Information Overload

Information overload.  Stocks stood still yesterday as investors digested a trove of economic information from the Eurozone and the US, all suggesting different things.  Political tensions are running hot in Washington adding some stress to the markets, though they have been largely written off as “business as usual”.

 

MY TWO CENTS

 

1. Euro trash.  Things just seem to be getting worse for the Eurozone economy.  Earlier this month the European Central Bank added a round of monetary stimulus by lowering key interest rates to -50 basis points (yes that’s negative) and agreeing to purchase 20 billion Euros worth of bonds each month starting in November.  That may not be enough as a fresh round of purchasing managers indices (PMI’s) that came out yesterday suggested that the EU may be on the brink of a recession.  The IHS Markit flash Composite PMI for the Eurozone showed a decline from 51.9 to 50.4, just above the level of contraction.  Recall that PMI’s above 50 represent growth and numbers below represent contraction.  Manufacturing across the region has been in contraction since earlier this year, but services have been holding up.  In this latest survey, services declined to 52.0 from 53.5, surprising economists on the downside.  Contributing to the pain is Germany’s weakening economy.  Germany has the largest GDP in  the EU and their rapidly declining manufacturing economy contributed to a composite PMI falling to 49.1 from 51.7, in contraction zone for the first time since mid-2103.  Germany has been struggling to keep its economic footing as two of its largest trading partners, the US and China, duke it out in a trade war causing a significant slowdown in manufacturing activity.  Additionally, the banking sector is struggling to cope with negative interest rates and the potential for US tariffs continue to weigh on investment decisions across the region.  The EU is feeling the pinch at the moment leaving many wondering if the slowdown will affect the US at some point.  For now, the EU’s weakness may be benefiting US equities as investors are looking for the safest bets.

 

2.  Anything you want to add?  Despite all of the economic strife going on in the EU and China, the US economy continues to show signs of resilience.  Growth has slowed but there aren’t the signs of rapid decline that have been popping up across the globe.  Yesterday’s Markit Manufacturing PMIfor the US came in at 51.0, up from the prior month’s 50.3.  Manufacturing has been declining for much of the year and this last PMI is the first increase since January.  The Services PMI grew to 50.9 from 50.7, but was below economists’ estimates.  Though manufacturing is an important part of the US economy, it represents a smaller portion of output than services, so many economists choose to focus more heavily on the health of services economy.  Both PMI’s remain slightly above the neutral line indicating muted growth.  PMI’s are constructed by polling companies on their health, activity, and forward projections and the results are tabulated into the indexes.  Anecdotal information is also collected and released.  Yesterday’s release came with a warning that was not really picked up by traders.  According to IHS Markit, jobs are now being cut by surveyed companies for the first time since January 2010.  Today, we will get a read on the consumer, another favorite topic of mine.  The Conference Board will release its Consumer Confidence Indexwhich has been hovering near all-time highs and, as I often write, as long the consumer remains confident and continues to consume, the economy will continue to grow.  Economists are expecting a read of 133.0 down from last month’s 135.1.

 

 

THE MARKETS

 

Stocks had a muted close yesterday as trade talks with China seemed to cool off and bad Eurozone economic numbers left traders wondering if the Atlantic Ocean would be enough to insulate the US from the pain.  The S&P500 slipped by -0.1%, the Dow Jones Industrial Average rose by +0.6%, the Russell 2000 fell by -0.10%, and the NASDAQ Composite Index traded off by -0.06%.  Bonds climbed for a sixth straight day and 10-year treasury yields were unchanged at 1.72%.

 

WHAT’S NXT

 

– FHFA House Price Index is expected to have grown by +0.3% month over month compared to last month’s growth of +0.2%.

– Richmond Fed Manufacturing Index is expected to remain at 1.

– Consumer Confidence is expected to come in at 133.0 compared to last month’s reading of 135.1.

– The treasury will auction off $40 billion 2-year notes.

– AutoZone and CarMax will announce earnings before the bell.  After the close, we will hear from Nike and Cintas.

daily chartbook 2019-09-24