Both the S&P 500 and Nasdaq managed to add to their respective long-running and uninterrupted weekly gains last week, but just barely. In fact, if it were not for Friday afternoon’s trade higher on mixed volume, we would have seen the first negative weekly performance for both indices in 2019. Last week’s equity market price action lacked conviction and leaves markets susceptible to some quarter-end weakness in coming weeks if a trade deal is not struck between the United States and China.
Last week’s trading was relatively listless with daily swings remaining in a relatively tight band. On a daily basis last week, the Nasdaq and S&P 500 did not gain or lose more than .5% on any given day. That lack of directional conviction after 10 weeks of gains is entirely expected given the rebound that has materialized since 12/24 – a rally which has lifted all three major equity market indices above their respective 50 and 200 DMA’s. The lack of volume sponsoring up days, in conjunction with the absence of price action last week, does indicate that some institutional investors have stepped to the sidelines.
As the chart below illustrates, daily price gains have both moderated in recent weeks and have been coupled with weak volume metrics, while daily losses have posted precisely the opposite – lower prices on rising volume. Those measures of internal market performance could well be indicating that a modest pull back is on the horizon if a US/China trade deal does not materialize in the near term. I would expect that in the event a pullback does materialize in the near term, it will be shallow.
What is left of our trade higher, in the early months of 2019, will be heavily dependent upon resolution of the US/China trade tensions and, to a lesser degree, to those companies that have yet to report Q4 results.
This week Salesforce (CRM), Ciena (CIEN), and Burlington Stores (BURL) report. Several economic data releases of significance last week acted to keep US equity markets in-trend. Personal income data for December (M/M) was significantly stronger than consensus forecast (1.0% vs. 0.4%). November’s results were 0.2%. However, consumption was weaker-than-expected on a M/M basis -0.5%. The PCE price Index Y/Y was 1.7% – well within inflation target. PMI Manufacturing Index for February remained in expansion mode: 53.0. Factory orders for December were 0.1% versus November’s -0.5%.
Though Wednesday’s release of December’s international trade data is obviously backward-looking, it will be closely watched through the lens of declining global industrial production, weakening global economic expansion, and most importantly, trade tensions between the world’s two largest economies. Last week, President Trump delayed the scheduled increase to 25% on Chinese imports due to some meaningful traction in the talks. The negative US trade imbalance for December is expected to range from $-58.2B to $-45.0B, according to Econoday consensus.
Also due for release on Wednesday is the EIA Petroleum Status report for the week ending 3/1/19. As discussed in recent notes, the recent relative equilibrium achieved between production and consumption has led to a rare period of relative price stability. Last week crude inventories dropped by 8.7M bbls. Gasoline inventories dropped by 1.9M bbls, and distillates were relatively unchanged on a week-over-week basis. Any meaningful tightening in this week’s EIA inventory data will likely trigger a move towards $60/bbl for WTI.
On Friday the monthly employment report for February is released. Last month’s employment report provided a critically important data point for investors – particularly given the dour partial federal government shutdown narrative that was suspended above the market. January’s employment report was significantly stronger than expected from a top-line perspective (+304K), while data within the report spoke to healthy earnings growth on a year-over-year basis (+3.2%). An additional sign of strengthening in last month’s report came from the manufacturing sector, which added 13k jobs.
Econoday consensus is calling for more moderate gains for February. Nonfarm payrolls are expected to grow by 178k, the unemployment rate is expected to tick back down to 3.9%, the LFPR is expected to remain unchanged at 63.2%, and average hourly earnings on a year-over-year basis are expected to be 3.4% versus January’s 3.2%.
Flickr photo: Lain
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