U.S. markets showed continued momentum over U.S. and China trade talks and increasing optimism that the government will not be partially shutdown.
However, government funding is not a done deal, with President Trump sending mixed signals on a bipartisan border security deal reached by lawmakers.
Word that President Trump may meet with President Xi in mid-March, and that he may allow the March 1st deadline to slide if there is progress in this week’s talks, also helped sentiment.
Volatility was slightly elevated despite the overall market gains but held key levels of resistance.
The Dow added 0.5% after trading to an intraday high of 25,625.
Fresh and lower resistance at 25,600-25,800 was cleared but held with a move above the latter getting early November peaks at 26,000-26,200 in play.
The S&P 500 rose 0.3% following the opening run to 2,761 shortly after the open.
Major resistance at 2,750 was cleared and held with the index now joining the Dow on the close above the 200-day moving average.
The Russell 2000 was also up 0.3% testing a high of 1,545 ahead of the closing bell.
Fresh resistance at 1,540-1,550 was split on the close above the former with the index roughly 1% away from getting out of correction territory.
The Nasdaq advanced 0.1% after testing a morning high of 7,461.
Major resistance at 7,450 was breached but held into the close with the 200-day moving average holding by a half-point.
Energy easily led sector strength after jumping 1.3%.
Consumer Discretionary and Real Estate rose 0.7%.
Utilities were the only sector laggard after sliding 0.3%.
Global Economy – European markets settled higher across the board despite slightly disappointing economic news.
UK’s FTSE 100 rallied 0.8% and the Stoxx 600 Europe was up 0.6%. Germany’s DAX 30 and France’s CAC 40 were higher by 0.4% while the Belgium20 added 0.2%.
U.K’.s. inflation rate fell to 1.8% in January, down from 2.1% in December, and below forecasts of 2%.
Eurozone industrial production was weaker-than-expected in December as a drop in the output of capital goods contributed to a 0.9% fall month-over-month, and a 4.2% drop year-over-year.
Asian markets closed mostly higher ahead of Treasury Secretary Mnuching and USTR Lighthizer’s high level meetings scheduled for Thursday and Friday with Chinese VP Liu in Beijing.
China’s Shanghai jumped 1.8% and Japan’s Nikkei rallied 1.3%. Hong Kong’s Hang Seng rose 1.2% and South Korea’s Kospi gained 0.5%. Australia’s S&P/ASX 200 was down 0.3%.
MBA Mortgage Applications dropped 3.7%, pulled down by a 6.1% decline in the purchase index and a 0.1% dip in refinancing. The headline index was down 2.5% in the prior week, and this is a fourth consecutive weekly tumble.
Refinancing accounted for 43.2% of loan volume, versus 41.6% previously.
The 30-year fixed rate declined to 4.65% from 4.69%, with the 5-year ARM sliding to 3.97% from 4.04%.
CPI was flat in January, with the core up 0.2%, and missing expectations for a rise of 0.1%. On a 12-month basis, headline CPI slowed to 1.6% year-over-year versus 1.9%, with the core steady at 2.2%.
Energy prices fell 3.1% after the prior 2.6% decline and represents the 3rd-straight monthly drop.
Services costs edged up 0.2% to 0.5% from 0.3%.
Housing costs rose 0.2% versus 0.3% from December, with owners’ equivalent rent up 0.3% from 0.2%. Food and beverage costs were also up 0.2% to 0.5% from 0.3%.
Apparel prices climbed 1.1% with the Spring line coming in, from unchanged.
Transportation declined 1.3% thanks in part to weakness in gas prices. Medical care costs were 0.2% higher while education rose 0.2%.
Recreation was up 0.3% and commodities declined 0.3%. Other goods, services were up 0.2% from unchanged, with tobacco prices rising 0.3% from 0.2%.
Real average hourly earnings climbed to a 1.7% year-over-year clip from 1.3% previously.
Market Sentiment – Cleveland Fed Loretta Mester repeated the economy is doing very well while adding growth has been above trend over the last couple of years and could be around 3%.
Mester commented that labor markets continue to be very strong and inflation, after trending below target, has moved up and has been relatively stable around the FOMC’s 2% objective. She sees slower growth in the area of 2%-2.5% this year, with inflation holding near 2%.
Atlanta Fed Raphael Bostic indicated he is still in a wait-and-see mode in terms of the policy path while speaking at an EU financial forum in Dublin.
He doesn’t expect the economy to be as strong as in 2018 with significant slowing out of Europe and China, less support from fiscal policy, and as business leaders are more uncertain and nervous.
Philadelphia Fed Patrick Harker sees patience as a virtue and underscored the “wait-and-see” posture other officials have taken. He is expecting just one more tightening this year, with another in 2020 likely appropriate.
Harker said GDP growth should come in a little better than 2% this year, in line with most on the FOMC, after slowing this quarter to about 1.5%.
He remarked potential risks are tilted very slightly to the downside while saying there is no significant upward pressures on prices, and if anything, inflation pressures may be edging down slightly.
The iShares 20+ Year Treasury Bond ETF (TLT) extended its losing streak to 3-straight sessions after tapping a low of $120.91.
Lower support at $121.50-$121 was breached but held with backup help at $120-$119.50 and the 50-day moving average on continued weakness.
Lowered resistance is at $121.75-$122.25.
Market Analysis – The Russell 3000 Index ($RUA) closed higher for the 4th-straight session following the intraday push to 1,633. Late November and upper resistance at 1,625-1,635 held on the close above the former and the 200-day moving average.
Continued closes above the latter would be a bullish development for a run towards 1,650-1,660 and late October/ early November resistance.
Current support is at 1,625-1,615. A close below 1,600 would be a bearish development with risk towards 1,585-1,575.
RSI is in a slight uptrend with resistance from August and earlier this month at 70.
Continued closes above this level would be a bullish signal for a move towards 75-80 and January 2018 highs.
Support is at 65-60 with a move below the latter signaling additional weakness.
The Consumer Staples Select Spiders (XLP) extended its winning streak to 4-straight sessions after reaching a morning peak of $54.62. Fresh and lower resistance from early December at $54.50-$54.75 was breached but held.
Continued closes above $55 would be a more bullish signal for a possible run towards $56.50 and the early November peak.
Fresh and upper support is at $54.25-$54 with a move below the latter opening up risk towards $53.50 and a major hurdle from earlier this month.
RSI has been in a nice uptrend but seems to be stalling near resistance at 70. A close above this level could lead to continued strength towards 75 and January 2018 peaks.
Support is at 65-60 with a move below the latter signaling additional weakness.
All the best,
Roger Scott.