My take on the Fed and on the moment's selloff...

I'm listening to Fed Chair Powell field what I have to say are all the right questions, which, in a nutshell, are, 

"if you're data dependent, and, on balance, the data has actually been decent since your last meeting, why are you cutting interest rates now and stopping the runoff of your balance sheet a month early?"

This Morning's Log Entry: China, The Fed, Apple, Vietnam

7/31/19 Wednesday

The first tweet I saw early this morning was from Zero Hedge stating that trade talks in China had collapsed after just a day and a half. Within minutes I knew that that wasn’t the case, because I could see in futures trading that the market didn’t collapse. I then jumped over to this morning’s updates from the South China Post which confirmed half of the only legitimate expectations for this round of talks; that China would pick up the purchase of U.S. farm goods, although only under “favorable terms”. Interestingly, there was nothing definitive with regard to the U.S. lightening up on Huawei (the other half of legitimate expectations). Talks are set to resume in September.

This Morning's Log Entry

7/30/19 Tuesday

Woke this morning to a string of tweets from Trump hammering China, literally on the first day of the first in-person negotiations to take place since talks broke down in May. Being that he’s going there this morning suggests to me that the preliminary read from the U.S. team is not good, and that Trump sees things potentially going south.

Quotes of the Day

Ironically, Ray Dalio, the subject of my post earlier this evening, popped up in the Bloomberg article I just read (and sympathize with) subtitled "The Dark Side of Rate Cuts." 

Here's a snippet:   emphasis mine...

Has Dalio Lost His Edge?

I find myself thinking a lot lately about something I gleaned from an interview that took place a few years ago with a prominent hedge fund manager (Colm O'shea). He said that as bull markets near their tops, the smart money managers lose assets (clients), while the perpetual bulls collect the last of the spoils (gain assets/clients).

This Morning's Log Entry: Huge week!

7/29/19 Monday

Huge week for markets this week, as 168 members of the S&P 500 will report earnings, as the Fed will reduce its benchmark interest rate for the first time in over a decade, as the economic data calendar from Tuesday-on is loaded, and as U.S. and Chinese trade negotiators meet in Shanghai.

Quote of the Day

Bloomberg market strategist Mark Cranfield pretty well echoes our present concerns:

The Market's Feeling Heavy (video)

In last week's "weekly message", I mentioned that, per the technicals, the market feels a bit heavy to me at these levels. Here's some of what I was referring to:

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Quotes of the Day -- And -- Why We Do Our Own Work!!

The following speaks to why we do our own work!

Here's White House top economist Larry Kudlow last July:

"We are getting 3 [percent GDP growth] and it may be 4 for a quarter or two."

Here's yours truly last July:

This Week's Message: The Only Game In Town

This morning’s GDP number (+2.1%), while a marked decline from last quarter – and accompanied by a downward revision (to +2.9%) for 2018 – was as good as the market could ask for. 

Data of the Day

Here's ECB President Mario Draghi this morning on conditions across the Eurozone:

"Generally speaking, you have resilience in the service sector, and construction sector, at the same time this outlook is getting worse and worse; and it's getting worse and worse in manufacturing especially, and it's getting worse and worse in countries where manufacturing is very important. Because of value chains this propagates all over the Euro Zone."

He essentially echoed yesterday's release of the Flash PMI (Purchasing Managers Index) Survey results for July:

Note: 50 is the line separating expansion from contraction. Like he said, the services sector looks okay, manufacturing doesn't.

So how about the U.S.?

Well, while U.S. manufacturing conditions aren't yet recessionary, they're almost there. Services, on the other hand, are still okay, although not quite as strong as the Euro Zone reading:

This is consistent with my current assessment, via categories within our own macro index: Our economic subindex scores a relatively low +9.62 (0 is our expansion/contraction dividing line), with the consumer component scoring a sold +50, while the business component scores a very weak -20.

Now, to bring home how difficult it is to gauge the present state of the world, here's today's July durable goods numbers, with highlights (i.e., they were good!):

Highlights
If manufacturing is the Federal Reserve's central focus, they have less to be worried about. Not even the 2.0 percent headline jump in June, which exceeds Econoday's consensus range, nor the 1.2 percent surge in ex-transportation orders that far exceeds the consensus range, take the spotlight in this report. It's a rare 1.9 percent jump in core capital goods orders that points to new confidence in the business outlook and the release of prior pent-up demand for new production equipment.

New orders for machinery rose 2.4 percent in the month with fabrications up 2.1 percent and primary metals up 0.8 percent. These are all the building blocks to increase future production. Outside of capital goods the good news includes a 3.1 percent order surge for motor vehicles, and to top it off, a 75.5 percent jump for civilian aircraft orders which in prior reports, in part reflecting Boeing 737 troubles, had been depressed. The only real soft spot in June were defense orders where aircraft fell sharply for a second month, down 32.1 percent.

Goods news also comes from readings outside of new orders especially a 0.6 percent June rise in shipments of core capital goods. As the jump in orders for this category points to shipment strength in the third quarter, the strength in June shipments points to strength and perhaps upward revisions for nonresidential fixed investment in tomorrow's second-quarter GDP report.
Total shipments rose 1.4 percent in June, also very strong, with inventories rising a comparatively modest 0.3 percent which points to the need to rebuild inventories in what is yet another positive.

Although, alas (doubling down on my "difficult to gauge" point), the report wasn't all good:

Not positive at all, however, is a third straight decline for unfilled orders, down 0.7 percent in June that includes a 0.8 decline for civilian aircraft. This follows aircraft declines of 1.2 percent and 0.5 percent in the prior two months in what may be a 737 effect.

In a further offset, the headline revision to May was a steep 1 percentage point lower and now stands at minus 2.3 percent, with the revision for core capital goods orders 2 tenths lower (from revised data in the May factory orders report) and now at plus 0.3 percent. Yet shipments of core capital goods in May were revised only 1 tenth lower and are now at a still very solid plus 0.5 percent.

But, still, perhaps things are good enough to have the Fed maybe think twice about piling on a ton of stimulus right about now:

Revisions and the Boeing 737 aside, this report is an echo of the strength of last week's industrial production report where manufacturing posted its strongest performance of the year, and it diminishes the need for Fed rate cuts and will have to be put into broad context or explained away by Jerome Powell at his press conference next week should the Fed indeed lower rates.

And, lastly, the trade deficit widened this month, while both retail and wholesale inventories missed expectations (all components in tomorrow's GDP number). Perhaps the President's been given the heads up that maybe tomorrow's number will come in a bit soft; as he tweeted earlier:

"Fox Poll say best Economy in DECADES!"

Well, the business polls, and, obviously, the Fed, and, not to mention, the PWA Macro Index say different...

Yesterday Evening's Log Entry

7/24/19 Wednesday Evening

While the Dow closed down on poor numbers from Boeing and Caterpillar today, the S&P, the Nasdaq and the Russell 2000 (in particular) rallied strongly.

Today's Log Entry (and charts of the day)

7/24/19 Wednesday

Mnuchin and Lighthizer are heading to Beijing next week to promote the appearance that efforts are underway to ultimately end the trade war. The best they can come back with is a commitment from China to begin buying more U.S. ag products, but they’ll (assuming they can) have to give in a bit on the Huawei ban to make that happen.

Listen Closely!

Listen closely to this 43-second video clip featuring Alan Greenspan. This should sound very familiar to clients and blog subscribers:

Conversation with my lovely wife...

My conversation with my wife Judy one morning last week (she's recovering from knee surgery):

Video Commentary on the Latest Action

After we produced today's video the White House announced that U.S. officials will travel to China next week for face-to-face trade talks. The market literally doubled the day's advance within seconds of the announcement. 

Traders should probably curb their enthusiasm just a bit, however, as the announcement had been widely expected and the White House added that its eyeing a long-term timeline to strike a deal -- specifically 6+ months; which is responsible guidance out of Washington, as, per our reporting herein, the chasm separating the two sides has widened markedly over the past few months. 

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Quote of the Day

The International Monetary Fund (IMF) just once again reduced its global growth forecast, which was already the lowest since the 2008 financial crisis.

Here, from their narrative, is the essence of the problem:

Yesterday's Log Entry: The Market's Faulty Engine

In addition to an analyst's upgrade of U.S. chip makers, the chatter this morning is that the trade war is suddenly taking a positive turn; as (in addition to the weekend news referenced below) the White House is entertaining top U.S. tech sector officials today to discuss the Huawei ban (presumably exploring ways to lift it, at least a bit), and there's rumor that in-person talks will resume in Beijing sometime next week. 

Per my internal log entry yesterday (shared with you below), I'm growing more skeptical by the day:

This Week's Message: The Fed Is Compensating For A Policy-Induced Shock

Pay special attention to the areas I highlighted (with special emphasis on the Fed) and watch the 1-minute video clip at the end (I think the folks at BofA are reading our blog ;)):

A Perfect Cloud Burst??

While the term “perfect storm” sounds so ominous, it is indeed what comes to mind as I consider this week’s economic data, the virtual promise – from the source – of a July fed rate cut, and deteriorating trade relations between the U.S. and China (and, frankly, the U.S. and the rest of the world).

Right on Cue

Today’s menu of headlines was a perfect test of the prevailing two market-moving factors; the Fed and the trade war.

Quote of the Day

Like I've been saying, my read of the mood in China the past few weeks is that it has shifted markedly:

Quote of the Day

Jefferies' global equity strategist Sean Darby echoes the points we've been pounding home herein:

This Morning's Log Entry: Perplexed

The next few weeks will be hugely telling in terms of second half prospects. While it might seem an exaggeration to describe global business conditions as being in disarray, that’s the word that comes to mind; earnings outlooks will go a long ways toward confirming whether I’m justified in my description.

Quote, and Chart, Of the Day

Per my yesterday blog post "Careful What You Wish For", Macro strategist Cameron Crise and I are on the same page:

This Week's Message: General Conditions Via Our Macro Index (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Careful What You Wish For!

Well, as some might say is a good thing, U.S. purchases of Chinese goods plunged 7.8% (year-over-year) in June. However, Chinese purchases of U.S. goods tanked by a huge 31.4%.

Video Commentary On The Latest Action

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust: 

Quote (from China) of the Day!

The following tweet from Xu Xijin, editor of China's (state-controlled) Global Times newspaper, is consistent with the hunkering down I've been sensing while reading the Chinese media (each evening) the past few weeks:

Yes, It's All About The Fed, But Just For The Moment

Just to bring home how this moment is all about the Fed, and the prospects for a rate cut, take a look at our one-minute futures charts (left to right, top to bottom) for the Nasdaq 100, the dollar, the VIX (SP500 volatility index), bonds, smallcap stocks and gold on news that inflation rose by 01% (year-on-year [notably higher month-on-month]) higher than expected, and weekly jobless claims came in at 209k, vs 220k expected: 

This Morning's Log Entry: Curb Your Enthusiasm!

Right out of the gates in his congressional testimony this morning Fed Chair Jerome Powell offered up precisely what the market wanted; a cautious view of present general conditions that he hints will justify rate cuts to come. Thus, equity futures went from notably red to notably green in an instant.

A Not-Pretty Picture

Japanese data (supporting the points we made in our latest weekly message), paints a not-pretty picture of present global business conditions:  emphasis mine...

Yet Another Trade-War-Negative For U.S. Producers

Of course we know the hit that U.S. importers are taking due to the trade war (yes, they write the tariff checks to the treasury, then figure out how to offset [pass on] the cost), however, there's this other, perhaps subtle, but potentially very pernicious disadvantage when it comes to access to one of the world's most attractive labor markets, not to mention the world's largest consumer base.

The Problem That Feeds THE Problem

The President continues to say that if the Fed would cut interest rates the Dow would be at 30,000 and that the economy would rise "like a rocket"!

This Week's Message: Cherry Pickers' Paradise -- And -- When the White House Once Owned the Fed

Just finished up my weekly deep dive into the market and economic fundamentals and technicals that matter -- on both short and longer-term time frames -- and I'll tell ya, whether you're a bull or a bear, the cherries are presently ripe for the picking, and it's a bumper crop.

The Fed Is Not The Problem!! And Crazy Quote of the Day!

Per Wednesday’s commentary, futures are trading lower this morning on today’s strong jobs report; that’s your cue to start scratching your head.

You Should Be Scratching Your Head

Today, true to form for the past few days, the market rallied right into the close (very bullish indicator) and logged yet another all-time high for the major averages!

What the Market's Betting On

So, U.S. stocks (SP500) are at all-time highs and fed funds futures are pricing in a 100% chance of a rate cut this month!

The President is touting the best economy in history, and, at the same time, is demonizing the fed for having not yet cut interest rates!

The contradiction embedded in the above sentences is utterly stark (all-time high stocks say hugely bullish things about the economy while the need to cut rates says something scary's afoot)!

Manufacturers Echo Our Present Assessment, And Share Our Fundamental Concern

Yesterday's release of the Institute for Supply Management's (ISM) June Manufacturing Index pretty much echoes our present assessment of general conditions overall; expanding, but at a slowing pace.

Quote of the Day

Bespoke Investment Group hit the fundamental (and political) nail firmly on the head in their morning commentary:   emphasis mine...

This Morning's Log Entry

7/1/19 Monday

As expected, futures are rallying hard into the open this morning. Beyond this morning’s spike, and with trade-war-escalation off the table for the moment, the market is set to trade on data releases: Clearly, the trade for the moment is bad-news-is-good-news and vice versa. I.e., weak data releases that support the notion of a Fed cut in July will see stocks higher, strong data, lessening the odds of a cut, will see stock lower -- that is, until we dive into earning’s season, which is right around the corner. At that point the market gets messy, as I suspect we’ll see a good amount of whipsawing as companies express caution going forward (no relief on existing tariffs) against the tone of the data as they’re released.