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Was the Fed A Bullish Gamechanger?

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What’s in Today’s Report:

  • Fed Takeaways – Was It a Bullish Gamechanger? (Not Yet)
  • Jobs Report Preview
  • EIA/Oil Market Analysis

Futures are slightly higher as markets digest yesterday’s very dovish Fed statement and subsequent rally, while Chinese economic data beat expectations but still was weak in the absolute.

Chinese January Manufacturing PMI beat estimates at 49.5 vs. (E) 49.3, but it still signals outright contraction, so this doesn’t imply stabilization in that economy.

Other economic data from Europe, including Euro Zone GDP and German Unemployment, met expectations.

Today there are two economic reports, Jobless Claims (E: 220K) and the Employment Cost Index (E: 0.8%) but neither should materially move markets.

So, focus will move back to earnings (there are a lot of reports today and GE has started us on the right foot) and any headlines from the U.S./China trade talks.  Regarding U.S./China trade, we don’t expect a deal from this meeting, but more reports of progress will support (and likely extend) yesterday’s rally.

Jobs Report Preview

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What’s in Today’s Report:

  • Jobs Report Preview
  • Is the AAPL Decline an Opportunity for Value Stocks?

Futures are down more than 1% as AAPL sharply cut Q4 revenue guidance.

AAPL cut Q4 revenue guidance to $84 bln from the previous $89-$93 bln range, citing slowing Chinese demand as the main negative influence.

Economically UK Construction PMI and Euro Zone Money supply both slightly missed expectations.

The entire tech sector will be in focus today to see how well it can hold up in the face of the AAPL news, which wasn’t a shock as analysts and suppliers have been cutting IPhone numbers for months.  If stocks can set the lows early in the day and rally back, that would be an anecdotal sign near term selling pressure may be exhausted.

Away from AAPL, we get a lot of economic data today including (in order of importance): ISM Manufacturing Index (E: 57.9), ADP Employment Report (E: 175K), Jobless Claims (E: 217K) and Motor Vehicle Sales (E: 17.3M).  Data today could be important because if the data is firm, it should decrease the AAPL fallout.  However, if the data is weak, then it’s going to be another ugly day as the news will reinforce worries about corporate earnings and economic growth.

Technical Update (Encouraging Signals)

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What’s in Today’s Report:

  • Market Technical Update (Encouraging Signals)
  • Why Stocks Rebounded Yesterday
  • Why the Yield Curve Has Flattened SO Quickly (Blame Oil)

Futures are modestly lower as markets digest yesterday’s late day rally and look ahead to this morning’s jobs report.

Geopolitically, initial reports imply the U.S./China trade talks will continue despite the Huawei CFO arrest, which if confirmed is clearly a positive.

Global economic data was mixed again as Chinese currency reserves beat estimates while German IP missed.  But, neither number is moving markets this morning.

Today is all about the jobs report and given sudden uncertainty on Fed policy (will they pause?) this jobs report is now the most important one of the year.  Expectations are as follows:  Job Adds: (E) 190K, UE Rate: (E) 3.7%, Wages (E) 3.2% yoy), and the best outcome for stocks is a “mild miss” across all three segments.

Away from the jobs report we also get Consumer Sentiment (E: 97.4) and one Fed speakers, Brainard (12:15 p.m. ET).

Jobs Report Preview

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What’s in Today’s Report:

  • Jobs Report Preview
  • Technical Update:  Good Bounce, Poor Price Action

Futures are modestly higher on continued momentum from the Wednesday rally, as markets ignored more disappointing economic data.

For the second straight night foreign economic data disappointed, and this is a becoming a disconcerting trend.  UK Manufacturing PMI dropped to a 27 month low at 51.1 vs (E) 53.6.

AAPL reports today but after the bell, so the focus of the regular session today will be on economic data.  There are three reports to watch but the ISM Manufacturing Index (E: 59.0) is the most important one, followed by  Jobless Claims (E: 212K) and Productivity and Costs (E: 2.3%, 1.1%).  Bottom line, we need Goldilocks data (not too strong to make the Fed hawkish, not too weak to get us worried about growth) to further fuel this rebound.

Higher Rate Playbook

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What’s in Today’s Report:

  • Higher Rate Playbook Revisited
  • Was Yesterday a Reversal?

Futures are flat following a generally quiet night as markets look ahead to this morning’s jobs report.

Economic data and earnings overnight were solid as Samsung posted good numbers while German Manufacturers’ Orders handily beat expectations (2.0% vs. (E) 0.2%).

There was no notable trade news or European political news (Italy) out overnight.

Today the focus will be on the jobs report, and expectations are – Jobs: 180k, Unemployment: 3.8%, Wages: 0.3% m/m, 2.9% y/y.

The key is the wage number, and if it prints a 3.0% yoy gain, look for Treasuries and the dollar to rally.  A rally in the dollar to the mid 96 level and the 10 year yield moving into the mid to high 3.20% range will likely pressure stocks again.

Outside of the jobs report, there are two Fed speakers, Kaplan (12:30 p.m. ET) and Bostic (12:30 p.m. ET) but neither should move markets.

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Jobs Report Preview, October 5, 2017

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Hurricanes Irma and Harvey have sapped some of the importance from tomorrow’s jobs report because it’s likely going to be temporarily distorted lower than it should otherwise be. Case in point, the expectation is for 100k job adds when it should normally be about double that. So, it’s likely we’ll get a soft number and it’ll be dismissed by the markets.

But, it’s not clear what impact the storms will have on the wage component (theoretically it shouldn’t be much). Regardless, the practical effect is that is we see a soft number tomorrow (jobs and wages) it will be handed a relative pass given the storms.

That said, the jobs report still remains very important from a “reflation rally” standpoint. This week, the Manufacturing and Non-Manufacturing PMIs and auto sales have all helped to push stocks slightly higher, despite the market’s clear preference to see some profit taking in the reflation sectors. If tomorrow’s jobs report is “Just Right” and the wage number is firm, that will add fuel to the “reflation rally.”

From a practical standpoint, I’ll be adding about 75k jobs to whatever the number is on Friday to account for one-time, Hurricane Harvey/Irma-related declines.

“Too Hot” Scenario (A December Rate Hike Becomes 100% Certain, Risk Increases for More than Three Hikes in 2018)

>200k Job Adds, < 4.1% Unemployment, > 2.8% YOY wage increase. A number this hot will reinforce that an economic reflation is in deed underway, and it’ll likely make the Fed marginally more hawkish. Likely Market Reaction: This would not result in a “Virtuous Reflation.”…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Just Right” Scenario (Leaves a December Rate Hike Likely But Not Certain)

• 50k–200k Job Adds, > 4.2% Unemployment Rate, 2.5%-2.8% YOY wage increase. This gap is really wide because of the hurricanes, but the best scenario for stocks would be a print at the upper end of this range. Likely Market Reaction: A continued “Virtuous” reflation…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Too Cold” Scenario (Economic Growth Potentially Stalling)
< 50k Job Adds, < 2.5% YOY Wage Gains. Again, this number is artificially low because of the hurricanes, but if we see a big disappointment in the jobs number and a further softening of wage inflation that will send bond yields lower, but it would also likely weigh on stocks as it will raise concerns about economic growth. Likely Market Reaction: Bonds and gold should…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

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Jobs Report Preview, August 31, 2017

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Before getting into this month’s jobs report preview, I want to point out that August jobs reports have a history of being the worst reports of the year, and often provide negative surprises. The reason why isn’t exactly clear. It likely has to do with the resumption of college and end of summer jobs, although that’s never been statistically verified. The reason I’m telling you this is because if there’s one month where a soft jobs report is at least partially overlooked, it’s August. Point being, a soft jobs report tomorrow won’t be as “dovish” as a soft jobs re- port any other month.

Bigger picture, the inflation component of this report remains key. A December rate hike isn’t certain, but if wages tick higher and the headline number is strong, that will push yields and the dollar higher, and stocks likely lower (at least in the short term). Longer term, though, we need a “reflation,” and that comes with better growth and inflation, so that’s the preferred outcome for anyone with a longer-term time horizon (which is all of us, I suspect).

“Too Hot” Scenario (A December Rate Hike Becomes More Certain)
• >250k Job Adds, < 4.1% Unemployment, > 2.8% YOY wage increase. A number this hot will refute the lower inflation numbers and reintroduce the potential for a “not dovish” Fed. Likely Market Reaction: We should see a powerful re-engagement…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Just Right” Scenario (Leaves a December Rate Hike As A 50/50 Proposition)
• 125k–250k Job Adds, > 4.2% 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 (maybe) one more 25-bps rate hike in December. Likely Market Reaction: A knee-jerk, mild stock rally..withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Too Cold” Scenario (Economic Growth Potentially Stalling)
• < 100k Job Adds, < 2.5% YOY Wage Gains. If we see a big disappointment in the jobs number and a further softening of wage inflation, that will send bond yields lower, but it would also likely weigh on stocks as it will raise concerns about economic growth. Likely Market Reaction: Bonds and gold should surge and the 10-year Treasury yield would…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

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Weekly Market Cheat Sheet, August 28, 2017

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Last Week in Review

There were only two notable economic reports last week, and neither were particularly controversial… and neither did anything to change the current market expectation of 1) High 2% to low 3% GDP growth in Q3, or 2) Fed reduction of the balance sheet in September.

Neither data point gave us any incremental color on whether the Fed will hike rates in December, although
we’ll get a lot more color on that issue this week. Looking at the data, the most important number last week was the August flash composite PMIs. The headline number beat at 56 vs. (E) 54.3, but that strong aggregate number hid some pretty significant discrepancies in the details.

The reason the PMIs beat was because of a surge in service companies. Flash service sector PMI rose to 56.9 vs. 54.8. But, the more important manufacturing PMI dropped to 52.5 vs. 53.2 (the manufacturing PMI is just a better reading of activity, so it’s more heavily weighted in the minds of economists).

So, despite the headline beat, this number was actually a disappointment, although I want to be clear that it was not an outright negative (PMIs need to drop below 50 before they imply economic activity is slowing). Bottom line, this is not the type of August reading that would make us think we’re seeing an economic acceleration.

Turning to Durable Goods, they were in line. Yes, the headline reading missed expectations as orders for Durable Goods fell -6.8% vs. (E) -5.8%. But, longer-time readers of this Report know you should ignore the headline as it’s massively skewed by airplane orders. The more important number is New Orders for Non-Defense Capital Goods ex Aircraft (NDCGXA) and it rose 0.4% vs. (E) 0.5%, although June data was revised 0.1% higher, so it was an in-line reading.

Again, we watch NDCGXA because it’s the best proxy for business spending and investment. And, similar to the flash PMI, while the number isn’t an outright negative, it’s not the kind of number that makes us think a broad economic acceleration is coming.

Bottom line, both numbers last week implied continued steady, but unspectacular, economic growth, and that’s simply not enough to cause a rising.

This Week’s Preview

This will be one of the busiest weeks of the year from an economic data standpoint, and it will come during one of the lowest liquidity weeks of the year… so the potential for data-based volatility this week is high.

The key reports this week (in order of importance) are: Jobs Report (Friday), Personal Income and Outlays (Thursday) and Global Manufacturing PMIs (Thursday night/Friday morning).

The reason those reports are ranked like that is because of inflation. Remember, barring a shockingly week Jobs Report on Friday, nothing is going to stop the Fed from reducing the balance sheet in September.

But, whether they hike rates in December remains uncertain, and the key variable that will decide that is inflation. So, that means that the wage number in Friday’s Jobs Report, and the Core PCE Price Index (the Fed’s preferred measure of inflation, which is contained in the Personal Income and Outlays report) will be the two key numbers this week.

If they run hotter than expected, you will see markets begin to price in the chance of a December rate hike, which would likely be a near-term headwind on stocks as a rate hike is not priced in to bond yields, the dollar or equities.

Turning to measures of economic growth, the August manufacturing PMIs are always important, but again there really shouldn’t be any major surprises here. A firm number in the US that refuted the soft flash PMI from last week would be welcomed as we need better growth to push stocks higher, but really the focus will be on inflation this week.

Looking at the dovish possibilities, we could easily see the data this week push the 10-year Treasury yield to new lows if the inflation data is underwhelming, and we would view that as a negative for stocks broadly.

Bottom line, I know this is a heavy vacation week, but it’s important one for Fed and ECB expectations, and that has the potential to move markets, especially given the precarious technical situation the S&P 500 is sitting in.

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Weekly Market Cheat Sheet, August 14, 2017

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Last Week in Review

There was more underwhelming economic data last week, especially on the inflation front, as the prospects for an economic reflation in 2017 continued to dim.

From a Fed standpoint, the disappointing CPI and PPI reports further reduce the chances of a rate hike in December, although importantly the Fed is still expected to begin to reduce its balance sheet in September.

Starting with the headline numbers, CPI and PPI, they were both disappointing. The Producer Price Index declined to -0.1% vs. (E) 0.1% while the core figure was flat vs. (E) 0.2%. Meanwhile, the CPI report was slightly less underwhelming at 0.1% vs. 0.2% on the headline, and the same for the core.

While these aren’t horrible numbers, they aren’t good either, and the bottom line is that statistical inflation
remains stubbornly low, and it is appearing to continue to lose momentum. Again, for context, that’s a problem because in this environment, with (supposedly) strong economic growth and low unemployment, inflation should not be going down. Period. And the longer it goes on, the more it sparks worries that eventual deflation or disinflation will rise, and that’s not good for an economy with still-slow growth and extended asset markets.

Bottom line, even before the uptick in North Korea jitters this was a market in need of a positive catalyst to spur further gains. Unfortunately, the economic data (ex-jobs and sentiment surveys) has been consistently underwhelming, so the chances of a rising tide driven by an economic reflation continue to dim. And while a “dovish” number may be good for a mild pop in the S&P 500, soft data and a lower dollar/bond yields aren’t going to drive the market to material new highs.

This Week’s Preview

This week is busy, with mostly anecdotal data that will give us a better overall picture of the economy and inflation—and the main risk to stocks now is that the data comes in light, and along with low inflation that spurs fears of an economic loss of momentum. If that happens, stocks will take out last week’s lows.

The most important report this week will be tomorrow’s Retail Sales report. Consumer spending has been lackluster for most of 2017, but around now we see a typical seasonal uptick. That will be welcomed by markets if that appears again this year. If the number is soft, it’s going to spur worries about the pace of economic growth (remember, hard economic data hasn’t been great all year, it’s been the PMI surveys that have been strong).

Beyond retail sales, we also get a first look at August economic data via the Empire and Philly manufacturing indices. Both numbers haven’t been highly correlated to the national PMIs lately, but it’s still our most-recent economic data and it could move markets, especially if we see any weakening in the data. Empire comes tomorrow and Philly comes Thursday.

Turning to central banks, we get the Fed minutes from the July meeting on Wednesday, and the ECB minutes from the July meeting on Thursday. The Fed minutes are important because we will be looking for clues as to how eager or committed the Fed is to September balance sheet reduction. With the ECB, the key will be seeing how committed or eager the ECB is to announce tapering of QE in September. As is usually the case, there shouldn’t be any big surprises in these minutes, but they could slightly shift expectations for those two events (balance sheet reduction/announcement of tapering), and as such also move Treasury yields and Bund yields.

Finally, July Industrial Production and Housing Starts also come this week (Thursday and Wednesday,
respectively). Again, these are an opportunity for the hard data to rise and meet strong soft data surveys, and in doing so reassure investors that the economy’s accelerating.

Bottom line, none of the numbers this week are “major,” but in aggregate they will give us a lot more insight into the pace of economic growth and the outlook for the Fed and ECB. And, this market needs some economic reassurance to help bolster sentiment after last week. Better data and steady Fed/ECB are a needed boost markets this week.

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Weekly Market Cheat Sheet, August 7, 2017

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Weekly market cheat sheet

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Last Week in Review

Friday’s jobs report caused a mild reversal of the week’s long downtrend in yields and the dollar, but that was more a function of “covering shorts” on the news rather than it was a function of the jobs report being materially hawkish (it met our “Just Right” scenario).

In total, while unemployment dipped further and wages were steady, in aggregate the economic data from last week largely reinforces the “stagnation” outlook for markets (slow-but-steady growth, low inflation).

Starting with the jobs report, as mentioned, it hit the upper end of our “Just Right” scenario. The headline job adds was stronger than expected (209k vs. 178k) while the June revisions were positive (up 9k to 231k).

Meanwhile, unemployment and wages met expectations: 4.3% unemployment and 0.3% wage gains, with a 2.5% yoy increase. In all, it’s a pretty Goldilocks jobs report, as job adds remain strong and the downtrend in wage inflation appears, at least in July, to have stopped.

That’s why we saw the rally in the 10-year Treasury yield and dollar. It wasn’t that the report was hawkish, but it did stop the trend in lower inflation stats. And, with a market as stretched to the downside as the Dollar Index and 10-year yield both are, it caused a snap-back rally.

Importantly, other than potentially making a December rate hike slightly more expected, Friday’s jobs report did nothing to alter the outlook for the Fed (still balance sheet reduction in September).

Looking at the economic data the rest of last week, it was more of the same: Not particularly impressive, but not implying a slowdown, either.

The ISM Manufacturing PMI slightly beat estimates at 56.3 vs. (E) 56.2, and that remained well above the important 50 mark. So, while there was a decline from June, it remains indicative of a manufacturing sector that is seeing growth accelerate.

The one disappointing economic data point last week was the ISM Non-Manufacturing (or service sector) PMI. It declined to 53.9 vs. (E) 56.9, and was the weakest reading since August 2016. However, the private sector Markit Services PMI rose to 54.7 from 54.2, so there is a conflicting message there (ISM is one firm that produces PMIs, and Markit is a competitor. Usually, their PMIs are generally in agreement, but not this month… and it has to do with the survey questions each use and the makeup of the final indices. It’s an oddity that there was a discrepancy, but it’s not an economic red flag (at least not at this point).

Bigger picture, economic growth through June and July appears consistent with the slow-but-steady growth we’ve become accustomed to over the past several years. It’s certainly not a negative for stocks, but it’s not going to create a rising tide that propels us to new highs.

This Week’s Preview

As is usually the case for the week following the jobs report and the PMIs, this week will be quieter from an economic data standpoint, although there is a very important report coming this Friday… CPI.

As we’ve said consistently, inflation is much more important right now (because it’s declining) than economic growth (which remains steady), so inflation numbers will have the potential to move markets more than growth numbers, as we saw on Friday with the jobs report.

To that end, Friday’s CPI has the potential to send bond yields and the dollar higher, if it confirms Friday’s wage number that implies inflation steadied in July. Conversely, if the CPI report is soft we’ll see Friday’s rally in bond yields and the dollar undone, quickly.

Outside of CPI Friday (and PPI on Thursday) the next most-important data point this week will be the Productivity and Costs report Wednesday. In Friday’s Report, I listed a number of events that could push stocks higher if earnings growth has peaked near term. Increased productivity was one of those events, so a strong productivity number will be positive for markets.

Beyond those two numbers, the domestic calendar is quiet this week, and none of the reports coming (NFIB Small Business Optimism Index, jobless claims) should move markets too much.

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