U.S. markets opened strong after American and Canadian representatives agreed to a new trade deal late Sunday night, known as the U.S.-Mexico-Canada Agreement or USMCA.
The trade optimism overshadowed a bit of weak economic data that stalled momentum with the small-caps slacking for much of the session after an opening pop.
Fed speak was heavy but mostly positive as the major indexes pushed prior resistance levels while closing mixed.
Volatility pushed near-term support but levels that also held into the closing bell.
The Dow held positive territory throughout the session after jumping 0.7% while trading to a high just south of 26,738.
Fresh resistance at 26,750-26,800 held with the all-time high at 26,769 from the September 21st peak.
The S&P 500 was higher by 0.4% after holding green throughout the session and tapping a high of 2,937. Fresh and lower resistance at 2,940-2,950 held with the index missing its record high by 4 points.
The Nasdaq dipped 0.1% despite reaching an intraday peak of 8,107 and missing its all-time high by 26 points.
Upper resistance at 8,075-8,100 held with continued closes above this level keeping 8,150-8,200 in play.
The Russell 2000 tumbled 1.4% following the plunge to 1,669.
Fresh support at 1,670-1,660 held with a move below the latter being a continuing bearish development.
Energy and Materials led sector strength after jumping 1.4% and 1%, respectively.
Industrials rose 0.9% while Health Care and Technology were up 0.6% and 0.5%.
Real Estate sank 0.8% to pace sector laggards. Communication Services were off 0.4% while Consumer Discretionary and Utilities were lower by 0.3%.
Global Economy – European markets closed higher following the positive developments from the new trade deal between the U.S., Canada and Mexico.
Germany’s DAX 30 advanced 0.8% while the Belgium20, France’s CAC 40, and the Stoxx 600 Europe were all up 0.2%. UK’s FTSE 100 was down 0.2%.
The Eurozone August unemployment rate fell 0.1% to nearly a 10-year low of 8.1%, matching expectations.
The Eurozone September Markit manufacturing PMI was revised downward to 53.2 from the originally reported 53.3.
German August retail sales dipped 0.1%, missing forecasts for a rise of 0.5%.
The UK September Markit manufacturing PMI unexpectedly rose 0.8 to 53.8, stronger than estimates of 52.5.
IMF Managing Director Christine Lagarde stated that the International Monetary Fund will lower its outlook for global growth with an updated forecast next week, though she did not provide specific new figures.
Asian markets settled mixed with China’s Shanghai and Hong Kong’s Hang Seng closed for holidays.
Japan’s Nikkei added 0.5% while Australia’s S&P/ASX 200 sank 0.6%. South Korea’s Kospi was lower by 0.2%.
The China September manufacturing PMI slipped 0.5 to 50.8, missing forecasts of 51.2.
The September non-manufacturing PMI unexpectedly rose 0.7 to 54.9, topping expectations for a slip of 0.2 to 54.
The Japan Q3 Tankan large manufacturing business conditions unexpectedly fell 2 to 19, missing forecasts of 22.
ISM Manufacturing Index slipped to a still-robust 59.8 in September after popping to a 14-year high of 61.3 in August, while just missing forecasts of 59.9.
The employment component edged up to 58.8 from 58.5. New orders declined to 61.8 from 65.1 while new export orders improved to 56, up from 55.2. Prices paid dropped to 66.9 from 72.1.
September PMI Manufacturing Index was up 0.9 points from the prior month to 55.6, matching the preliminary reading.
Construction spending inched up 0.1% in August, missing forecasts for a 0.4% month-over-month gain.
Atlanta Fed’s Q3 GDP Nowcast estimates growth rose to a 4.1% pace, up from last Friday’s forecasts of 3.6%.
According to the Atlanta Fed, the uptick was a function of the boost to real government spending to 1.7% from 1% following the construction spending report.
Market Sentiment – New York Fed John Williams said the Committee is inching closer to conducting normal policy. He said the Fed is looking at policy options, including the current stance of leaving reserves plentiful with the funds rate target set by administered rates.
He also said the Fed could return to the pre-crisis times when reserves were scarce and interest rates were set by adjusting reserves frequently via open market operations.
Williams said a decision on the operating framework will hopefully be made in the coming months. On the economy, he said it is doing well overall and the dual mandate has been achieved.
He expects 3% GDP growth this year, but slowing to 2.5% in 2019. He remarked the unemployment rate may fall below 3.5% next year too.
As far as inflation, Williams predicts it could move up over 2%, but doesn’t see signs of greater pressures on the horizon. He continues to expect further gradual increases in interest rates.
On the neutral rates, he said it’s a fuzzy blur and is just one factor affecting that’s monitored, as well as economic and labor market indicators, wage and price inflation, global developments, and financial conditions.
Minneapolis Fed Neel Kashkari said most economic indicators are flashing green, while the bond market is flashing yellow. He commented business investment has picked up, led by the oil sector, while the tax cut hasn’t led to a huge uptick in capex.
However, he said there’s no reason yet to move rates higher and tap on the breaks.
Kashkari said he is spending a lot of his time trying to gauge the labor market, and said there hasn’t been a big uptick in wages.
He reiterated Fed Chairman Powell’s comments that analysts are not seeing much impact from tariffs in the aggregate data, and thinks that the changes to NAFTA are minor.
Boston Fed Eric Rosengren said the economy doesn’t need a lot of boost now, and that monetary condidions remain mildly accommodative, while fiscal policy is quite accommodative.
He doesn’t support quickening the pace of tightening, and thinks the current pace should be maintained until rates are mildly restrictive.
Rosengren went on to add the labor market should continue to tighten and that could put pressures on inflation, which would increase the risk of economic imbalances.
He said, other potential risks come from the stronger dollar, trade disputes, and emerging market problems.
Rosengren thinks firms could use tariffs as cover to pass on higher labor market costs to consumers.
He noted in his District many of his contacts have indicated they are getting little resistance to price increases.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 2nd-straight session following the pullback to $116.12.
Prior and major support at $116.50-$116.25 was breached with a close below $116 being a continued bearish signal for lower lows. Lowered resistance at $116.75-$117.
Market Analysis – The Russell 2000 ETF (IWM) closed lower for the first time in 3 sessions despite trading to a morning high of $169.32.
Resistance at $169.50-$170 held with continued closes above the latter signaling a return of momentum.
The fade to $165.77 held near-term support at $165.50-$165.
A move below the latter would be a bearish signal for a continued backtest towards $164-$163.50 and late July support levels.
RSI is back in a downtrend with support at 35.
A move below this level would signal additional weakness with risk to 30 and February lows. Resistance is at 40-45.
The Technology Select Sector Spiders (XLK) closed higher for a 3rd-straight session after reaching an all-time peak of $76.
Continued closes above this level would be a bullish development for a run towards blue-sky resistance at $77-$77.50.
Rising support at $75.50-$75. A close below $74.50 would likely signal a short-term top.
RSI has been in a nice uptrend with resistance at 65-70.
A move above the latter would get 75 and June and August highs in the mix. Support is at 60.
All the best,
Roger Scott