“To say a lot has transpired in the markets over the past three weeks would be an understatement,” Sevens Report analyst Tom Essaye wrote in a Thursday note to clients. Click here to read the full article.
What’s in Today’s Report:
U.S. equity futures are trading with tentative gains amid a stable bond market following good data out of Europe as focus shifts to Powell’s Congressional testimony today.
The ECB’s latest consumer survey showed a notable drop from 3.0% to 2.5% in three year inflation expectations which is helping bonds stabilize while German Manufacturers Orders came in at 1.0% vs. (E) -0.6%, underscoring a resilient Eurozone economy.
This morning, focus will be exclusively on Powell testimony before the Senate which begins at 10:00 a.m. ET as investors will be looking for any new insight on the pace of future rate hikes (25 or 50 basis point hike this month?) and/or the expected terminal rate (currently priced in near 5.375%). If Powell strikes a hawkish tone, expect volatility in stocks amid a potentially sharp rise in yields.
Looking into the afternoon, there is a 3-Yr Treasury Note auction at 1:00 p.m. ET which should offer some clues to how the bond market digests Powell’s first day of Congressional testimony (a badly tailing auction could further weigh on stocks), while there is one economic report due out late in the day: Consumer Credit (E: $26.4B), but unless the number comes in well above estimates, it should not move markets.
What’s in Today’s Report:
Futures are modestly higher as a soft EU inflation reading is helping to extend Thursday’s rally.
Euro Zone PPI came in much lower than expectations (15% vs. (E) 17.7% y/y) and that’s helping to slightly offset the hot inflation data from earlier in the week.
Economically, Euro Zone and UK Composite PMIs were generally in-line with expectations.
Today the key report will be the ISM Services PMI (E: 54.5). For stocks and bonds, the best case for this report is that the headline is stable (not much above expectations) while the price indices decline. If that happens, stocks can extend the rally.
We also get several Fed speakers today including Logan (11:00 a.m. ET), Bostic (11:45 a.m. ET), Bowman (3:00 p.m. ET) and Barkin (4:15 p.m. ET). If they echo Bostic’s comments from yesterday about the Fed being done with hikes by mid to late summer, that will be a tailwind on stocks.
What’s in Today’s Report:
Stocks futures are trading with modest gains this morning while Treasury yields are tracking European bond yields higher following stubbornly high inflation data overnight.
Economically, both Spanish and French CPI headlines were hotter than expected, above 6%, which saw European rates markets price in a 4% terminal ECB rate for the first time. Government bond yields across the Eurozone notably rose to multi-year highs.
Looking into today’s session, there are several economic reports to watch including: International Trade (E: -$91.0B), Case-Shiller Home Price Index (-0.5%), FHFA House Price Index (E: -0.3%), and Consumer Confidence (E: 108.5).
Traders will be looking for less signs of stagflation in the data as elevated inflation figures and weakening growth metrics were a headwind for equities last week.
Finally, the Chicago Fed’s Goolsbee (who just succeeded Evans) has his first speaking engagement since taking over the role at 2:30 p.m. ET, and as a voting member of the FOMC, his comments will be closely watched for any new clues about Fed policy plans in the months ahead. A notably hawkish tone, could easily cause another bout of volatility in risk assets this afternoon.
“Markets are admitting the Fed may not be close to done,” Sevens Report strategist Tom Essaye wrote in a Tuesday note, as stocks sank following worse-than-expected retail earnings. Click here to read the full article.
Investors took profits on Friday while they could ahead of the weekend…explained Tom Essaye, founder of Sevens Report Research. Click here to read the full article.
The looming jobs report is a reminder that expectations for Fed policy are the key influence on this market right now…Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter, told Bloomberg. Click here to read the full article.
What’s in Today’s Report:
Futures are slightly lower as markets continue to digest Wednesday’s Fed decision (50 bps in March or five hikes in 2022) amidst mixed earnings results.
AAPL posted better than expected earnings and the stock was up 3% overnight, but overall results continue to be mixed and that’s contributing to market volatility.
Today’s focus will be on important inflation data and the reason is clear: If the inflation data is materially stronger than estimates, that will only encourage the Fed to get more hawkish/unpredictable, and that will add to the headwinds on stocks. The key inflation numbers to watch today are: Core PCE Price Index (E: 0.5%, 4.8%), Employment Cost Index: (E: 1.2%, 4.1%), and the Inflation Expectations in the 10:00 a.m. Consumer Sentiment Index.
We also get some notable earnings today, including CAT ($2.22), CVX ($3.10), SYC ($1.47), and CL ($0.79). But, barring a major disappointment, they shouldn’t move markets.
For index investing, the appeal is that human decision-making, human emotions are taken out of it. That works all well and good until a stock that is supposed to be…said Tom Essaye, a former Merrill Lynch trader who founded “the Sevens Report” newsletter. Click here to read the full article.
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Below you’ll find six charts, spanning asset classes and economic data.
The charts are divided up into two groups.
Group 1 is comprised of four charts that explain why stocks have rallied so nicely in 2017, and why, in the near term, the trend in markets is still higher.
Group 2 is comprised of two charts that look into the future, and show that despite a bullish set up right now, there are real, serious reasons to be worried about how long this rally can last. Point being, these indicators are telling you not to be complacent!
Group 1: Why Stocks Have Rallied
Chart 1: Economic Data
Chart 2: Earnings Growth
Earnings and Economic Data – The Unsung Heroes of 2017
We have said since the early summer that an acceleration in economic data and earnings growth have been the unsung heroes of the 2017 rally.
And, as long as both of these factors continue to trend higher, that will underpin a continued rise in U.S. stocks, regardless of noise from Washington, North Korea, Russia, etc.
Chart 3: S&P 500
The Trend Is Your Friend
The trend in stocks has been relentlessly higher since early in 2016, and the S&P 500 has held that trend line through multiple tests.
Bottom line, the technical outlook on this market remains powerfully positive.
Chart 4: Commodities (Oil & Copper)
There are few better indicators of global economic growth than industrial commodities, and two or the most important (oil and copper) have been telling us for months that global growth is accelerating.
And, as long as oil and copper are grinding to new highs, that will be a tailwind not just on U.S. stocks, but on global stocks as well.
Group 2: Risks to This Rally
While the four charts above explain why stocks have rallied and why the outlook remains, broadly, positive, there are still risks to this rally and this market.
Don’t be fooled into being complacent with risk management, because while trends in U.S. and economic growth, earnings and the stock market are all still higher, there are warning signs looming on the horizon.
Chart 5: Inflation (Warning Sign #1)
Non-Confirmation: Why Isn’t Inflation Rising?
Inflation remains inexplicably low, considering that we’re near full employment and global economic growth is accelerating.
And, accelerating inflation remains the missing piece of a true “Reflation Rally” that can carry stocks 10%, 15% or even 20% higher over the coming quarters and years.
But, it’s not just about missed opportunity.
The lack of inflation is a big “non-confirmation” signal on this whole 2017 rally, and if we do not see inflation start to rise, and soon, that will be a major warning sign for stocks, because…
Chart 6: The Yield Curve – Will It Invert?
Yield Curve: Sending a Warning Signal?
If the outlook for stocks is so positive, then why did the yield curve (represented here by the 10’s – 2’s Treasury yield spread) equal 2017 lows on Wednesday?
Simply put, if we’re seeing accelerating economic growth, rising earnings, potential tax cuts and all these other positive market events, the yield curve should be steepening, not flattening.
So, if this 10’s – 2’s spread continues to decline, and turns negative (inverts) then that will be a sign that investors need to begin to exit the stock market, because a serious recession is looming, and the Fed won’t have much ammunition to fight it.
If I was stuck on a desert island (with an internet connection and access to my trading accounts of course) and could only have one indicator to watch to tell me when to reduce exposure in the markets, this 10’s – 2’s spread would be it – and it’s not sending positive signals for 2018!
