Thursday, November 29, 2018, 12:08 PM, EST
- NASDAQ Composite -0.53% Dow -0.38% S&P 500 -0.43% Russell 2000 -0.38%
- NASDAQ Advancers: 926 Decliners: 1369
- Today's Volume (100 day avg) -3.96%
- Crude $51.53 +$1.24 , Gold $1225.20 +$3.97
- Equities are digesting gains from yesterday after Fed Chairman Powell's comments
- All eyes now move to the Trump/XI meeting at this weekend;'s G20 gathering
- Today's U.S. Economic data was solid
- Personal Income rose 0.5% vs. 0.4% est.
- Personal Spending rose 0.6% vs. 0.4% est.
- Initial Jobless Claims were 234,000 vs. 220,000 est, and 224,000 last week
- PCE Core price index rose 0.1% vs. 0.2% est.
Thanks Jerry! No, this does not refer to Jerry Seinfeld or even Jerry Garcia. We are of course referencing the 600+ Dow point increase attributed to Federal Reserve Chairman Jerome Powell's commentary at the Economic Club of New York yesterday.
Specifically, his statement that interest rates are "just below" the neutral level was interpreted as being dovish by the markets and stocks rallied right after Noon yesterday. Digging a bit deeper, a "neutral" rate is not easily viewed in any statistics. Rather it is a concept that current rates are not too restrictive or stimulative, and is estimated in a range of 2.5% to 3.5%. With Powell saying we are "close", many market participants figure the Fed will slow the pace of hikes compared to a more aggressive path suggested in October, when Powell said we are a "long way" from neutral.
One problem with this thinking is that being close to the bottom end of a range does not mean the Fed will stop hiking, so the market may have overreacted. Still, our takeaway is that the market holding much of yesterday's gains is constructive, since for most of the past few weeks many market declines were not met with any type of bounce.
Right now, Fed futures agree with the stock market as CME data suggests an 86% chance of a rate hike in December - pretty much baked in - and only a 37% chance of an increase in March. Importantly, with only a 39% chance of a hike by December 2019 the futures also seem to be suggesting only one hike in 2019 based on current data.
The Fed, being data dependent and all, might be able to use the next few months to assess the U.S. economy and also the event watched by most investors this week, namely the G20 meeting in Buenos Aires. On Saturday, the leaders of the U.S. and China will try to make progress in the trade front. Both seem to need a way to back off the current escalating tariff path in a face-saving way so markets are hopeful but recent history suggests a big breakthrough on current and future tariffs might be a bit of a "Hail Mary". Today, President Trump said he's "very close" to doing something with China which took stocks off their lows but also said "I really don't know" and "I like the deal we have right now". Bottom line, with the Fed off the radar as a threat today, the ball is in the President's court to help move stocks higher (or lower).
Today, equities held on to most of yesterday's gains, opening slightly in the red and remaining lower by about 0.4% currently. All sectors save for energy (where oil poked around below $50 for a time) are negative. But the real story is in the jump in most sectors since about noon yesterday, with "risky" groups like retailers, healthcare, technology and industrials all seeing sharp gains. Utilities, a safe haven since October, underperformed. From here, it's the kind of market that is hard to take a new long or short position given the difficulty in handicapping Saturday's discussions about China/U.S. trade.
In economic news, personal income and spending both rose more than estimated while jobless claims ticked up slightly but remain at low levels. The Fed's favored measure of inflation, PCE Core, rose 0.1% - below the 0.2% reported last month and 0.2% expected this month - so this read on inflation is positive for stocks. Oil continues to march to its own drummer as the U.S. shale boom increases supply while Russia and OPEC consider production cuts. Crude rallied from below $50 to move above $51 on news of said cuts. For now, equities are not attributing the weakness to a demand problem, so the commodity is not weighing on stocks too much.
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Brian's Technical Take
Chairman Powell's "dovish" speech spurred a risk-on rally in global assets with the Dow and S&P 500, +2.5% and +2.3%, each having their 2nd best performance in twelve months. Specifically Powel noted interest rates were just below neutral which indicates the Fed could pause rate hikes sooner than previously expected. Accordingly the dollar weakened and rates declined.
Animal spirits are taking a breather today ahead of this weekend's G20 meeting. While a trade agreement is unlikely to be cemented, any improvement from the heightened tensions between the US and China would be welcomed. After a week of "sideways consolidation" the 10-year treasury yield dipped to 3% this morning, a level it has not seen since September 18th. This should be a reliable support not only from psychological perspective but also 3% previously acted as resistance back in June and August ("resistance turns support").
More interesting is the technical setup in the shorter 2-year yield which looks ripe for a meaningful move. Today the short yield is again testing the key 2.79% level which has acted as clearly defined support since mid-September. The price action over this time has formed a textbook head & shoulders pattern which generally speaking is commonly viewed as bearish, however it can just as likely be a continuation pattern with the neckline holding firm and the prior uptrend resuming. While the direction of the next move is unclear as it will likely be based on the outcome of the upcoming meeting between Trump and Xi, it could be stronger than what one would normally expect.
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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.