American Stocks Hardly React To Positive Trade News

American Stocks - Very Slight Monday Rally

The stock market rallied in the morning and sold off throughout the day. S&P 500 only closed up 0.12%. Nasdaq was up 0.36% and Russell 2000 fell 8 basis points. 

The initial rally was caused by the increased potential for a trade deal. President Trump stated America wouldn’t increase tariffs on China if a deal isn’t made by March 1st.

Traders bought the rumor and sold the news. Interestingly, the VIX was up 9.92%. This may have been caused by the intraday decline. Or also traders buying protection from a potential correction. Good news of the trade deal and dovish Fed are fully priced in. 

CNN fear and greed index increased to 70 which is greed. It’s surprising that this index hasn’t reached extreme greed this year. S&P 500 is up 11.54% year to date.

American Stocks - Fed To Remain Dovish

Best chance for the rally to continue is for economic growth to rebound. If it doesn’t, recession warnings will go out. If the economy rebounds, we will probably see stocks rally until the Fed turns hawkish again. I doubt the Fed will be hawkish at its March meeting which is in 22 days. 

There is a 97.4% chance rates will stay the same at that meeting. The difference between the 10 year yield and the 2 year yield is only 15 basis points. Which means a hawkish March meeting would probably invert the curve.

There is an 82.3% chance rates will stay the same all year. 

The chart below shows the chances of one hike by the Fed and the Bank of China. There is almost no chance of a hike by the Fed and a 35% chance the Bank of China hikes rates once. I don’t see why either would hike rates as there is only sparse evidence of a global economic recovery in 2019.  

The only potential for hawkish statements at the March meeting is from balance sheet guidance as the Fed will give us details on the timing of the end of QT. 

If traders think the unwind will end this year, they will think this is a hawkish update. This unwind will still likely end in 2020 or even 2021.

American Stocks - Very Strong February Flash Markit PMI

Investors were surprised by the January Markit PMI report because manufacturing was strong and services was weak. 

Specifically, the overall index was 54.4, services was 54.2, and manufacturing was 54.9. The global economy is weakening with specific problems in the manufacturing sector. 

Manufacturing is more global than services. While services may have been hurt by the decline in consumer confidence because of the stock market volatility and government shutdown, the consumer still should be strong. The labor market is strong, and inflation is low. There is strong real wage growth.   

The flash report from February was the reverse. It rectified my confusion as services was strong and manufacturing was weak. 

Since services is much larger than manufacturing, that change is very good for the overall index. The overall index increased to 55.8, which is an 8 month high. The services index increased to 56.2 which is an 8 month high. Finally, the manufacturing index fell to 53.7 which is a 17 month low.

American Stocks - According to the Associate Director of IHS Markit, this report is consistent with GDP growth of 2.5%. 

That’s much stronger than many expectations. 

It’s still early in the quarter, but the NY Fed’s Nowcast calls for 1.2% growth and the St. Louis Fed’s Nowcast expects 2.47% growth. It’s possible that Q1 will be the weakest quarter of this slowdown. If 2.5% growth is the trough, this was a very modest slowdown. 

Personally, I expect growth to be lower than that. However, that doesn’t take anything away from this solid PMI.

Employment growth accelerated sharply from the 19 month low in January. Backlogs of work increased for the 2nd straight month. The latest increase was the steepest since May 2018. 

Rate of new business growth was the quickest in 4 months although it was still below the peak in the spring of 2018. In January, soft economic reports cratered because of the government shutdown and stock market volatility. They are showing glimpses of rebounding this month. 

The big unknown is whether hard data will improve in February after missing estimates modestly in January.

American Stocks - Improved European & German PMIs

It’s notable that both the European and German Markit PMIs also improved. 

European composite index was up from 51 to 51.4 which was a 3 month high. Services PMI was up from 51.2 to 52.3 which was also a 3 month high. 

Manufacturing fell from 50.5 to 49.2 which is a 69 month low. There was a slight increase in new business in the service sector and a solid decline in new business in manufacturing. 

The chief economist at IHS stated this quarter is on pace to have one of the weakest rates of expansion since 2014. GDP growth is expected to struggle to rise more than 0.1%. I consider all this information modestly bullish because services improved. 

The European economy is still growing, while many projected it to fall into a recession by now.

German PMI was stronger than the European report. Germany’s PMI increased from 52.1 to 52.7 which is a 4 month high. Services index increased from 53 to 55.1 which was a 5 month high. 

Manufacturing cratered as the PMI fell from 49.7 to 47.6 which was a 76 month low. Q1 GDP growth is on pace to be 0.2%.

American Stocks - Conclusion

The American stock market is on precarious ground if the economic data doesn’t modestly improve in February and March. 

Markit PMI was strong as it was driven by sharp growth in the services sector. Europe and Germany had modest service sector growth and declines in manufacturing. 

If the global recession is limited to manufacturing, we can get through this weak period without the S&P 500 revisiting the Christmas Eve low.   

Spread the love