Here We Go Again

Here we go again.  Fed raises rates as expected, traders parse the text and dots, analysts analyze the well-crafted speech, traders decide economy is still good to go.  But wait, some bad trade news… buy techs.  That sums up yesterday’s markets narrative as investors decided that Jay Powell’s speech was mostly neutral which helped boost stocks.  The rally was muted by Trump statements regarding the state of his relationship with China’s President Xi and Canada’s Justin Trudeau.  The S&P 500 closed well off of its highs for the session but managed to close in the green breaking a four day losing streak.  A higher close for the index is positive and it is taking its first steps in rebuilding a base after having reached and fallen from an all time high.  The story for the Dow Jones Industrial Average was very similar, although it is in somewhat of a weaker position with no solid technical support having achieved a new all time high so quickly in prior sessions. The small cap Russell 2000 continues to struggle a day after it closed below its round number support at 1700.  The Russell will get support below from its Fibonacci line at 1676 and as mentioned yesterday, the R2K is still constructive but in danger of falling out of trend.  The NASDAQ 100 was the star in equity trade yesterday as investors grabbed for the least-risky risk asset (at least according to speculators in the current market regime).  This theme has been repeated over and over this year and the thesis is that trade issues should only affect multi national industrials whose valuations are more heavily based on current and near term earnings performance.  Growth stock valuations are more heavily based on potential for future growth (or greatness) which, in theory, should insulate them from near term earnings pressure from trade issues.  Now that we know that superlative tech heavyweight Apple will get a pass on the tariffs we can safely assume that it should continue to thrive.  Apple traded up 2.06% in yesterday’s session. So, investors go back to the old reliable growth stocks hoping for a breakout.  Don’t believe me? Check out chart 16 in my attached daily chartbook at the Growth vs Defensive indicator.  Recall that the indicator moves up and to the right if investors favor growth stocks over defensive ones, and it has been doing just that in recent sessions as investors grab for growth.  Yesterday, a more interesting narrative occurred in bonds and currencies, which are always a far better indicator of the economic landscape.  In response to Wednesday’s Fed announcement, longer maturity treasuries rallied serving to flatten the yield curve once again.  You may also recognize this as a recurring pattern.  Though rates were all over the map yesterday, 10 year yields ended the session virtually unchanged at 3.05% with the 2/10 yield curve swap settling at 22 basis points.  Treasuries continued to rally overnight in response to renewed credit struggles in Italy as investors flee for yields and safety (there will likely be much more to report on that in the week ahead).  Ten year yields will start the session at 3.03% and the yield curve is unchanged.  Typically, currencies rally when central banks raise interest rates.  Higher yields incentivize foreign investors to buy higher yielding sovereign debt which require currency conversion ultimately causing the local currency to rise.  The dollar did just that as it rallied in yesterday’s session after trading soft and sideways since hitting a high in mid August (see chart 13 in my attached daily chartbook).  The dollar index will gun for its 95 Fibonacci line and will be helped by the risk-off mood in Europe.  The dollar index is still neutral.

This morning we received the important core PCE deflator, which tracks personal consumption and expenditures by consumers.  This is the Federal Reserve’s favorite indicator of inflation and the index came in right on expectations with a year over year growth of 2%.  Recall that 2% is the Federal Reserve’s target inflation rate.  So, on target with expectations and, more importantly, on target with the Fed.  This shouldn’t be surprising as the Chairman most likely already had a preliminary report of the number prior to his speech on Wednesday.  We have another big week ahead for economic releases with numbers that range from manufacturing to employment.  Yes the big monthly employment situation number will be released next Friday.  Today’s session will prove to be a volatile one as eyes will turn to emerging markets, Italy’s budget, and Capital Hill, which means it may not be business as usual.

daily chartbook 2018-09-28