The US equity market outlook reverted back to “Uptrend Under Pressure“ last week as markets once again fell prey to themes that were decidedly not tied to our most US recent economic data. If, hypothetically, last week’s economic data were the principal driver of price action, we would likely have seen better equity performances. We received largely solid economic data across the board – as highlighted below – but price action did not reflect that.
Better than expected economic data has perversely fueled fear of a reduced likelihood of the Fed not cutting interest rates again by year-end. That is a concern for markets, though it could be argued that the economy does not appear to need any additional loosening – at least at this point in time.
That may change if we see any additional slippage in the U.S. economic landscape and/or if we see a meaningful escalation of trade tensions between the US and China. Though the former is not evident in our economic data at the moment, the latter is certainly a factor for investors to consider and one that manifested itself once again last Friday as markets were attempting to rally. In something of an unexpected turn, Bloomberg News reported that the Trump Administration was considering limiting investments from the US into Chinese companies. Additionally, the Bloomberg News article went on to state that stripping Chinese companies from US stock exchanges is being considered. I consider that eventuality unlikely. However, though unlikely, it was not a factor widely considered by those managing equity market risk.
That news unsettled markets and drove an additional trade-related variable into investor psychology. Of the five trading sessions last week, four saw losses. Friday’s losses were the most significant in that they cemented the week’s directional trade lower. Markets closed off their intra-week lows but only fractionally on Friday. Volume on the tech-heavy Nasdaq rose 8.5% and 3.0% on the NYSE. The CBOE S&P 500 Market Volatility Index (VIX) rose 7.16% to close out the week at 17.22. The Put/Call ratio traded up to 1.1 on Friday as well.
Markets remain vulnerable to trade-centric headlines as was evidenced last week.
Not at all unexpectedly, Chinese US-listed equities felt the impact of the Bloomberg News report most directly. On Friday, the S&P SPDR China (GXC) fell 2.2%. Chinese equity standouts Tencent, New Orient Education, and Huya all fell sharply on the session.
They are also increasingly having to price in the hyperbolic dysfunction that defines a stridently divided Washington DC.
That dysfunction was on full display all week but especially in the Leader of the House’s pronouncement that the Congress would step into a more formal impeachment inquiry – without a congressional vote before recess.
We don’t push off into earnings season in a meaningful way for two weeks. Until then, expect investors to be on edge, volatility to climb, equity prices to remain under pressure, and headlines to become increasingly more alarming and dysfunctional both domestically and globally.
Economic Calendar Highlights Last Week:
August New Home Sales came in significantly stronger than expected. Econoday consensus was 662k. They were actually 713k. Additionally, the prior month’s totals were revised up to 666k from the initial reading of 635k.
The EIA Petroleum Status Report continued to reflect a stable supply/demand function despite a tumultuous middle-east narrative.
The final Q2 US GDP reading was in-line with expectations coming in at the previously reported 2.0%. Both real consumer spending and the GDP price index also conformed to previous reading.
International Trade in Goods continued to reflect marginal gains. August’s initial monthly deficit was $-72.8b. Econoday consensus was calling for $-73.4b.
Durable Goods Orders for August were also stronger than consensus, coming in at 0.2% versus -1.2%. New orders however were slightly lower than July’s 2.0%.
Personal Incomes and Outlays for August were solid. On a M/M basis, incomes rose 0.4% while spending rose 0.1%. the PCE Price Index M/M change was 0.0%.
Economic Calendar Highlights This week:
Economic Calendar Highlights This week:
The Institute For Supply Management releases the ISM Mfg. Index for September. Last month’s reading of 49.1 reflected a dip below 50.0 and fueled a degree of concern over the health of the manufacturing sector in light of the ongoing trade dispute between the US and China. Econoday Consensus for September is 50.0 though the range is 49.1 to 52. There are no contributing analysts that believe that manufacturing has contracted further from last month’s reading.
The weekly EIA Petroleum Status Report is released at 10:30 am. Last week’s report was relatively tame. Crude inventories rose 2.4M bbl. Gasoline inventories were flat (-0.5M bbl). And Distillate inventories contracted by 3.0 M bbl.
Weekly Jobless Claims for the week ending 9/28 are released at 8:30 am. Econoday consensus is calling for claims of 215k. Last week’s claims results were 213k. The four-week moving average stands at 212k.
The Employment Report for the month of September is released at 8:30 am. Econoday consensus (145k) is not calling for a major departure from the previous month’s results. In fact the unemployment rate is expected to remain 3.7%. August’s LFPR was a stronger than expected 63.2% It will be interesting to see if that figure ticks higher. Fed Chair Jerome Powell will be giving a speech at 2:00 pm.