Stocks Soar On Mexican Trade Deal & Rate Cut Hopes

Stocks Soar - The Perfect Day For Stocks

Stocks soar and Friday was the perfect day. The jobs report was weak enough to allow the Fed to cut rates. But not weak enough to make investors seriously consider the possibility of a recession. Furthermore, President Trump made a trade deal with Mexico, preventing the tariffs from being implemented.

Keep in mind, we’re still in the same situation as the economy is weak and the trade war with China is ongoing. This was the perfect news to get the market higher for one day, but now is an even better time to bet against the market because intermediate term issues remain.

Personally, I never thought the Mexican trade war would last long because Mexico isn’t in a position to go up against America as 40% of its economy relies on America.

Specifics Of The Great Day & Week

Stocks Soar - The S&P 500 rallied 1.05% on Friday. It was up 4.41% this week. That’s better performance than some years. S&P 500 is now up 14.62% year to date as this has been a spectacular first half of 2019 for stocks. The S&P 500 is only down 2.46% from its record high.

Despite the market being close to its high, I’m confident that a new high won’t be hit soon. A record high will only be hit if President Trump makes a trade deal with China, if the Fed is very dovish on the 19^th, or if economic data improves.

Personally, I think the Fed is set up to disappoint markets because the Fed funds futures market is pricing in a 54.4% chance of at least 3 cuts this year even though the Fed has never suggested it will cut rates.

If the Fed moves towards guiding for 1 cut, it can easily disappoint markets. The market sees a 27.5% chance of a cut on the 19^th, but I see almost no chance of that happening.

Nasdaq increased 1.66%, the Russell increased 0.72%, and oddly the VIX increased 2.32% to 16.3. That rally in the VIX could be nothing or it could be a warning sign to get out of stocks.

CNN fear and greed index increased 3 points to 32 which is fear. I see fearless bullish investors as most of the correction has vanished. This was a classic risk on day as the utilities fell 0.77% and every other sector except the financials increased. Best 2 sectors were tech and consumer discretionary which increased 1.92% and 1.58%.

Bond market and stock market are singing different tunes.

Stocks Soar - 10 year bond yield fell 4 basis points on Friday to just 2.08% because the market sees low growth in the intermediate term. That makes sense because Q2 GDP growth is on pace to be 1.7%.

The stock market is out in left field rallying as if one or two rate cuts will change everything. 2 year bond yield fell 3 basis points to 1.85%, making the difference between the two bonds 23 basis points. That’s normal, but the 10 year yield being below the Fed funds rate isn’t.

Specifics Of The Mexican Trade Deal

Stocks Soar - President Trump tweeted, “I am pleased to inform you that The United States of America has reached a signed agreement with Mexico. The Tariffs scheduled to be implemented by the U.S. on Monday, against Mexico, are hereby indefinitely suspended. Mexico, in turn, has agreed to take strong measures to stem the tide of Migration through Mexico, and to our Southern Border.”

Even though the tariffs weren’t implemented, there was still damage done because it created uncertainty. Businesses can’t call the President’s bluff like investors can. Business owners need to make strategic decisions, not predict policy.

Stocks Soar - Hopefully, uncertainty wanes in the coming weeks.

Everyone’s attention will be back on the possibility of a China deal especially since the G20 summit is coming up; it’s from the 28^th to the 29^th.

President Trump stated he will decide on the next Chinese tariffs after the summit. If the summit goes poorly, all Chinese imports could be taxed at a 25% rate.

GDP Nowcast Updates

Stocks Soar - St. Louis Fed updated its Nowcast to show 2.9% Q2 GDP growth instead of 3.2%. That’s a big weekly dip, but it’s still the highest estimate by far. I would be shocked if growth was above 2.5%, let alone actually at this target.

Atlanta Fed Nowcast was updated to show 1.4% growth instead of 1.5% growth. The Nowcast fell because the labor report caused the estimate for real government expenditures growth to fall from 2% to 1.7%.

Finally, the NY Fed’s Nowcast was revised from 1.48% to 1.01%. It was pushed lower by the international trade report, the ADP report, and the ISM manufacturing report. This is the lowest reading the Q2 NY Fed Nowcast has ever been at.

If actual growth is below 1%, recession fears will explode. Even worse, the Q3 Nowcast estimate fell from 1.98% growth to 1.31%. I don’t expect Q3 to be strong, so it’s entirely possible this is accurate. It’s still way too early to tell for sure.

Earnings Estimate Update

Stocks Soar - Q2 earnings estimates aren’t that important now because it’s the current quarter and guidance is what matters. Therefore, we will look at Q3 in the table below.

As you can see, May wasn’t great as estimates fell from 3.48% to 2.29%. June has been ok as estimates have only fallen 4 basis points. That’s because analysts are expecting the Fed to cut rates.

It’s also because not many reports came out in early June; there wasn’t much to adjust. The main portion of Q2 earnings season is coming in about 6 weeks.

Stocks Soar - Conclusion

The stock market was greeted with a jobs report on Friday that could force the Fed to cut rates as early as July. There was also a trade deal with Mexico.

If there’s a trade deal with China, the S&P 500 can easily increase 5%. I’m not sure one will occur soon because China has backed out of negotiations. However, President Trump needs to make a deal before he is up for re-election in November 2020.