Weak Empire Fed Report - Yet Stocks Still Rally

Weak Empire Fed Report - Stocks Slightly Increase On Monday

Despite the Weak Empire Fed Report, stocks still rallied. On Monday, the S&P 500 increased slightly, while the Nasdaq and Russell 2000 increased significantly.

Investors usually get nervous when the market prices in a positive outcome for an uncertain news event. An example of this is a stock rallying sharply before an earnings report where there’s a good chance a negative reading comes out.

For an expensive high flying stock, a very slight revenue miss can be enough to send it down double digits because the whisper number was higher than the consensus.

In this case, the market has rallied to within 2% of its record high before the Fed meeting. If the Fed doesn’t guide for any rate cuts this year, the market will likely sell off. I don’t think that’s likely, but it’s possible.

It’s also interesting to see stocks rise with the terrible Empire Fed index which I’ll review later in this article.

Details Of Monday’s Action

Weak Empire Fed Report - S&P 500 increased 9 basis points, Nasdaq increased 0.62%, and Russell 2000 increased 0.67%.

Monday was another example of the VIX moving in tune with the market as it was up 0.46% to 15.35. CNN fear and greed index actually fell 1 point to 37, which is fear, even though stocks rallied.

Best sectors on the day were communication services and real estate which increased 1.06% and 1.12%. Worst sectors were the materials and the financials which fell 0.94% and 0.93%. Maybe the financials fell because the Fed is expected to forecast cuts on Wednesday.

10 Year Yield’s Trade Deal Projection

Weak Empire Fed Report - 0 year yield is at 2.09% and the 2 year yield is at 1.87%. Most of the yield curve is normal. Except for the kink in the near term part of the curve which is caused by expected rate cuts.

The chart below shows the odds of a trade deal based on the 10 year yield. To be clear, this is only an estimate. I don’t think it’s perfectly accurate. But I like the idea of looking at the 10 year yield to determine if the market thinks there will be a trade deal.

This isn’t perfectly accurate because there are other factors that determine the 10 year yield such as growth and inflation.

As you can see, based on this measurement there is about a 30% chance of a trade deal.

10 year yield may have fallen because of the decline in inflation expectations and the slowdown.

Weak Empire Fed Report - Personally, I don’t think there is any chance of a trade deal at the G20 meeting. But there might be new momentum towards a deal. It’s highly unlikely that 2 days of meetings can transform a situation where both sides are firmly entrenched into a deal.

No one knows of any catalyst of a deal. It’s always good for both sides to talk. But there needs to be a new proposal by one side or both to get a deal done.

This is like if 2 business leaders meet at an event after a failed negotiation. Talking could help them, but if both sides are staunch to what they want, nothing will get done.

The election getting closer might make President Trump more willing to give up something he wants. A weak economy on either side can make either China or America more likely to give in to make a deal.

Consumer Confidence Falls Slightly

Weak Empire Fed Report - Preliminary June reading from the University of Michigan consumer sentiment report showed confidence waned modestly. Specifically, the index fell from 100 to 97.9 which missed estimates for 98.4.

Tariff uncertainty likely played a role in this decline as expectations fell almost 5 points to 88.6. Current conditions rose 2.5 points to 112.5. This report will cause those who look at the differential between current and expectations to be weary of a recession.

If the worst fears of a trade war with China are accurate, a recession is more likely. There’s nothing new here. It’s not like the consumer is preparing for a disaster as this index is higher than it was in April which was revised to show decent retail sales growth.

Perhaps the biggest takeaway from this report is the decline in inflation expectations. Consumer’s inflation expectations for the next year fell 0.3% to 2.6%.

As you can see in the chart below, expectations for inflation in the next 5-10 years fell 0.4% to 2.2% which is the lowest reading in the 40 year history of this survey. Inflation expectations are firmly anchored. This should make the Fed more willing to cut rates.

Weak Empire Fed Report - Survey Has A Massive Miss

Empire Fed is just one of the regional Fed reports. It doesn’t influence the market. But it is one part of a group of surveys which are correlated with the ISM manufacturing PMI.

You can tell it doesn’t impact stocks because its June report was a complete disaster and stocks rallied on Monday. This report had the biggest month over month drop since November 2010 as it fell 21.7 points.

As you can see in the chart below, it fell from 17.8 to -8.6 which is the lowest reading in 2 years. It missed estimates by the most since June 2011.   

Weak Empire Fed Report - Let’s look at the details of this terrible report.

Weak Empire Fed Report - New orders index dropped 21.7 points to -12. The Shipments index fell 6.6 points to 9.7. Unfilled orders fell 17.9 points to -15.8.

6 month expectations index didn’t crash as bad as general conditions as it fell 4.9 points to 25.7. That’s not even the worst reading of 2019. New orders index fell 5.6 points to 27.8. Shipments index only fell 1.2 to 29.2.

Capex index cratered to the lowest level since mid-2016 as it fell 15.7 points to just 10.5. To be clear, this index never fell to the negatives in the 2015-2016 recession.

Technology spending wasn’t as bad, but it wasn’t good as it fell 10 points to 12.8. That’s the worst reading since late last year.

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