U.S. markets were tentative on Thursday while trading on both sides of the ledger as Wall Street’s awaits Fed Chairman’s comments from the annual central banking symposium in Jackson Hole, Wyoming on Friday.
An early session inverted yield curve caused some nervousness as algorithms triggered to create some selling pressure as the 10-year treasury yield briefly fell back below its 2-year counterpart.
The news and reaction wasn’t as dramatic as the prior inverted yield curve selloff from last week as the major indexes recovered to push higher highs before settling mixed.
Volatility ticked higher but was able to hold key resistance levels while giving a neutral reading heading into Friday’s Fed update.
The Dow gained 0.2% after trading to an intraday high of 26,388.
Near-term and lower resistance at 26,200-26,400 was cleared and held with more important barriers at 26,600 and the 50-day moving average.
The S&P 500 was down just over a point, or 0.1%, following the intraday fade to 2,904.
Near-term and upper support at 2,900-2,875 held with backup help at 2,850-2,825.
The Russell 2000 dipped 0.3% after testing a first half low of 1,500. Current and upper support at 1,500-1,485 held by a third of a point with a close below the latter reopening risk towards 1,475-1,460.
The Nasdaq declined 0.4% following the backtest to 7,937 and close back below the 8,000 level.
Current and upper support at 7,950-7,900 was breached but held with risk towards 7,850-7,800 on a close below the latter.
Financials advanced 0.7% to lead sector strength while Consumer Staples and Real Estate gained 0.5%.
Materials were the weakest sector after falling 0.7% while Healthcare and Energy dropped 0.5%.
Global Economy – European markets settled lower despite the slight recovery in the European economy in August from weak demand caused by trade tensions.
UK’s FTSE 100 fell 1.1% and France’s CAC 40 was lower by 0.9%. Germany’s DAX 30 gave back 0.5% while the Stoxx 600 and the Belgium20 were lower by 0.4%.
IHS Markit flash manufacturing purchasing managers index in the eurozone rose to a two-month high of 47 in August from 46.5, topping forecasts for a 46.3 reading.
Asian markets were mixed following news Japan’s manufacturing activity shrank for the 4th consecutive month.
Australia’s S&P/ASX 200 added 0.3% while Japan’s Nikkei and China’s Shanghai nudged up 0.1%. Hong Kong’s Hang Seng sank 0.8% and South Korea’s Kospi stumbled 0.7%.
Japan’s Manufacturing Purchasing Managers’ Index rose to a seasonally adjusted 49.5 in August from 49.4 in July.
Initial Jobless Claims dropped 12,000 to 209,000, below expectations for a print of 216,000. The 4-week moving average edged up to 214,500 from 214,000. Continuing claims slumped 54,000 to 1,674,000 after the 41,000 increase to 1,728,000 the prior week.
August PMI Composite Flash fell 0.5 ticks to 49.9 versus estimates for a print of 51.9. New orders also dropped into contractionary territory at 49.5, the weakest since August 2009.
The services index dropped 2.1 points to 50.9 in August, more than erasing the 1.5 point rise to 53 previously.
The composite slid 1.7 points to 50.9 following the prior month’s 1.1 point gain to 52.6.
Leading Indicators Index bounced 0.5% to 112.2 in July, a fresh record high, and topping expectations for a rise of 0.3%.
Half of the 10 components that make up the index made positive contributions, led by building permits (0.23%) and jobless claims (0.16%), with solid gains in stock prices (0.14%), the leading credit index (0.14%) and average consumer expectations (0.12%).
Four of the indicators made negative contributions, paced by ISM new orders (-0.1%). Consumer goods orders were unchanged.
Kansas City Fed Manufacturing Index for August checked in at -6.
Market Sentiment – Kansas City Fed Esther George said she doesn’t believe the economy needs more accommodation and wants to see evidence the economy is weakening. She said easing policy is not a free choice as it pulls forward demand, adding it can make leverage more attractive, and it can create more risk.
Esther believes uncertainties are weighing on sentiment, but added that fear and uncertainty are not the metrics the Fed should focus on.
She reiterated the general view of the FOMC that the economy is in a good place.
Philly Fed Patrick Harker said he somewhat reluctantly supported the rate cut last month to bring policy back to neutral.
He thinks the Fed should be on hold for now and monitor how things play out. He added he is monitoring the yield curve, but stressed it’s just one signal.
Harker went on to say he is afraid of creating too much leverage in the economy via low rates and that negative rates would be a high hurdle for him, but he’d never say never.
Dallas Fed Robert Kaplan supported the July rate cut, but would like to avoid further action.
He went on to say rate cuts hurt savers, but waiting too long has negative consequences. He said he will keep an open mind, though, as he balances those risks.
Kaplan’s expectations is for growth around 2%, though that compares to his 2.5% outlook in April.
He said risks are to the downside, however, even though the consumer is very strong and is a key underpinning of the economy, manufacturing is weakening and the deceleration in global growth is probably starting to seep in.
He expects continued strength in consumption but is closely monitoring manufacturing.
Kaplan said he was in favor of the July easing and would like to avoid taking further action, but will keep an open mind. He’s less obsessed with the 2s-10s, but is more focused on the entire curve where every maturity is now below the funds rate band.
He doesn’t believe the Fed needs to bring U.S. rates in line with lower global rates since the latter is more a function trade uncertainties, QE, and other ECB policies.
Kaplan said doesn’t want to follow other central banks in a race to the bottom.
He noted that many other countries have eased policy much more than the U.S., but it hasn’t done much to stimulate growth.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 4th time in 5 sessions following the late day backtest to $143.48. Near-term and upper support at $143.50-$143 was breached but held.
A close below the latter reopens risk towards $142-$141.50.
Lowered resistance is at $144-$144.50.
Market Analysis – The Spider S&P 500 ETF (SPY) closed higher for the 5th time in 6 sessions after trading to an intraday high of $293.93. Lower resistance at $294-$294.50 and the 50-day moving average was challenged but held.
Continued close above the $295 level and prior support from July and earlier this month would be a more bullish development for continued strength.
Current support is at $292-$291.50. A close below the $290 level would be a slightly bearish signal with downside risk towards $288-$287.50.
RSI is flatlining despite clearing resistance at 50.
Continued closes above this level would signal additional strength towards 55-60 and mid-July peaks. Support is at 45-40.
A move below 40 would signal additional weakness towards 35-30 with the latter representing the monthly and late May low.
The Communication Services Select Sector Spider (XLC) remains in a 4-session trading range but is showing signs of lower lows following the pullback to $48.80.
Near-term and upper support at $49-$48.50 was breached but held.
A close below the latter would signal a breakdown out of the current range with additional weakness towards $48.25-$47.75.
Resistance is at $49.50-$50 and the 50-day moving average.
There is upside potential towards $50.50-$51 on a close above the latter.
RSI has been in a holding pattern with resistance at 50 and a major hurdle throughout the month.
Continued closes above this level would be a bullish development for additional strength towards 55-60.
Support is at 45-40.
All the best,
Roger Scott.