Ready to launch. Stocks snapped a four-day winning streak as traders digested news of a last-minute cancellation of a military strike on Iran. The increased tensions between the US and Iran hit a high point on Friday dampening the positive momentum brought on by Wednesday’s Fed announcement.
MY TWO CENTS
- More weakness is showing. On Friday, Markit released its Manufacturing Purchasing Managers Index which came in with a miss at 50.1 versus last month’s 50.5. The index has not been this low since 2009, which should raise some eyebrows. Numbers below 50 represent a contraction. The release is consistent with both Philadelphia and New York Fed indices that also reflect significant slowdowns in manufacturing. In the same release, the Services PMI also came in below estimates at 51.7, down from the prior month’s 51.9.
- Volatility in all the wrong places. While US equity indices are hovering on or just below all time highs and the VIX index trading around 15.5 one might assume that all is well. If we take a broader view a different picture begins to emerge. Mostly sleepy Gold has been running up rather quickly logging five straight weeks of gains. On Friday, Gold closed just below $1400 after gaining +4.43% for the week. The move is in response to the expectation of inflation resulting from lowered interest rates as well as increased geopolitical tension. The Dollar tells a different story as it has been under pressure in response to the increased likelihood that the Fed will cut interest rates. Remember that the Fed cuts rates to prop up a weakening economy. Finally, the price of Crude oil continues to rise in response to increased tensions with Iran. Though the moves have heretofore been relatively subtle, a sustained price growth in the commodity may find its way into consumer prices causing an uptick in inflation, which could complicate things from the ready-to-act Fed.
THE MARKETS
Stocks traded off in a muted session on Friday as tensions with Tehran overshadowed potential trade progress and the market friendly Fed. The market has factored in an accommodative Fed and some sort of positive result from this week’s meeting between President Trump and President Xi at the G-20 summit. An Iranian crisis is still not fully factored in. The S&P500 slipped by -0.13%, the Dow Jones Industrial Average traded off by -0.13%, the Russell 2000 fell by -0.89%, and the NASDAQ 100 dropped by -0.12%. Bonds traded off and 10-year treasury yields climbed by +3 basis to 2.05% after trading below 2% intraday in Thursday’s session. Short maturity yields were slightly lower as the probability for a Fed rate cut increased and the 3-month/10-year yield curve steepened slightly, though it remains inverted.
WHAT’S NXT
– Chicago and Dallas Feds will release activity Indices this morning and they are expected to have receded by -0.20 and -2.0, respectively.
– In the week ahead, we will get New Home Sales, Durable Goods Orders, GDP Figures, Personal Consumption, the PCE Deflator, and a final University Of Michigan Sentiment Indicator for June. Starting tomorrow, earnings begin to pick up again as we near the end of the quarter. Please refer to the attached earnings and economic calendars for details.
– Fed speak will pick up this week now that the policy meeting is behind us. Refer back to my daily note for details.
– The long-awaited G-20 meeting will begin on Friday in Japan which is where it is hoped that progress will be made between the US and China in the ongoing trade war.
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