The Running of the Bulls

1.  Which way is up?  As I have been lamenting quite a bit in my daily note, investors are becoming increasingly confused with information coming from the markets.  Let’s get the easy stuff out of the way first.  The trade war is bad for the global economy so markets should react positively if tensions ease and restrictions get lifted.  For the most part the market has been reacting logically to this pattern, with the only challenge being misinformation coming from multiple Administration insiders.  It gets kind of difficult to decipher what is real information and what is just rhetoric.  Now on to the tough stuff.  The market has become unhealthily obsessed with Fed rate cuts.  The Fed began to change its hawkish tone to dovish last Christmas in order to shore up tanking stock markets.  There is some logic in their move as consumption, the primary driver of the US Economy, is closely correlated to stock market performance.  As the year progressed, global economies began to shows signs of weakness which prompted the Fed to double down on their soft talk.  Somewhere in the middle of all that, the President took up his bully pulpit and began to exert public pressure on the Fed to cut rates.  Investors started to view a rate cut as a cure-all for all things bad in the market, so when the Fed changed its policy statement last month by removing the word “patient”, investors began to count a rate cut in July as a given, and markets rallied.  This is where things got tangled.  Global PMI’s and sentiment continue to decay and corporate earnings growth continues to soften.  Investors are beginning to wish for worsening conditions, hoping that they will increase the likelihood of a big rate cut.  So the thesis has become bad is good and good is bad.  This became clear as stocks sold off in response to last Friday’s strong jobs report.  Loading up on equities in response to bad economic news when analysts are expecting slow or no earnings growth is a risky venture.  History shows us that weakening conditions can be eased by accommodative monetary policy, but they cannot be quickly reversed.  How the stock market reacts remains to be seen but there is some good news in all of this confusion: the labor market remains strong.

2.  Trade, oh trade.  With the market so heavily focused on monetary policy, trade has faded into the background, but it still remains problematic.  WHILE YOU SLEPT, China turned up the rhetoric against the US after the State Department announced the approval of a $2 billion arms sale to Taiwan.   Also in that neck of the woods, South Korea and Japan are slugging it out with tariffs of their own.  Just because it is happening over there doesn’t mean it won’t affect things over here.  Remember that Asia still accounts for a majority of semiconductor production and consumption, with Korea and Japan being major players.

Stocks and treasuries spent a second session in the red as investors began to have some concern over a rate cut later this month.  The S&P 500 slipped by -0.48%, the Dow Jones Industrial Average sold off by -0.43%, the Russell 2000 traded off by -0.9%, and the NASDAQ 100 fell by -0.71%.  Bonds traded up slightly and 10-year treasury yields climbed by +1 basis points to 2.04%.  As investors begin to worry about delays in rate cuts, the dollar climbed and gold slipped.  Crude oil rose slightly yesterday but remains under pressure as analysts believe that the OPEC+ extended production cuts won’t be enough to draw down the increasing supply and weakening global demand.

– The Bureau of Labor statistics will report its JOLTS Job Openings which is expected to show 7.473 million openings compared to last month’s 7.449 million.

– Fed Chairman Jay Powell will speak this morning.  Also speaking today will be St. Louis Fed President James Bullard, Fed Vice Chairman Randal Quarles, and  Atlanta Fed President Raphael Bostic.  Pay close attention to these.

– The Treasury will auction $38 billion 3-year notes.

– PepsiCo announced earnings early this morning with a 1.9% beat and Levi Strauss & Co will announce earnings after the close.

Please call me if you have any questions.

Best regards,

Mark