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Sellers' exhaust! The bears were on vacation last week leaving the buyers to watch over the equity markets. All equity indices finished the week with positive moves propped up by the strong employment numbers released on Friday. This all despite the first real shots of the trade war between the US and China being fired on Friday. In summation of last week: Foremost, it was a short week that was punctuated by Independence Day and it was marked by low volume, which served to accentuate any moves that occurred. There were two economic releases that stood out last week in the Fed Minutes release and the employment situation. The Fed Minutes painted a Fed that had a very positive view on economic growth with fears that trade tensions could have some negative effects. Despite the fears the Fed seemed poised to continue on the same course to raise rates and normalize the balance sheet. Equity markets seemed unfazed by what appeared to be hawkish but bonds took note bringing the slope of the yield curve to new lows (see chart 18) and sending 10 year yields down (see chart 20). On Friday, the employment situation came out with a greater than expected number of new jobs created and a wage growth number that was lower than expected. That is interpreted as: economy is strong and inflation is under control, which was enough to send the broader markets up. On the trade war front, the strong rhetoric continued, predominantly from the Trump administration. There were some signs mid-week that the pressure on the EU was working as there were some unsubstantiated hints that the EU was considering removing all tariffs on autos. Markets liked it and traders bought on the rumor. However, all in all the ambiguity around trade strategy and the reluctance on the part of the US’ trade counterparts that plagued the markets for many weeks prior appeared to abate even as many tariffs took effect on Friday. The bottom line? Equity markets want to trade higher but have and will most likely continue to be hampered by the trade war.
This week we will get some interesting economic releases. Notable amongst them is the recently notable JOLTS Job Opening number, the Consumer Price Index, Producer Price Index, and the U Michigan Sentiment indicator (see attached economic calendar). The JOLTS numbers are used by economists and traders to gauge the level of job openings relative to unemployed workers seeking jobs. The PPI is a leading indicator of inflation as the index reflects the prices paid by producers - the beginning of the chain. The CPI, though well followed by many economists, is not followed as closely by the most important economists. Those being the ones who work for the Federal reserve. If you read my note regularly, you know that the Fed favors the PCE deflator as their meter for consumer inflation. However, the CPI is important to retirees as Social Security increases are based on the CPI. The President will announce his candidate to replace retiring Justice Kennedy, and while the ultimately selected justice will have an impact on the markets in the future, we can expect the selection to have little impact in the short run. Earnings season begins this week, which will hopefully shift the markets' focus onto corporate health (see attached corporate release calendar). However the week ahead will still feature a healthy level of trade talk, as the media begins to unpack all of the real effects of the trade war (expect to learn more about soy beans this week). With all indices at key inflection points we can expect a volatile trading week ahead. Remember that volatility can be positive or negative and the bulls will be happy if the bears decide to extend their holidays for at least another week. Please call me if you have any questions.
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