Only Fools

Last week’s equity market trading was dominated by trade/tariffs, economic data, and the Fed. The trade/tariffs narrative was arguably the most significant of the three in that it bled so inextricably through both the economic data and Fed conversations.

On Tuesday morning, Chairman Powell’s willingness to offer markets a “bone” in the way of potential accommodation––in the event there are trade-induced weaknesses in the US economy––provided a meaningful lift for markets. The Dow registered a gain of greater than 500 points as a result. That gain allowed markets to set up for follow-through on Friday. Gains became less dramatic on Wednesday and Thursday. However, the May employment report fueled a renewed sense of “risk-on,” and a perverse appetite for US equities last Friday. In the process, all three major equity market indices tacked on greater than 1%, led by the Nasdaq’s 1.66% tally.

The street clearly removed any doubt as to what it was hoping for in coming quarters… not stronger economic expansion and corporate earnings growth but lower interest rates.

Last Friday’s release of the May employment report is a case in point. Econoday consensus was calling for a monthly gain of 175K jobs in the report; it disappointed with a gain of merely 75K. Additionally, the two previous monthly reports were revised lower. The unemployment rate did hold steady at a 49-year low (3.6%). The labor force participation rate remained 62.8%. Average hourly earnings held steady at 0.2% on a month-over-month basis. Away from the top line miss on gains and revisions, the report was in-line with expectations. It was the topline miss and backward-looking downward revisions to the previous monthly topline gains that raised the prospect of Fed action on rates sooner rather than later. That action, long anticipated, is unlikely before Q4.

We have once again reverted to a weak hand, in that the shift to bad news is looked upon as good news for the market due to the expectations that weaker economic data will require the Fed to lower rates. It is certainly not a sign of investor confidence in either the US or the global economy. Healthy markets climb stairs of sustainable price appreciation, predicated on earnings and economic data; they also climb a wall of worry. What transpired last week was neither.

It was a week of welcome and relatively dramatic gains to be certain, but for how long that enthusiasm lasts is another question entirely.

As the charts below clearly illustrate, all three major equity market indices rallied sharply last week for reasons outlined above. In the case of the S&P 500, Friday’s close allowed it to effectively recapture its 50 DMA. The same was the case for the Dow Industrials. The Nasdaq composite, however, closed out the week below its 50 DMA. My call for a critical test here at the 200 DMA in recent weeks has proven to be relevant. It will remain so. In other words, I don’t think we are out of the woods, despite last weeks dramatic snap back in equity prices.

If equity market gains are now subject to weaker-than-expected economic data, I suspect that any signs of better-than-expected economic data will perversely act as a headwind for investors. Additionally, market momentum shifted last week as the trade tariffs announced by President Trump on Mexican imports have apparently been rescinded. That would certainly be good news––if it holds.

China is another matter entirely. It’s not clear where the trade talks stand other than to say they are fluid. As the link in today’s themes highlights, there is no breakthrough apparent at this stage of the talks. The lack of tangible accomplishments and the increasingly heightened political rhetoric associated with the talks has fueled significant investor concern.

Last week’s comment by Fed Chair Powell––that the Fed is ready and willing to address any trade-induced economic weakness, was cheered by investors, but policy is often times different than reality, and if we know anything about US/China trade talks, they are frustratingly complicated, political, and unpredictable.

I suspect the takeaway from last week was that the Fed is on-hand and ready to act to offset any significantly negative fallout from failed trade talks. Otherwise, what were traders buying? Valuations have not meaningfully changed over the past seven days, trade talks with China are at a standstill, and if anything, markets will likely be hemmed in as we progress towards the conclusion of Q2.

This week’s economic calendar highlights a focus on inflation:

The Bureau of Labor Statistics releases the Producer Price Index–Final Demand figures for the month of May. The release is expected to reflect a tame inflation environment. On a M/M basis, the PPI-FF is expected to tick down from April’s 0.2% to 0.1%. On a Y/Y basis, it is expected to tick down from April’s 2.2% to 2.0%. Y/Y, less food and energy, the PPI-FD Econoday consensus is 2.3%. Though a very significant and widely watched data release, May’s expected results are not expected to shift the inflation narrative in a meaningful way.

The Bureau of Labor Statistics releases the Consumer Price Index reading for May. An average price of fixed goods, the CPI reading is also a significant tool used to measure inflation at the consumer level. On a M/M basis, Econoday is expecting the reading to slip to 0.1% in May–down from April’s 0.3% reading. Y/Y is expected to slip to 1.9% from 2.0%. Less food and energy, the CPI on a Y/Y basis is expected to remain from April’s 2.1%.

EIA Petroleum Status Report
Last week’s EIA Petroleum Status Report reinforced the narrative that speaks to slackening demand due to slowing economic expansion. Inventory builds across all three verticals were manifested. Crude inventories rose 6.8 M bbl, gasoline inventories rose 3.2 M bbl, and distillates inventories rose 4.6 M bbl. Recent inventory builds in the weekly report have contributed to crude oil’s pricing weakness.

Weekly Jobless Claims
Certainly a consistently encouraging weekly report, the Jobless Claims data last week again reflected a tight labor market coming in with a new claims total of 218 K. The four-week moving average–level stands a 215 K.

Retail Sales
Econoday consensus is calling for an uptick for retail spending in May. April’s report was a bit disappointing. In Friday morning’s release, consensus is calling for a rebound–to 0.7% from April’s M/M change of -0.2% on a M/M basis. Less autos, the report is expected to be 0.4%. A strong retail report would actually run counter to the “Slow Down” narrative that has increasingly been adopted by much of the street.

Industrial Production
Again, this release in April was a bit disappointing, not unlike retail sales. Production M/M contracted -0.5%, manufacturing also contracted by 0.5%. Capacity utilization was a solid 77.9%. May’s release is expected to reflect expansion in this critically important economic metric of measure. Econoday consensus is calling for a modest gains in production and manufacturing (0.2%). Capacity utilization is expected to come in at 78%.

June 14, Flag Day Flickr photo: Sky Noir
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