Ain't No Stopping Us Now!

Ain't No Stopping Us Now!  Stocks rallied to new highs on Friday, once again, as investors remain convinced that lower rates are a sure thing.  Traders largely ignored inflation figures choosing instead the path of least resistance for stocks… up.

MY TWO CENTS

1.  Sorry, not sorry.  With markets rallying to new highs along with low bonds yields driven by a high conviction of a Fed rate cut,  investors would be wise to take a break from the buffet and give the market a chance to digest all of the information.  Can you tell that I am just a bit uneasy about recent rallying in the equity markets?  Well let me clarify a bit.  It’s not the whatbut the whywhich has me scratching my head.  The state of the domestic economy, based on the numbers, appears to be healthy.  Sure, the pace of the growth has been slowing, but it still remains positive.  According to last month’s GDP release the economy is growing at an annualized rate of 3.1%.  Unemployment is running near all time lows without causing wage inflation.  Company earnings growth has admittedly slowed and is expected to be flat to slightly negative, largely a result of the ongoing trade war.  The picture is not perfect, but it certainly is one that would support ongoing growth in  stocks markets at an even pace.  The Fed is painting a slightly different picture as they point out slowing global economic growth and trade uncertainty which may warrant economic stimulus to prevent a recession.  If the Fed is worried and feels the need to lower already low rates by historical standards while the economy continues to expand, it seems that the right response should be heightened concern.  When equity markets run to new highs as a tangible resolution to US-Chinese trade struggles appears nowhere in sight and the Fed worrying about a global economic slowdown, traders appear to be throwing caution to the wind.

2.  How are things going in China?   WHILE YOU SLEPT, China released its 2Q GDP, which grew at a +1.6% clip, up from last quarters growth of +1.4%.  Year over year industrial production beat consensus estimates coming in with a +6.3% growth compared to last month’s +5.0% increase.  Finally, Retail Sales beat estimates, coming in at +9.8% year over year, up from last month’s +8.6% growth.  The strong figures suggest that China’s efforts to stimulate its economy are working.  The results are also inconsistent with the Fed’s slowing growth thesis.

THE MARKETS

Stocks rallied with gusto on Friday as investors remain in a good place with rate cuts.  A -25 basis point rate cut later this month has a 74.4% likelihood, while a -50 basis point cut has a 25.6% chance, according to Fed Funds Futures.  The optimism for lower rates helped power up stocks on Friday as the S&P500 climbed by +0.46%, the Dow jones Industrial jumped by +0.90%, the Russell 200 traded up by +0.78%, and the NASDAQ 100 advanced by +0.59%.  Bonds traded up and 10-year treasury yields fell by -1 basis point to 2.12%.  With the increased likelihood of lower rates, the dollar continued to weaken with the Dollar Index falling by -0.25%.

WHAT’S NXT

- This morning we will get the Empire Manufacturing Index from the New York Fed which is expected to come in at 2.0 after last month’s surprise -8.6 pullback.

- The remainder of the week will feature a number of important economic releases including Retail Sales, Industrial Production, housing figures, the Fed Beige Book, the Leading Index, and University of Michigan’s Preliminary read on Sentiment.

- Earnings season officially begins this week.  Schwab and Citigroup will report before the bell and JB Hunt Transportation will announce earnings after the close.  Please refer to the attached economic and earnings release schedules for details and expectations.

- New York Fed President John Williams will speak this morning.

daily chartbook 2019-07-15

earnings releases 7_15

econ numbers 7_15