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Presidential Cycles and Markets

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What’s in Today’s Report:

  • The Presidential Cycle and Financial Markets

Futures are higher with most overseas markets thanks to positive trade headlines and easing Brexit concerns.

Treasury Secretary Mnuchin said last night that Chinese Vice Premier Liu He will travel to Washington for high level trade negotiations in two weeks and that China has encouragingly made significant agricultural purchases so far this week.

British courts ruled the suspension of Parliament by Boris Johnson unlawful, reducing odds of a no-deal Brexit.

Today, there are a few economic reports to watch: S&P Case-Shiller HPI (E: 0.1%), FHFA House Price Index (E: 0.2%), and Consumer Confidence (E: 133.6) and no Fed speakers are scheduled to speak.

There is however a 2-Yr Treasury Note auction at 1:00 p.m. and the results have recently led to sizeable moves in the bond market and subsequently influenced stocks, so there is a potential for volatility in the early afternoon.

Macro Outlook: Better, But Is It This Good?

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What’s in Today’s Report:

  • Macro Outlook Update:  Better, But Is It This Good?
  • Weekly Market Preview
  • Weekly Economic Cheat Sheet (Today and Friday are the key days)

Futures are flat as economic data was weak, but countering that was positive comments on U.S./China trade.

September EU flash composite PMIs were ugly, as the headline dropped to 50.4 vs. (E) 52.0 while manufacturing fell to 45.6 vs. (E) 47.3.  As usual, U.S./China trade is over shadowing everything else, but these are not good numbers and they do not imply global economic stabilization is occurring.

On U.S./China trade, the Chinese Ministry of Finance called last week’s talks “constructive” and that’s alleviating fears the earlier than expected departure implied a breakdown.

Today the key number is the Sept. Flash PMI (E: 51.2) and it needs to meet or beat expectations, otherwise concerns will continue to rise about the future growth of the U.S. economy.

There are also three Fed speakers (Williams (9:50 a.m.), Bullard (1:00 p.m.), Daly (2:30 p.m.)) we got a lot of Fed speak on Friday and it didn’t change the current outlook, so there’s no reason to think that will happen today.

Is the Tariff Delay Bullish?

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Today’s Report is attached as a PDF.

What’s in Today’s Report:

  • Why Isn’t the Tariff Delay Causing a Bigger Rally?
  • Bond Market Update:  Not Confirming 3000 in the S&P 500

Futures are marginally higher ahead of the ECB decision and following a short tariff delay by President Trump.

Trump announced that the October 1 tariff increases (25% to 30% on 250 bln of imports) will be delayed till October 15th as a gesture of “goodwill.”

Economic data was again soft as German Industrial Production dropped –0.4% vs. (E) -0.1%, continuing the trend of disappointing EU manufacturing data.

Today the key event is the ECB Meeting.  The decision is at 7:45 a.m. and the Press Conference will be held at 8:30 a.m.  For the ECB to meet expectations we need to see 1) A rate cut, 2) More QE and 3) A “Tiered” deposit system.  Outside of the ECB we also get two important economic reports,  CPI (E: 0.1%) and Jobless Claims (E: 215K) and they could move markets if they are surprises (especially is CPI runs hot).

Updated Market Multiple Table

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What’s in Today’s Report:

  • Updated Market Multiple Table
  • Contrarian Play: Bullish Breakouts in the Energy Patch

U.S. stock futures are suffering mild losses this morning as investors digest yesterday’s more pronounced sector-rotation money flows amid mixed economic data with focus turning to central bank events over the next week.

Chinese CPI and PPI were slightly firmer than expected in August, while French and Italian Industrial Production figures were underwhelming.

In the U.S., the NFIB Small Business Optimism Index was a mild disappointment at 103.1 vs. (E) 103.5 mostly due to declining growth expectations.

The mixed economic data, however, was not enough to materially affect investor sentiment and therefore is only having a modest impact on price action this morning.

Today, there is just one economic report to watch: July JOLTS (E: 7.311M) and there are no Fed officials speaking as they are in their “blackout period” ahead of next week’s FOMC meeting.

That will leave investors focused on the recently emerging “rotation trade,” and due to the heavyweight that tech stocks carry in the major indexes, if big tech names remain under pressure today, that will likely be a drag on the broader market.

Jobs Report Preview

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What’s in Today’s Report:

  • Jobs Report Preview (The Ideal Number for Markets and a Word of Caution for this Report)
  • Why the Starbucks (SBUX) Guidance Cut Caught My Attention

Futures are sharply higher after the U.S. and China confirmed trade talks will occur in early October (better late than never from a market standpoint).

The talks will be high level, with the three key principles (Liu He, Lighthizer and Mnuchin) all attending.

Economically, the only notable number was German Manufacturers’ Orders, which badly missed expectations, falling –2.7% vs. (E) -1.5%.  But that soft report was ignored on the kneejerk optimism of more U.S./China trade talks.

Focus today will turn back towards data now that we have a confirmation of future U.S./China trade talks, and the key reports today are (in order of importance):  ISM Non-Manufacturing Index (E: 54.0), ADP Employment Report (E: 150K) and Jobless Claims (E: 215K).

As has been the case since the Fed’s “hawkish cut,” good economic data will be positive for stocks, although at these levels the S&P 500 is trading well above the recent trading range, despite a lack of any actual progress in fundamentals.

Has There Been Actual U.S./China Trade Progress?

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What’s in Today’s Report:

  • Has There Been Actual U.S./China Trade Progress?
  • The Most Important Economic Number to Watch Going Forward

Futures are moderately higher as more positive U.S./China trade chatter fuels the rebound.

There was more vague, but positive, commentary on the tone of current U.S./China communications, as China called the conversations ”effective.”

There was a lot of economic data overnight and it was decidedly mixed.  Japanese IP beat estimates but German Retail Sales (-2.2% vs. (E) 1.1%) disappointed.  Bottom line, the outlook on the global economy remains decidedly mixed.

Today should be quiet given the looming holiday weekend, but the key number to watch is the Core PCE Price Index (E: 0.2% m/m, 1.7% y/y).  If that runs very “hot” (so a number close to 2.0%) that will be taken as slightly hawkish and could reverse some of this week’s rally.

Identifying Potential Positive Surprises

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What’s in Today’s Report:

  • Identifying Potential Positive Surprises
  • EIA/Oil Analysis

Futures are sharply higher on more positive U.S./China trade “chatter” and political resolution in Italy.

Chinese officials made general comments about not wanting to further escalate the trade war and won’t retaliate to the recent tariffs, and that’s helping sentiment.  But, to be clear, no actual progress has occurred – just vague rhetoric, and as far as we can tell the phone call between the two delegations has not occurred yet (remember it was loosely scheduled for Tuesday).  Point being, things haven’t improved as much as the two day rally would imply.

Economic data was decent as German unemployment met expectations while EU Economic Sentiment was better than expected (103.1 vs. (E) 102.5).  Regarding Italy, the country will avoid new elections, and while that’s not a sustainable positive catalyst for markets, it does, for now, remove another potential headwind.

Attendance and volumes will continue to decrease into the long weekend, but focus will remain on any trade related headlines.  Economically, the notable reports today include Q2 Revised GDP (E: 2.0%), Jobless Claims (E: 213K) and Pending Home Sales (E: -0.3%) although none of those should move markets.

Bottom line, if Treasury yields are stable, stocks can hold these early gains, although we continue to caution this rally is being driven by month-end positioning more than any actual, positive progress on the headwinds facing this market.

Powell Speech Preview

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What’s in Today’s Report:

  • Powell Speech Preview
  • Can Strong Consumer Spending Prevent a Recession?

Futures are marginally higher following a quiet night as trader position ahead of the Powell speech later this morning.

Economic data was sparse overnight although core Japanese CPI met expectations at 0.6% y/y.

There was no trade news overnight although Kudlow (Director of the National Economic Council) said discussions between the U.S. and China were “productive” on Wednesday (although he always says that).

Today the big event is the Powell speech at 10:00 a.m. ET. From a market standpoint, the 10’s-2’s spread will tell us whether the speech is positive or negative for stocks.  If Powell is sufficiently dovish, then 10’s-2’s should widen out towards 5 basis points, and that should help stocks rally.  Conversely, if Powell is not sufficiently dovish, 10s’-2’s will invert, likely notably, and in that case, if could get a bit ugly for stocks in the afternoon.

Did the Yield Curve Actually Invert?

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What’s in Today’s Report:

  • Why Italian Political Drama Matters to You
  • Did the Yield Curve Actually Invert? Only Sort Of

Futures are solidly higher this morning, rising in sympathy with EU shares as Italian political concerns ease while a German Bond auction was unexpectedly weak, both of which are helping bolster stocks.

In Italy, odds of a coalition government being formed are rising materially, reducing fears and general uncertainties surrounding new elections this fall.

Economic data was thin o/n however there was a soft 30-Year Bond auction in Germany this morning which is helping yields rise and fueling general risk-on money flows.

After a choppy start to the trading week, the list of market catalysts picks up today as there is one economic report: Existing Home Sales (E: 5.380M) but investors will be primarily focused on the July FOMC Meeting Minutes (2:00 p.m. ET).

If the Minutes release is another “hawkish disappointment” like the announcement and Powell’s press conference were in late July, we could see another wave of volatility as investors’ dovish hopes are elevated going into the Jackson Hole Economic Symposium later this week.

Updated Market Multiples

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What’s in Today’s Report:

  • Market Multiple Table Updated

Futures are drifting higher this morning, tracking gains in overseas markets as the recent rally in global equities is digested amid a much quieter macro backdrop this week.

Sentiment towards the trade war has been improving since Friday as the Trump administration appears increasingly concerned with the impact of tariffs on the U.S. economy, and that is continuing to act as a mild tailwind on stocks.

There were no material economic reports or other market-moving headlines overnight.

Looking into today’s session, there are no economic reports in the U.S. however there are two more Fed officials scheduled to speak before Powell’s Jackson Hole speech on Friday: Daly (4:30 p.m. ET) and Quarles (6:00 p.m. ET).

If Daly and Quarles have a similar tone to Rosengren from yesterday, which was “less dovish” that could weigh on stocks in the after-hours session (both speakers are after the bell) as expectations for Powell to deliver a more well-defined, dovish policy outlook on Friday will be dialed back.