Every “witch” way. Stocks traded up in a high volume, quadruple witching session on Firday. Friday’s session topped off a week of gains, the best since last November, resulting from little economic news but lots of optimism.
WHAT YOU NEED TO KNOW:
1) Manufacturing continues to slip. Empire Manufacturing, a report compiled by the NY Federal Reserve Bank on manufacturing conditions in the state, came in at 3.7, well below expectations. Industrial Production similarly missed expectations with a month over month growth of just +0.1% after contracting by-0.6% last month.
2) Consumer sentiment is high. According to the University of Michigan Sentiment indicator, sentiment on current as well as future conditions grew bringing the composite index to 97.8 up from last month’s 93.8. To learn more about confidence indices like Michigan and the CCI, read my note on the topic here: https://www.siebertnet.com/blog/index.php/2019/01/30/they-earned-it/ .
3) A US Chinese trade deal continues to remain a high probability, despite mixed news. A final meeting between President Trump and President Xi continues to be pushed back in order to allow negotiators time to complete the deal. On Friday, Chinese lawmakers passed a law against forced technology transfers, which has been a contention point for negotiators. The legislation is a positive sign that the two sides continue to make progress.
Stocks continued their melt up on Friday ending a week that had very little positive macro news. The positive move in stocks would mean that investors are positive about the economy in the near future. Bonds on the other hand continue to factor in a more negative view about the future as they continue to rally as well. This differing view is the direct result of the Federal Reserves recent messages and policies. The current rally in the stock market was sparked by the Fed’s patience campaign and was further helped by a newly dovish ECB. The reasons for the policy shift by the central bankers was their expectations of slower growing economies, which is not good. When expectation for economic conditions are bad, bonds trade up. Bonds have been trading up since the Fed began making its pronouncements in late December, with the aggregate bond indices continuing to reach all time highs ever since. Ten year treasury yields continue to trade at the low end of their range and closed at 2.58% helping to flatten out the 2/10 yield curve to +14. Additionally, Fed Funds futures are factoring a roughly 27% chance of rate cuts in 2019. Stocks are factoring in a best case scenario and bonds a worst case one.
WHAT TO LOOK FOR TODAY:
This morning we will get the NAHB Housing Market Index and it is expected to have risen to 63 from 62. Before the bell we will hear from Lumber Liquidators, amongst others. On this light release day there will be much chatter about merger talks between Deutsche Bank and Commerzbank, the potential for Lyft to launch its IPO this week, and Fed talk leading up to the FOMC meeting later in the week.
WHAT TO LOOK FOR IN THE WEEK AHEAD:
This week will be all about the FOMC meeting that will take place tomorrow and Wednesday culminating in the policy release and a press conference. The Fed is not likely to change rates but Fed watchers are hoping for some more clarity on balance sheet normalization. Fed officials have discussed the possibility of winding down asset sales but have yet to set a policy on it. Additionally, the Fed will come out with its Dot Plot detailing FOMC members’ rate predictions going forward. We will get some more numbers on manufacturing with Factory orders and Manufacturing PMI, which will be watched closely after last weeks disappointing figures. On Thursday, we will get the Leading Index from the Conference Board, which is an important leading indicator for economic output. Refer to the attached economic and earnings release calendars for details.