to the highest level since summer 2001, coming in at 125.6 vs. (E) 113.8. While a strong number, that is another sentiment survey, and these soaring sentiment surveys need to start reflecting in the hard data starting in Q2 (remember, Q1 GDP is still expected to be around 1%).

The other notable number last week was Pending Home Sales, which also beat estimates, rising 5.5% vs. (E) 2.5%. The biggest takeaway from the March housing data is that it appears higher mortgage rates are not hurting the residential housing market, and that’s an important but underappreciated tailwind on the economy, generally speaking. Going forward, a stable housing market remains critical if there’s any hope to seeing a material economic acceleration.

Bottom line, the last two weeks have been light on economic data, but what numbers we’ve got have generally been good, and as a broad statement the economic data has continued to offset lack of progress in Washington… but that trend will be put to the test this week.

This Week

After two quiet weeks of economic releases, we more than make up for it this week, as the three most-important economic releases of the month all come over the next five days. From a broader context standpoint, with Washington stuck in neutral and hopes of big tax reform fading, economic data needs to stay firm to support stocks. If the data disappoints this week, don’t be surprised if we test last week’s lows.

The most important release this week is Friday’s jobs report. We will do our typical “Jobs Report Preview” later this week, but again it’s important this number is Goldilocks, in that it’s strong enough to support the market, but not so strong that it makes a May rate hike more likely.

The next most-important release this week is the global manufacturing PMIs (out today). The European and Asian numbers have already been released, and focus now turns to the March ISM Manufacturing PMI at 10 a.m. today. This number is taking on a bit more significance due to the disappointment of the flash manufacturing PMI of two weeks ago. It hit a surprise six-month low, so markets will want to see the ISM Manufacturing PMI refute that reading.

The manufacturing PMI is followed by the global manufacturing PMIs out Tuesday night/Wednesday morning. Those reports will again potentially confirm the uptick in global growth, and especially in Europe, where numbers have been strong lately. Domestically, it’s the same story. Economic data needs to support this market in the face of disappointment from Washington. Failure to do that puts this rally at risk.

The only other notable event this week will be the ECB minutes. If the minutes read hawkish, that could put a temporary headwind on HEDJ and long Europe positions. But a dip will likely be a buying opportunity in HEDJ.

Help your clients outperform markets with the Sevens Report. Claim your free trial today: 7sReport.com.