Friday, July 12, 2019, 12:31 PM, EST
- Stocks advancing again on rate cut expectations
- Producer Price Index for June rose 0.1% vs. 0.0% expected
- Core PPI rose 0.3% vs. 0.2 est.
- Year over year core prices rose 2.3% vs. 2.1% expected
Stocks are up again today. You can almost picture the river of money flowing into stocks as investors position themselves for lower rates here and abroad that will raise asset prices. It seems the TINA (There Is No Alternative) trade is back. A Trump tweet yesterday morning causing trade concerns was but a minor blip on the advance. Fears the trade talks are not seeing progress or that China may have violated US sanctions by importing oil from Iran? Not a factor today given expected Fed action.
The fact that Consumer Inflation came in a little hot yesterday did not deter stock buyers or change the 100% market based odds for a rate cut at the end of the month. Today, producer prices rose more than expected and the major averages continued their advance. And with earnings season starting next week with major bank earnings, you might think that an expected 2.8% decline in Q2 earnings might deter stock buyers. You'd be wrong. In fact, the 0.3% earnings decline in Q1 means that a Q2 decline would technically be an "earnings recession". Still stocks charge ahead.
I'm not discounting the headwinds facing stocks, any of which could come to the fore in the coming weeks. Slowing global growth, expectations of slowing domestic growth, trade tensions - and the business uncertainty that that creates - and weak earnings/guidance are all factors that could ding stocks but for the past few days at least it's been "Take 'Em".
As we sit now, the Dow and S&P 500 are at records, above two key round numbers of 27,000 and 3,000 respectively. The S&P 500 still has not yet closed above that level so that's something to watch. The Nasdaq 100 and Nasdaq Composite are also at record levels. Lagging are small cap stocks which, as measured by the Russell 2000, are still below the highs achieved on May 6th.
Today's PPI release showed higher than expected producer prices, with June PPI up 0.1% against a flat estimate and core PPI excluding food and energy prices up 0.3% compared to the 0.2% reported last month and expected. Year over year, producer prices rose 1.7% vs. 1.6% expected and were up 2.3% on a core basis vs. 2.1% expected.
Oil spent its third straight day above $60, up about $0.20 to $60.40 as traders keep on eye on Iran and another on the Gulf of Mexico.
Industrials, Materials and Consumer Discretionary stocks are the leading sectors with defensives Real Estate and Utilities lagging along with Healthcare which has seen some stock-specific and sector headwinds over the past two days.
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Brian's Technical Take
Last week we abandoned our "low is in" call for the 10-year treasury yield made three weeks past as the following week's candlestick did not confirm the bottoming pattern. Sure enough the long yield made a marginal new low last week to 1.94% but quickly rallied back above the 2% support level.
Last week's move to new lows and reversal higher netted a weekly gain of 3bps and ended a streak of eight weeks in the red. In doing so it again carved out a bottoming candlestick, dragonfly doji, which this time around is seeing bullish confirmation from this week's rally. The weekly RSI is coming off a deep oversold 22 reading, the lowest since December 2008 (are things that bad?), which may suggest the pendulum has swung too far.
There is a wide gap in the long yield's daily period chart between 2.19% and 2.28%. This is a key resistance level which I suspect will be put to the test in the upcoming weeks. With the short end anchored down by the looming rate cut(s), the yield curve could be in the early innings of a widening move.
The 10Yr - 2YR Treasury spread bottomed in December after a two-year flattening move. After nearly six months of sideways consolidation, it broke out from that range in early June and with it the daily and weekly RSI's reached bullish levels of 70 and 62.
While the yield curve will often go from negative to positive in advance of a recession largely due to a Fed easing cycle, or the expectation of, the 10Yr - 2YR spread never went negative. Assuming this part of the curve has plenty of widening left (my bias), the shorter end, which banks are more sensitive to, is likely to widen as well. In fact this week the 5YR - 3M spread registered its largest weekly gain in more than eight months.
There are plenty of ongoing geopolitical and trade risks, coupled with the potential for a continued softening in economic data, which could limit the upside potential in rates and the widening of the curve, however the lows could be in. For bank investors that may be enough. Next week the money centers kick off the unofficial start to earnings season. As always their data and outlook will be parsed for clues as to what the future may hold. Concerns about rate cuts, falling yields, and a flattening curve may be more than baked in. The price action will be telling.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.