“If next week’s data comes in firm and shows us that this economy isn’t losing momentum, then that will likely provide a big confidence boost to stocks, and could help support a rebound,” said Tom Essaye, president of the Sevens Report.
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Futures are moderately lower following a generally quiet weekend, as markets digest Friday’s bounce.
Nothing outright negative occurred over the weekend to cause the resumption of selling. But, there was no improvement in any macro headwinds either and as such markets are digesting Friday’s gains.
There were no notable economic reports overnight.
Today focus will turn towards economic data and we get two important reports: Retail Sales (E: 0.6%) and Oct. Empire Manufacturing Survey (E: 19.3). Strong readings will give the market a needed boost of confidence as they’ll remind investors the economic remains strong.
On the earnings front, activity picks up starting tomorrow but there are two notable reports today: BAC (E: $0.62), SCHW (E: $0.64).
What’s in Today’s Report:
Futures are sharply lower as global markets dropped following the Wednesday rout in U.S. stocks.
Nothing new occurred overnight to cause the additional selling this morning and this is all momentum driven.
There was no notable economic data or geo-political news out overnight and the sell-off itself was the focus of most of the financial media.
Today the key event is the Core CPI report (E : 0.2% m/m, 2.3% y/y) out this morning. This release is even more important than before because if it prints “hot” (core CPI above .4% m/m) that will add to the concern that the Fed is going to get more hawkish and that will add another source of pressure on stocks, which we obviously don’t need right now. Conversely, if this number is inline of a little light, that could provide a catalyst for markets to try and stabilize.
What’s in Today’s Report:
Futures are moderately lower following hawkish commentary by Fed Chair Powell and ahead of a critical speech on China by VP Pence.
Fed Chair Powell said in a Q&A after the bell that the Fed is a “long way” from neutral rates and may have to go “past” neutral. The comments further pressured bonds overnight and extended the rise in global bond yields.
Politically, VP Pence will deliver a very critical policy speech on China that goes beyond economic criticism, and the concern is the speech will make a trade deal even more difficult to achieve.
Today focus will be on bond yields (does the surge in yields/dollar continue?) as well as the Pence speech on China (just how critical will it be?). Economically, there are two reports, Jobless Claims (E: 213K) and Factory Orders (E: 2.1%) and one Fed speaker, Quarles (8:15 a.m. ET), but none of that should move markets.
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“Yesterday’s tech weakness, even if it just part of a healthy pullback in an extended sector, does set up a potential danger spot for stocks over the coming days,” says Tom Essaye of The Sevens Report, noting tech has powered stock gains this year even in the face of trade uncertainty.
Futures are slightly higher this morning after a very quiet night as global shares are edging higher after yesterday’s run to new all-time highs in several major US indexes.
Trade concerns continue to ease after yesterday’s favorable developments between the US and Mexico, leading to a further pullback in the dollar which has been the most significant tailwind for stocks over the last week.
Looking ahead to today’s session, there are a few notable economic reports due out: International Trade in Goods (E: -$69.4B), S&P Case-Shiller HPI (E: 0.2%), and Consumer Confidence (E: 126.8) but there are no Fed officials scheduled to speak.
Economic data aside, progress on trade and the subsequent decline in the dollar index have been the primary bullish influences on stocks right now, so as long as the trade situation doesn’t deteriorate today, and the dollar doesn’t materially rally, stocks should be able to continue towards new highs.
Futures are extending Friday’s gains following efforts by Chinese authorities to further strengthen the yuan.
The yuan strengthened to a one month high vs. the dollar as Chinese officials re-introduced the “Counter Cyclical Factor” in setting the daily value of the yuan. That “factor” is widely seen as an intent to ensure yuan strength and avoid a potential breach of 7.00. And, that support of the yuan is a potential macro positive.
The only notable econ report was German IFO Business sentiment, which beat estimates at 106.4 vs. (E) 105.4.
Today there are no notable economic reports and no important Fed speakers, so focus will remain on any trade headlines (a new trade deal with NAFTA seems imminent and that should be a mild positive on sentiment and stocks).
• Stock futures are cautiously higher today as the dollar continues to pullback on Trump’s comments about the Fed while investors have doubts about the new round of trade talks between the US and China.
• The dollar is down another 30 basis points+ this morning, extending its multi-session downtrend which should continue to act as a modest tailwind for stocks this week.
• British CBI Industrial Trends Survey was a mild miss at 7 vs. (E) 10 as Brexit concerns continues to weigh on sentiment.
• There are no economic reports or Fed speakers today.
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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!
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Looking to today’s CPI report, the preference here is for a slightly “Too Hot” number in headline and core CPI while a worst case scenario for stocks is a soft number, but keep in mind there will be impacts from the Hurricanes so the details in the report will be important.
Bottom line, I’ve said consistently for months that the only way I can see stocks moving materially higher is if they are driven by a reflationary rally. We got a glimpse of that in September, but for the reflation rally to continue, we need more Goldilocks data starting with today’s CPI.
Disconcertingly, if we don’t get that Goldilocks data, then the onus is going to be totally on earnings season to support stocks, and ensure this September rally doesn’t reverse. In that scenario, it’s an awful lot of pressure to put on continued growth in corporate earnings this late in an economic cycle.
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