Markets Await Trump’s Summit With Xi

Markets - Another Rebound, But Only For Big Caps

The S&P 500 managed to close positive after spending some of the day negative. It would have been psychologically tough for the bulls to withstand a decline after the big rally on Friday which occurred. Stocks were extremely oversold.

With this 0.33% increase in the S&P 500, the CNN fear and greed index increased from 17 to 19. That's still barely in the ‘extreme fear’ category.

The CNN index didn’t exit ‘extreme fear’ partially because the VIX increased 0.63% to 19.02. Nasdaq increased just one basis point. Russell 2000 fell 0.87% because of optimism on a potential trade deal with China.

If you think a deal will occur, the trade is to buy the Dow and short the Russell 2000. The Dow was up 0.44%.

The best sectors were healthcare and consumer staples which increased 0.99% and 0.91%.

It was sort of a ‘risk off’ day. Small caps fell, the VIX increased, and consumer staples outperformed.

However, it wasn’t completely ‘risk off’. S&P 500 was up and the 3 leadership sectors which are consumer discretionary, technology, and communication services all rallied.

The worst sectors were energy and materials which fell 0.33% and 1.25%.

Markets - President Trump Criticizes Powell Again

Ahead of chairman Powell’s speech in front of the NY Club for Growth on Wednesday, President Trump stated, “So far, I’m not even a little bit happy with my selection of Jay.”

President Trump thinks the U.S. central bank is “way off-base with what they’re doing.” The only thing President Trump can do is complain to the media. That will allow him to blame the Fed if the economy falls into a recession.

Trump knows if he picks a new Fed chair in the next few months, it will roil the markets at a key point in the cycle. It would also be tough politically as the choice needs to be confirmed by the Senate.

The initial reaction to Trump getting rid of Powell would be a selloff because there would be uncertainty. Even if Powell is replaced with a dove, there would still be the same FOMC members. Trump has left his stamp on the Fed.

Because he chose many of the members, it’s tough to make an argument as to why the members need to be replaced.

Markets - Clarida Tries To Smooth Powell’s Statement

The Federal Reserve vice chairman gave a speech on monetary policy on Tuesday. Richard Clarida stated, Fed policy is “much closer” to the neutral rate than it was in December 2015.

That’s painfully obvious because the Fed has hiked rates 7 times since then. The goal of that statement was to quell the markets after Powell’s statement that the Fed funds rate is “a long way from neutral.”

The Fed loves to beat around the bush with its statements. Unfortunately for Clarida, his statement doesn’t counteract what Powell said.

Markets - Investors are still fearful the Fed will go overboard with hikes in 2019.

Latest odds for a hike in December are 79.2%. The 2 year yield and 10 year yield were flat which means the difference between the 2 yields is only 22 basis points. Inversion may occur sometime by the end of the 1st half of 2019.

Those who extended the flattening trend a few months ago were wrong to project an inversion by this fall. Inflation and growth expectations have fallen, and the Fed has maintained its hawkishness.

Another important point Clarida made was on the economy. He said, “U.S. economic fundamentals are robust, as indicated by strong growth in gross domestic product and a job market that has been surprising on the upside for nearly two years.”

Personally, I think Clarida’s opinion is delayed by a few months. That’s a kind way of saying he’s wrong.

Economic growth is weakening, and the labor market looks like it’s about to follow along. If the Fed relies on this analysis, it will raise rates in December and in the first half of 2019.

By the time the Fed sees the economic weakness, it will probably be too late.

Markets - Latest Trade News

Everyday until Friday and Saturday there will be speculation on how the summit with Presidents Trump and Xi will go.

Larry Kudlow has leaned towards wanting a deal which is why it’s no surprise his latest comments were constructive. He stated, “We’re having now a lot of communication with the Chinese government at all levels. We were at a total standstill. Nothing was going on.”

It’s important to mention trade growth has weakened because of cyclical weakness not the trade disputes. If stocks rally sharply after a deal is made, investors will soon find out that economic growth is still weakening which will cause a reversal.

Markets - Over 80% Of Global PMIs Are Above 50

Manufacturing growth is slowing across the globe. But the chart below shows it’s not as bad as the last two global slowdowns yet.

As you can see, over 80% of global manufacturing PMIs are above 50 which means most manufacturing sectors are still growing.

The amazing global synchronized growth in late 2017 to early 2018 is no longer here. But the economy isn’t in a synchronized recession either. I could see the American Markit manufacturing PMI falling below 50 in the 2nd half of 2019.

Markets - Conclusion

Large caps rallied slightly while small caps fell because investors think good news on trade will come from the summit on Friday and Saturday.

This should make Friday’s action interesting because some traders may not want to go into the weekend with big bets on the table, since they know a major news event will occur over the weekend.

Powell’s speech on Wednesday could quell the markets if he decides to pull back on the hawkish rhetoric. This is all about 2019 policy because he won’t change his stance on the December rate hike.

A big decline in stocks that takes them to new 2018 lows would put the hike in doubt, but as of Wednesday, that hasn’t happened.

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