Shared some thoughts on the subject with Reuters today -
The data we received this morning was disappointing – no question about it. In fact all three data points we outlined earlier today in the pre-opening were underwhelming and below consensus expectations; housing, consumer sentiment and the Chicago PMI. In spite of the weak data, we opened positive. We have managed to give back our early gains to trade flat to modestly negative on the session. A relatively tight range on the day when compared with the previous six trading sessions. I wouldn’t call it “stabilization” just yet but we have had a session that is absent of the dramatic trading patterns that have come to define the closing sessions of Q3. Importantly, though we have seen some moderation in the directional trade today we have seen an increase in trading volume on both the NYSE and NASDAQ.
Both gold and oil have continued to feel significant institutional selling pressure as the quarter comes to a close. Today gold traded to its lowest level since January while oil continues its swoon. That’s not all either. The Bloomberg Commodities Index is off 1.4 percent today. Commodities, as a complex, look to be closing out their worst quarterly performance in six years. Much of the weakness in commodities can be tied to strength in the U.S. dollar, surplus supply and of course tepid growth of global demand – particularly in the EU. China’s slowdown in the rate of their economic growth has also contributed to the slackening demand for commodities. As if to underscore the point, WTI had is worst day in 17 months today. This marks the third consecutive quarter of losses for oil - both Brent and WTI. This is very good news for consumers. It couldn’t come at a better time either.
Intraday Sector Heat Map:
Communications + 0.52%
Financials + 0.40%
Health Care + 0.27%
Consumer Staples + 0.27%
Technology + 0.10%
Industrials – 0.16%
Materials – 0.19%
Consumer Discretionary – 0.20%
Energy – 0.88%
What looked to be a blood bath for the markets yesterday actually ended up being something entirely different. We opened sharply lower on elevated volume primarily as a result of geo-political issues we have discussed. However, we spent much of the session clawing our way back – nearly to positive territory. Again, markets showcased that fear driven volatility that we have come to expect but the narrative for the day was not carried by the themes that instilled fear in markets. Rather, a sense that though our economic data here at home has been uneven it is undeniably constructive across many fronts.
We are getting some pre-market futures help from an unexpected source this morning – Europe. European markets are solidly positive as we get ready to open here as a result of the most recent economic data that is fuelling speculation that the ECB may be forced into adopting monetary policy that is similar to the US Fed’s. A Quantitative Easing model centered on Central Bank purchases of sovereign debt. The ECB has long avoided this approach for many reasons – not the least of which is that the ECB is not a fully political/economic union. The ECB is committed to avoiding the protracted and painful Japanese decades long stagnation that is increasingly taking shape.
This morning we get another crack at the bat with housing. The 9:00 AM Case Shiller HPI report will be released.
The S&P/Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S. The composite indexes and the regional indexes are seen by the markets as measuring changes in existing home prices and are based on single-family home re-sales. The key composite series tracked are for the expanded 20-city composite indexes. The original series (still available) covered 10 cities. A national index is published quarterly. The indexes are based on single-family dwellings with two or more sales transactions. Condominiums and co-ops are excluded as is new construction. The data are compiled for S&P by Fiserv, Inc. The S&P/Case-Shiller Home Price Indices are published monthly on the last Tuesday of each month at 9:00 AM ET. The latest data are reported with a two-month lag. For example data released in January 2008 were for November 2007. (Source Investor’s business Daily)
Unlike recent hosing centric data this morning’s report does not speak directly to homes built, homes sold or otherwise. As the definition above explains, it speaks to pricing. It is a critically important piece of information in gauging the health of the housing market and the demand component of it. It bleeds directly into virtually every other aspect of our consumer centric economy. Consensus for the 20-city SA on a month over month basis is calling for a gain of 0.1%. The range in consensus is -0.3% to +0.2%. A surprise on the upside will fuel monetary minded hawks. A miss on the down side will provide a soap box for the doves. I suspect we see little surprise if any.
Markets will shift focus at 9:45 AM to the Chicago PMI. Clearly by its’ title it is focused on the Chicago based economy.
The Institute For Supply Management - Chicago compiles a survey and a composite diffusion index of business conditions in the Chicago area. Since October 2011, the survey has been conducted by Market News International. Manufacturing and non-manufacturing firms both are surveyed. Hence, it is not directly comparable to pure manufacturing surveys. Readings above 50 percent indicate an expanding business sector. (Source Investor’s business Daily)
Not as critically important to the market from a truly national economic perspective but still, very closely watched. Any miscue or disappointment here poses less risk to markets than either other data release today.
Finally at 10:00 we receive our Consumer Confidence data. As we all know consumer confidence is huge given that roughly 70 percent of our economy is tied directly to the consumer. This is an important and telltale sign for economists in gauging demand for everything from housing to autos. From durables to non-durables. From discretionary spending to non-discretionary spending.
The Conference Board compiles a survey of consumer attitudes on the economy. The headline Consumer Confidence Index is based on consumers’ perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income. Three thousand households across the country are surveyed each month. In general, while the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month. (Source Investor’s Business Daily)
In short, we have plenty to price into markets today. Given the impressive reversal higher we saw from our intraday lows yesterday which had the DOW off 178 points early, it is entirely possible we could get to midweek with a degree of stability in markets. The data today will need to cooperate.
Though markets are well off their intraday lows, internals speak to internal bleeding. Wounds suffered in recent weeks by markets are adding up with this past week’s civil unrest in Hong Kong being the latest. My note this morning’s spoke to weakness heading into Q4. Today’s sloppy action defined by weak internals and underwhelming leadership fits neatly into that paradigm. All sectors of the market are lower on the day, save one. Today’s drift lower in equity pricing comes on the heels of and in spite of some rather positive economic news on the personal incomes and outlays front. More news that confirms that our economy – independent of the geo-political concerns that are driving fear into markets – is continuing to rebound smartly.
This morning’s positive economic news came in the form of the Commerce Department’s release of both income and spending. According to data, consumer spending rose 0.5 percent in August - slightly better than consensus. The Commerce Department figures also reflected a 0.3 percent advance in incomes. The advances in both incomes and spending for August support the thesis that consumers are in better shape than they have been in quite some time.
As has often been the case lately with economic data, housing has been the wild card. This morning was no different. The pending home sales data released by the National Association of Realtors indicates that home sales in August slipped by 1%.
The net result is a market that is off balance and struggling for footing. All majors are lower and volume on both the NYSE and NASDAQ are elevated versus Friday. It appears as though we have another distribution day in the works leading up to the start of Q4.
Intraday Sector Heat Map:
Technology + 0.10%
Industrials – 0.07%
Consumer Discretionary – 0.10%
Materials – 0.36%
Communications – 0.17%
Health Care – 0.25%
Consumer Staples – 0.65%
Financials – 0.69%
Energy – 1.01%
We are heading into an incredibly important week for markets as a result of the deluge of data that will absolutely, positively impact our directional trade into the final quarter of 2014. Whatever we find in the data this week, we should keep several things in perspective not the least of which is the final Q2 GDP reading we received on Friday. It is of course backward looking but still relevant and topical given the significance of the upside surprise we got.
Also keep in mind that energy prices having been falling like a stone. In some states gasoline has dropped below $3.00/gallon. Energy prices have fallen over the past three months far faster than most economists had been expecting. This is a very important trend heading into the Holiday season as cheaper gas allows for more disposable spending – directly impacting retail among other consumer centric sectors of the economy.
It is also clear that in Q3 businesses were investing at a more brisk rate that in the first half of the year – another nod to confidence. Along the same vein of confidence, our most recent New Home Sales released Friday leapt 18 percent in August to a six year high proving that the housing market is healthier than consensus expectations. It would be irresponsible to omit the fact that New Home Sales remain well below pre-crisis levels in spite of the surge registered in August. That said, markets have some wind at their back.
However, last week did also speak to a lack of confidence by investors as markets waffled under the pressure of heightened volatility. Some of that volatility is being fueled by geo-political themes represented by Ukraine and Argentina. Some of it is centered on China and the EU from an economic cycle perspective. To a degree, some cautious tones for the market emerged from the Chicago Fed’s decelerating activity index as well.
From where I stand, none of these issues have had or will have the upper hand at the end of the day or for our Q4 directional trade for that matter. These themes are more transitory than they are permanent challenges, or at least that is my hope. In my opinion, markets have been managing these themes with efficiency.
The potential for trouble comes into play this week (see the economic calendar below). Will we see data that underscores increasing improvement in our economic climate or will we get data that justifies our inability for equity markets to punch higher with confidence? Will we see a move by the ECB to steer monetary policy in the direction of QE? It is important to note that the 10-year has barely moved through all of our recent dramatic equity market gyrations. It closed out trading on Friday at 2.53 percent.
The NASDAQ and S&P 500 both regained their respective 50 DMA with Friday’s reversal higher. The DOW added 165.88 points or roughly 1 percent while the NASDAQ added 1.02% and the S&P 500 posted a 0.85 percent gain. All well and good but volume on both the NYSE and the NASDAQ slipped – not exactly reassuring. Cautious.
Just an aside:
Friday’s cult of personality drama was provided us by Bill Gross’s resignation/departure from PIMCO. I am certain Denver will welcome Mr. Gross with open arms.
This week Michael Lewis will take the stage as a result of his conversation regarding the relationship of regulators with those being regulated.
Economic Calendar for the week:
8:30 AM Personal Income and Outlays
10:00 AM Pending Home Sales
10:30 AM Dallas Fed Manufacturing Survey
9:00 AM Case-Shiller HPI
9:45 AM Chicago PMI
10:00 AM Consumer Confidence
8:15 AM ADP Employment Report
9:45 PMI Manufacturing Index
10:00 ISM Manufacturing Index
10:00 AM Construction Spending
8:30 AM Jobless Claims
10:00 Factory Orders
8:30 Employment Situation
8:30 international Trade
9:45 AM PMI Services Index
10:00 ISM Non-Manufacturing Index
Clearpool’s Peter Kenny says this market has a little run left in it before the end of the year.
Dow Jones, S&P 500 and NASDAQ futures are all pointing to a modestly positive to unchanged open for US equities this morning after our day of reckoning. Though in the overnight, Asian markets did catch the wave lower established by US equity trading, European markets have stabilized in anticipation of final U.S. GDP revision for Q2. Importantly, global markets have lent some balance to the lopsided trade that have rattled markets.
Additionally, Nike’s earnings after the bell provided a glimpse into an earnings season that is about to “officially” commence. Nike’s earnings were better than forecast and were coupled with solid growth guidance. It acts as a reminder that US corporate earnings drive equity pricing. That directional trade has been fairly consistent for some time now – higher. Though volatility will remain a constant in the weeks ahead, one theme that has the potential of restoring calm and trend to trading, as is always the case, is earnings.
Meantime and up until we get to Q3 earnings season, look for some pressure on equities this morning and some follow through in themes that really drove the pricing lower yesterday. However I expect a degree of moderation in that pressure. Moderation lent to us this morning in part and temporarily by global equity ballast.
As we head into earning season it is worth remembering that though we have run into some turbulence over the past five trading sessions, one week ago we closed at historic highs. The P/E ratio on the DOW as of yesterdays close is 15.72, S&P 500 is 18.04. Both are well within historical norms – though on the high end. We are heading into what is widely expected to be a solid Q3 earnings season. Monetary policy with or without QE will remain accommodative for the foreseeable future and we are in the midst of an expanding economy.
Markets head into the weekend in need of a pause and some perspective.
US stock index futures are largely unchanged to positive because equity market investors are in a holding pattern this morning. Though global markets have clearly been pricing in “risk off” over the previous three sessions, US markets are in pause mode in anticipation of the 10:00 AM new home sales figures. Many are expecting those figures to reflect improving demand to the tune of an annualized rate of 430,000 in August after two months of declines. The lack of traction/trend in the all-important housing market has kept the tone of trading tentative though much of the economic data we have been getting has otherwise has kept our trade higher intact. From employment data to industrial production and energy production, the broader narrative remains constructive – though markets are clearly under some pressure.
At the moment, gathering storms are stirring fear into the hearts and minds of those blindly hoping for another buyer to show up. As is often the case, when markets are pricing in relatively stretched valuations and global uncertainty, there suddenly appear reasons to doubt what just last week seemed to be a foregone conclusion. Global equity markets have collectively taken an unmistakable step back from the march higher that many had been hoping for just last week. We have seen three consecutive days of negative performance in US equities. Of the three, yesterday was the most compelling and not only because it was the third day of selling pressure but because the velocity of the trade lower accelerated into the closing bell. In reality, the pullback was minor. I could not help but think that had the closing bell not rung, we would have traded sharply lower. The NASDAQ and S&P 500 only lost 0.4% and 0.6% respectively and though volume was lighter than Monday’s, there were clear signs of institutional selling – particularly in the closing 30 minutes of trading. All in, the three day reset has been moderate and I dare say healthy. Volume on the NYSE and NASDAQ were off 1.62% and 2.46% respectively and as a result we avoided a distribution day. However, the advance decline line has been struggling to put it mildly which does indicate that we are seeing some compression and a breakdown in leadership.
Airstrikes in Syria coupled with weaker than expected housing data – again – provided the market with a less than compelling thesis form the long side. Global markets in Asia and Europe have provided a degree of balance. Asian markets closed mixed and European markets are mixed to positive at the moment.
On the plus side, the situation in Ukraine has taken a step back from the brink. Reports from NATO command over the past several days have confirmed that Russia has cut its presence in the troubled region. That development downgrades the geopolitical risk that it represented to markets. The Israeli/Gaza conflict that caused such fear for markets a month ago has seemingly been quelled for the time being but has been replaced with the increasingly horrific ISIS narrative. There can be little doubt the ISIS challenge will involve a great deal of global coordination and strategic thinking. God only knows where it is all headed.
The fact is that bond yields here in the US and globally have remained well contained while earnings and economic growth continue to provide support for the expansion narrative – particularly here at home. Housing remains the weak spot in our recovery and has been a contributor to our subdued level of inflation despite a monetary policy that most would have thought would have gotten the Fed to its 2% target by this stage in the game.
Economic Calendar for Wednesday, September 24, 2014
7:00 AM MBA Purchase Applications
10:00 New Home Sales
Economic Calendar for Thursday, September 25, 2014
8:30 AM Durable goods
8:30 AM Jobless claims
9:45 AM PMI Services Flash
11:00 AM Kansas City Fed Manufacturing index
And at 1:20 PM Dennis Lockhart is speaking