The dog days of summer trading are here and the market is a mixed bag. The leading sectors of the last few weeks have been utilities and REITs – both defensive. Stock indices have generally moved higher over the last week except the Russell 2000 which faded lower into Friday’s close – a leading indicator or a laggard? The market leading large-cap FAANG stocks have largely run out of gas while some names like Facebook and Netflix have broken their uptrends with poorly received earnings reports. We are close to recovering all-time highs in the S&P 500 from January’s top so we need to consider two scenarios.
The first is that we are about to make a “double-top” in the S&P 500 and have a larger pullback after testing the January high. If this happens, it would explain why bond yields have remained stubbornly low and that the defensive sectors have been leading over growth sectors like biotechnology and semiconductors. Volume has been poor over the last several weeks so that says participation is suspect, too. On the other hand, there may be new optimism centered around “solving” trade tensions just in time for the U.S. November elections. There have been signs of China and the EU wanting to play ball with the current administration so this is a possibility to consider. Jobs reports and GDP have been good but there are questions about sustainability as inflationary pressures increase while the Fed raises interest rates – not a good combination.
There should be an answer soon to these questions as we are very close to testing the 1/26 high. See chart below:
Things to watch next week:
- The PPI and CPI are released Thursday and Friday, respectively. These indicators will show us the direction of prices (inflation) for producers and consumers.
- The Russell 2000 was the only index out of sync to close out the week. Its direction on Monday may be the leading indicator for the other indices.
- Bond yields went lower a few basis points on Friday. The 10 year should pop over 3% if we are going to test the January high.
Those toilet paper stocks may have some room to run…..
Economic & Central Banking Snippets
- Solid hiring by US employers failed to boost the annual rate of US wage growth in July, fuelling arguments for the Federal Reserve to tread carefully as it raises rates. Employers added 157,000 jobs last month which was lower than Wall Street analysts had expected, but that left the monthly pace of job growth at a hearty 224,000 over the past three months, bolstered by upward revisions to earlier data.
- The unemployment rate dropped to 3.9%, however, year-on-year wage growth flatlined at 2.7%. This means that wages are rising slower than the inflation rate as reported by the CPI of 2.9%. This may be an indicator that wage growth inflation has some more room to run higher but we will have to wait for the data to prove this out in the coming months.
- The eurozone’s economy slowed in the three months through June. The European Union’s statistics agency said the combined gross domestic product of the 19 countries that use the euro increased at an annualized rate of 1.4% in the second quarter, Paul Hannon reports. Exports sputtered and business confidence weakened on worries over future relations with the currency area’s largest trading partners. (WSJ)
- The Bank of Japan (BOJ) bucked market expectations and kept its ultra-easy monetary policy in place in a bid to stimulate inflation, which the central bank acknowledged will likely fall short of its 2% goal until at least 2021. The BOJ stuck to its overall policy framework despite a global wave of monetary tightening led by the Federal Reserve. (WSJ)
- The Institute of Supply Management’s manufacturing gauge rose to 58.1 in July, down from 60.2 a month ago. The latest report indicates that a tight labor market and supply chain have placed pressures on the sector, according to Timothy Fiore, chair of the ISM manufacturing business survey committee. “Demand remains robust, but the nation’s employment resources and supply chains continue to struggle,” he added. “Respondents are again overwhelmingly concerned about how tariff-related activity, including reciprocal tariffs, will continue to affect their business.” (FT)
- An independent reading of growth in China’s manufacturing sector edged down to an eight-month low in July as new export orders fell at the fastest pace in two years. The Caixin-Markit manufacturing purchasing managers’ index fell to 50.8 in July, down from 51 in June and inching closer to the 50-point mark separating growth from contraction.
- The Bank of England (BOE) has raised interest rates to the highest level in almost a decade, saying recent data vindicated policymakers’ view that the first quarter slowdown in UK growth was temporary. (FT)
- Apple hit a valuation of $1T this week which is the first time that a company has achieved this benchmark. However, this chart below may show that everyone’s plate may be full when it comes to Apple stock. Why? Well, as it becomes a larger percentage of fund manager’s portfolios, they need to pare it back for diversification reasons. It doesn’t mean that Apple’s stock can’t go higher but it does mean that the rest of the S&P 500 needs to keep going higher if the relationship below holds up in the coming months.
- Iran’s currency hit a historic low of 100,000 rials to the dollar last week. The collapse, which has seen the currency lose half its value in just four months, was encouraged by a deepening economic crisis and the imminent return of full U.S. sanctions. The penalties will be reimposed in two stages on Aug. 6 and Nov. 4, forcing many foreign firms to sever business ties with Tehran. (Seeking Alpha)
- In what would be its 13th IMF bailout, Pakistan is reportedly drawing up plans to seek up to $12B – its largest ever rescue from the fund – with senior finance officials set to present the option to Imran Khan soon after he takes office. Any loan from the IMF, which many believe is necessary to resolve the country’s escalating foreign reserves crisis, would see the IMF impose restrictions on public spending. (Seeking Alpha)
- Tesla had earnings this week which rallied the stock and relieved concerns over their manufacturing process. They still burn plenty of cash so they need to get these cars off the lot ASAP.
- Tech firms (and particularly social media) should be held liable for “harmful and misleading” material spread on their platforms, according to U.K. media committee chairman Damian Collins, and should pay a levy to enable regulation. “Companies like Facebook made it easy for developers to scrape user data and to deploy it in other campaigns without their knowledge or consent,” he wrote. The full report is due in the fall. (Seeking Alpha) The higher regulatory costs have no doubt affected Facebook’s bottom line as their stock tumbled after earnings. See the chart below to get some historical context on how a big a tumble the stock took after earnings:
- General Electric is seeking a buyer for key parts of its digital business as the beleaguered industrial conglomerate unwinds a signature initiative of former Chief Executive Jeff Immelt amid a broader retrenchment. The Boston-based company has hired an investment bank to run an auction for the operations, which GE has poured billions of dollars into, according to people familiar with the matter.
- Wells Fargo agreed to pay $2.09 billion to settle with the Justice Department over the sale of toxic mortgage-backed securities during the financial crisis. The Justice Department said it reached a civil settlement with Wells Fargo to end the long-running probe into the matter. Wells Fargo had already set aside funds to cover the settlement. (WSJ)
- Royal Bank of Scotland will pay its first dividend since it was bailed out during the financial crisis, marking a milestone on the bank’s road to recovery and paving the way for a further reduction of the government’s 62.4% stake. (FT)
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