The stock market had a good week and we may be carving out the beginning of a new uptrend as earnings season begins to wind down. In general, earnings were good so corporate America continues to chug along while the Fed raises interest rates and inflation begins to become part of the 2018 narrative. Inflation can be a tricky variable for corporations as they may be unable to pass along input costs to their customers which would pressure their margins and profitability. However, I think we need to see that theme build up over a few quarters before concluding margin pressures will result in lower stock prices later in 2018 or 2019.
To review the technicals, the broader indices have been in a corrective pattern since a high that was achieved in late January. There is some evidence that this corrective pattern may be going into hibernation as the last test of the 200 day on May 3rd has resulted in more than just a bounce. Volatility levels in the $VIX index are also coming back down which signals a positive undertone to the price action in stocks. Let’s take a look at this week’s daily chart of the S&P 500 to see what is going on (each candlestick in this chart represents one day, by the way):
I will present more charts next week for a more comprehensive review of the major indices. This corrective pattern since January seems to be coming to an end across the board so next week’s charts should be important for how the remainder of 2018 plays out in the stock market.
What to look for next week:
- We should to start the week higher and then have a pullback by the end of the week which should give us the final clue on wether this move from the 5/3 low is sustainable. A shallow retreat in three waves would signal a larger uptrend is afoot which I think would last several months.
- Housing data mid-week.
- The 10 yr Treasury. Yields should rise higher and breach the 3.03% resistance in the chart if we are to have a healthy yield curve AND a healthy stock market at the same time. A flat yield curve portends weakness in the economy so 10YR yields rising should be welcomed by the stock market – eventually, at least.
Chart of the Week!
Economics & Central Banking Snippets
- American consumer sentiment was unchanged in May from the previous month but topped expectations. The report did reflect a small uptick in inflation expectations. A preliminary reading of the University of Michigan’s consumer sentiment survey remained at 98.8, against forecasts for a modest dip to 98.5. “What is likely to capture attention, however, are the small uptick in near term inflation expectations, the downward slippage in income expectations, and the expected stabilisation of the national unemployment rate at decade lows,” Richard Curtin, chief economist of the Surveys of Consumers noted. (FT)
- The Canadian economy unexpectedly shed jobs last month, putting a dent on the confidence that policymakers have been expressing in recent weeks over the country’s growth outlook. The country lost 1,100 jobs in April, according to Statistics Canada. That’s a sharp drop from the 32,300 increase in March. The unemployment rate was unchanged at 5.8%. (FT)
- US consumer prices climbed less than expected in April, providing further evidence that while inflation is picking up, it is unlikely to significantly overshoot the Federal Reserve’s target in the short term. The core consumer price index, which excludes volatile food and energy prices, showed prices were 2.1% higher when compared to last year.
- Tokyo office vacancies keep dropping as Japan continues to break free of its sluggish economy. This should contribute to increased inflation in rents which the Bank of Japan would welcome as a by-product of their quantitative easing program.
- China’s bond yields keep dropping which may be hinting at a slowdown in their growth rate.
- Argentina took the drastic step of calling on the International Monetary Fund for help after a series of steep interest rate rises failed to stop the slide in the peso. The situation is pushing a country that only recently restored its credibility with investors back towards a financial crisis. (FT)
- China likely will offer to import more U.S. goods as the two sides look to avert an all-out trade war. China is dispatching its chief economic envoy, Liu He, to Washington where he is expected to come with specific ideas designed to narrow the two country’s vast trade imbalance. Such a move is viewed as one of the best ways to ease tensions that already have affected trade flows and business deals.
- California took a major step toward becoming the first state to require solar panels on nearly all new homes. The California Energy Commission voted 5-0 to approve a mandate that residential buildings up to three stories high, including single-family homes and condos, be built with solar installations starting in 2020, Erin Ailworth reports. The commission estimates that the move, along with other energy-efficiency requirements, would add $9,500 to the average cost of building a home in California. (WSJ/FT)
- Goldman Sachs and Apple are preparing to launch a new joint credit card, a move that would mark the Wall Street firm’s first foray into plastic and deepen the technology giant’s push into its customers’ wallets. The planned card would carry the Apple Pay brand and could launch early next year, people familiar with the matter said. (WSJ/FT)
- This year, for the first time, demand for the low-skilled, seasonal H-2B visas was so high that the U.S. government awarded them by lottery. The result is uncertainty for businesses such as crab processors from Maryland’s Eastern Shore. The Chesapeake Bay Seafood Industries Association, which represents the roughly 20 licensed processors in Maryland, says this year’s randomized allocation has left the state’s industry short about 200 workers, almost half the seasonal workforce. The result: Processors that don’t have pickers aren’t buying crabs. Those crabbers aren’t buying bait from local fishermen. And the local economy takes a hit. The number of visas available each year is capped by statute at 66,000, evenly divided between the summer and winter seasons. Congress gave the secretary of Homeland Security authority to issue up to 69,000 more this summer if she determines there is sufficient need.
- The difference between yields on short- and long-term US Treasuries further narrowed on Friday, touching their flattest level in more than 10½ years. That shrinking gap marks the resumption of an overall flattening of the so-called yield curve evident this year as investors anticipate a potentially faster pace of interest rate rises from the Federal Reserve, but also remain wary of the longer-term economic outlook. On Friday, the yield on the two-year Treasury was 2.53% while the 10-year yield was 2.96%. A “flat” yield curve implies an economic slowdown is coming within the coming 6-12 months.
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
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Paul J. McCarthy, III
President – Kisco Capital