Health break. Stocks rallied yesterday on the wings of hope built from Trump comments and tweets. The President did his level best to give stock traders a cue to stop the slide in equities and traders responded positively.
WHAT YOU NEED TO KNOW:
1) Yesterday’s rally was built on hope. Despite Trump’s claim that the recent break in negotiations with China is just a “squabble” and that he expects a deal to come sooner than anyone thinks, there is still a lot at stake and both sides look like they are hunkering down for the long haul. While the President was busy talking the markets up, his administration was releasing a plan to tax an additional $300 Billion in consumer exports from China. Added to the existing tariffs, the new wave would essentially place tariffs on almost all of Chinese imports to the US and are due to be triggered right around the G-20 meeting that will take place in Japan in late June. Additionally US firms are expected to be barred from using telecom equipment that would pose a security threat… that really means Huawei. The announcement drew rhetoric from President Xi Jinping. Finally yesterday, Trump asked the Fed to enact quantitative easing and drive the US to a 5% GDP growth to match Chinese efforts to bolster their economy. A long lasting and meaningful trade deal with China would be very good for the US, and tariffs as a means to entice China into making a deal are understandable. However, if no deal is reached and tariffs become a longer term strategy of protectionism, all bets are off.
2) Meanwhile, the Chinese economy is still struggling. WHILE YOU SLEPT, Chinese economic data showed a slump in retail sales which showed a year over year growth of +7.2% versus last month’s +8.7%. Additionally, Factory Output missed estimates (+6.5% est.) and came in at +5.4% year over year versus last month’s growth of +8.5%. These already weak numbers will certainly be impacted by the newly imposed and proposed US tariffs, upping the ante for China to make a deal. Further, the weak Chinese data will restart the discussion of global economic slowdown which can be a drag on equities.
Stocks rallied yesterday on hopes that a trade deal can still happen as the President downplayed the latest spat with his Chinese counterparts. The rebound was the largest gain in a month for the Dow Jones Industrial Average, which rose by +0.82%, closing just above its 200 day simple moving average (a positive signal). The S&P500 traded up by +0.8% led by the Technology sector, the Russell 2000 climbed by +1.82% (still below its 200 day simple moving average), and the NASDAQ 100 bounced up by +1.06%. The VIX volatility index, also referred to as the “fear” index, eased back a bit in yesterday’s trade closing just above 18, which still indicates a higher level of discomfort. My regular readers will recall that I often refer to 18 as a magic level for the VIX. Closes above 18 mean that investors are skittish making it a negative signal for stocks. Bonds eased back just a bit yesterday and the 10 year treasury yield rose by +1 basis point to 2.41%. The 3-month / 10-year yield curve popped back into positive territory closing at +1 basis point.
WHAT TO LOOK FOR TODAY:
This morning we will get April’s Retail Sales data from the US Census Bureau and economists are expecting growth to have slowed to +0.2% month over month compared to last month’s +1.6% growth. Excluding autos and gas, we are expecting a month over month growth of +0.3% versus last month’s +0.9%. Later this morning, Industrial Production is expected to come in flat after last month’s -0.1% month over month slide. We will also get the National Association of Home Builders Housing Market Index and it is expected to come in at 64 up from last month’s 63. Readings above 50 indicate that home builders have a positive view on industry conditions. Federal Reserve Vice Chairman Randall Quarles will testify before the Senate Banking committee and Richmond Fed President Thomas Barkin will speak at noon. WageWorks, Alibaba, recently famous IPO Beyond Meat, and Macy’s will announce earnings before the bell, amongst others. After the bell earnings include Cisco, Walmart, Pinterest, Nvidia, and Applied Materials. Stock futures will start the day under a bit of pressure resulting from the weak Chinese economic numbers.