Simmer Down

Simmer down.  Yesterday, stocks were off slightly on earnings and a GDP report as they closed out a second month of gains.  Equities hobbled through yesterday’s trading in a tight range ultimately closing near their lows of the session.

WHAT YOU NEED TO KNOW:

1)  GDP growth is slowing… by a bit.  Yesterday’s GDP figures showed that top line GDP grew at an annualized rate of +2.6%, which was better than expected but still down from the prior quarter's read of +3.4%.  The majority of the growth came from consumer expenditures as might be expected with the aggregate contributing roughly 2/3 to economic output.  As long as the consumer stays confident, the economy will continue to perform.  To learn more about GDP and what goes into the number, read my note on the topic here:  https://www.siebertnet.com/blog/index.php/2018/12/19/crude-behavior/ .

2)  China may be turning around.  WHILE YOU SLEPT an independently calculated PMI pegged the worlds second largest economy at 49.9, beating analyst expectations.  Remember that a PMI above 50 shows growth.  The significance of the stronger number is that China may find itself in a stronger position to negotiate with the US if its economy begins to turn a corner.

3)  Fed governors continue to preach patience in their public appearances, however some still believe that there could be more rate hikes as inflation may pick up later this year.  In a speaking engagement, Philadelphia Fed Chief Patrick Harker said that he expected 1 rate hike this year and at least 1 more in 2020 as he believed that inflation will overshoot the Fed’s 2% target.

Stocks took another day of rest yesterday as traders contemplated the morning's economic release, the failure of the Korean de-nuclearization summit, and new potential troubles for the President.  Stocks closed near session lows with the S&P 500 trading off by -0.28%, the Dow Jones Industrial Average closing down by -0.27%, the Russell 2000 slipping by -0.35%, and NASDAQ 100 falling by -0.27%.  The slight pullback in the major indexes after 2 months of record growth is to be expected as they all bounced off of old and strong resistance levels.  Many analysts believe that this recent two-month rally (it is the best Jan - Feb performance for the Dow Jones since 1987) has been largely driven by institutional investors with retail investors sitting on the sideline waiting to get in.  If you believe in the old odd-lot theory which asserts that markets peak when retail investors get into the market, equities may experience a rough month ahead.  The original theory was based on the fact that retail investors lacked the discipline and, more importantly, information available to the larger institutional players.  The theory is not quite as valid these days as most retail investors have access to financial data, news, and timely market notes (like this one).  If retail investors do decide to rush in, the move could give stocks some more upside in the months ahead.  Bonds are another matter entirely.  Bond traders have been somewhat skeptical about the Fed and the economy.  10 Year US Treasury yields went from 2.68% to 2.71% during the last two months in which equities broke some records in response to Fed messaging and policy shifts.  Earlier this week yields crept up in response to Powell’s testimony, and yesterday they edged up a bit further on the GDP figure.  It would appear that bond traders are also in a wait and see pattern along with the Fed.

WHAT TO LOOK FOR TODAY:

We have a busy morning of economic releases starting with the delayed PCE figures.  Personal Income is expected to have grown by +0.3% and spending is expected to have receded by -0.3%.  The PCE Deflator is expected to have grown by +1.7% year over versus last month’s +1.8%.  The Core PCE Delator is expected to be +1.9%, flat from last month’s read.  This is the Fed’s favorite inflation gauge and it is expected to be right below their +2% target.  Later this morning we will get the ISM Manufacturing index and it is expected to be at 55.8 down from last month's 56.6.  We will also get the University of Michigan Sentiment index for February and it is expected to be at 95.9 up slightly from last month’s 95.5.  Foot Locker is the only major earnings release before the bell.  Analysts are expecting them to earn $1.399 per share on a revenue of $2.185 billion.  Next week brings another packed schedule of releases ranging from housing numbers to the Fed Beige Book to the Monthly Employment Situation… stay tuned.  Have a great weekend and please call me if you have any questions.

daily chartbook 2019-03-01