On high but shaky ground

On high but shaky ground.  Stocks were driven higher Friday on good earnings and strong economic data.  Despite not all of Friday’s news being good, stock traders forged ahead to new highs for some indexes.

 

MY TWO CENTS

 

1.  The big setup.  Up until the barrage of earnings last week, expectations for Fed rate cuts governed the bullish pace of markets.  Last week, not all earnings were great but some of the most widely followed stocks managed to pull off some solid quarters helping to propel stocks to some new all time high water marks.  Aside from positive earnings, the one interesting point in last weeks trading was Mario Draghi’s release of EU monetary policy.  Draghi struck a highly dovish stance but failed to actually deliver rate cuts immediately.  Setting the stage for a September cut and quantitative easing was not enough to please investors in the shadow of recently decaying economic strength.  Investors reacted by selling off stocks in the EU and the US.  Later this week, the US Fed will announce its monetary policy in which the central bankers are largely expected to cut Fed Funds by -25 basis.  As of this morning Fed Funds futures peg the chances of -25 basis point cut at 78.6% and a -50 basis point cut at 21.4%.  Futures are also predicting 2 more cuts before the end of the year.  This means that expectations are high for the Fed to act on its recently dovish speaking.  Though the Fed is not likely to disappoint the market with no rate cut, a mere -25 basis point cut may not be enough to power the markets forward as they have in recent months.  The pressure is very much on the Fed as recent economic data, though mixed, paints a healthy economy, making a -50 basis point cut risky, despite the desires of stock investors.  Should the Fed not meet the increasingly high expectations of investors, stocks may encounter some turbulence, if last week’s display in Europe is any sign.

 

2.  On the international stage.  With the Fed taking top billing in recent weeks many investors have pushed aside all of the trade fears that drove the markets last year.  With a rate cut all but imminent this week investors may want to check in overseas and see what is going on.  If they do, they might not find everything wrapped up and as rosy as they might like.  In the EU, Boris Johnson was just appointed UK’s Prime Minister and he pledges to deliver BREXIT by October 31 no matter what, increasing the likelihood of a no-deal BREXIT.  In fact, one of his top ministers said the chances of a hard BREXIT are high.  Not good.  On trade between the US and EU… well let’s just say that it is not looking too bright there either as tensions escalate over France’s levying a digital tax on American tech companies.  WHILE YOU SLEPT, Trump threatened a tariff on wine imports, which would directly affect… France.   Across the Pacific, a US trade delegation is traveling to Beijing today to revive trade talks which have been largely non existent since a break down earlier this year.  Though the meeting represents progress, Administration officials are downplaying the meeting.  In fact President Trump himself stated that China may hold off doing a deal, waiting instead to work out a deal with a Democrat after the election (his words not mine).

 

THE MARKETS

 

Markets rose on Friday as positive earnings and a stronger than expected GDP number helped bolster stocks.  The S&P500 climbed by +0.74% to a new high, the Dow Jones Industrial Average advanced by +0.19%, the Russell 2000 popped by +1.12%, and the NASDAQ 100 jumped by +1.1% also to a new high.  Bonds eased back slightly and 10-year treasury yields fell by -1 basis points to 2.07%.

 

 

WHAT’S NXT

 

– This morning we will get the Dallas Fed’s Manufacturing Activity Index which is expected to come in at -5.0 slightly better than last month’s -12.1, but still contracting.

– No major pre-bell earnings today, but Dish Networks and Beyond Meat will announce after the close, amongst others.

– This week we will get the PCE Deflator, housing price indices, Construction Spending, Consumer Confidence, ISM Manufacturing PMI, the monthly employment situation, Factory Orders, final read on Durable Goods, and the final University of Michigan Sentiment Index for July.  The Fed will be the main attraction this week as the FOMC will meet starting tomorrow and announce its rate decision on Wednesday at 2:00 PM EST.

-The week ahead has a massive wave of earnings with over 150 S&P 500 companies announcing.  Please refer to the attached calendar of economic and earnings release calendars for details.

daily chartbook 2019-07-29

earnings releases 7_29

econ numbers 7_29