Thursday, July 18, 2019

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).

The potentially stormy conditions I see result from the push and pull among the latest data and fed rate cut prospects. Here’s what I mean:

The Fed: Listening to Powell and company, a Fed rate cut is already inked in.

The Data: This week’s economic data has been, frankly, good:

Monday: Empire State Manuf survey came in at 4.3 vs 0.8 expected

Tuesday: U.S. retail sales for June came in much stronger than expected

Tuesday: Industrial Production’s manuf component was twice better than expected

Tuesday: The Housing Market Index (Homebuilder Sentiment) scored a 65 (50 is the dividing line between optimism and pessimism), vs 64 expected.

Wednesday: Mortgage purchase apps up 1% year-on-year

Wednesday: Single family home permits rose .4% month-on-month

Thursday: Weekly jobless claims remain ridiculously low

Thursday: The Philly Fed Business Outlook Survey for July came in at 21.8 vs 4.5 expected (that’s not a typo!)

Thursday: Okay, so it’s not all rosy; The Index of Leading Economic Indicators (LEI) came in a -0.3% vs +0.1% expected.

As for trade relations: China has now drawn lines in the sand on issues that directly oppose the U.S.’s lines in the sand.

So, what I’m saying is that, considering the latest (just this week’s mind you) positive data (notwithstanding the LEI) – I expected the retail sales and housing sentiment, but did not expect the strong manufacturing data! – the idea that this economy needs a rate cut seems insane!

Ah, but there’s where the trade war crashes in. There’s absolutely no question that all (well, a lot) of the naysayers I’ve been at odds with for the past 18+ months (and that includes the Fed) are now on board: If the trade war persists, and, worse yet, if it bleeds further into our relationships with the EU, Japan and, now (per Trump last week) Vietnam and India, we can absolutely forget about any of the latest positive data sticking. I.e., the economy and the markets will have hell to pay in the not too distant future. Which is precisely why the Fed is about to cut interest rates!

Since my present short-term base case is that the above will likely (no guarantees!) culminate in a correction in stock prices (i.e., run-of-the-mill hell to pay) – which will cement ~three rate cuts this year and inspire better trade relations (ultimately leading to yet another move into all time highs), perhaps we can call it a perfect cloud burst.

A less sunny scenario, however, is one where, ironically, stock prices do not correct anytime soon, and, thus, unwarranted confidence (buoyed by a lofty stock market) along with political pressure (and/or, worse yet, grossly backward ideology) keeps trade tensions (and the attendant uncertainties) alive long enough to root recessionary conditions to the point where what would've otherwise been your garden variety correction morphs into the next true bear market. Then of course we’re back to the “storm” characterization.

Stay tuned...

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