Hello [MM_Member_Data name=’firstName’],
U.S. stocks are mixed as materials and real estate companies move higher. Stocks continue to recover the steep losses they suffered one week ago.
Expect higher volatility over next 2 days, since FED is releasing jobless claims tomorrow and Friday is quarterly GDP report, which has the potential to impact interest rates greatly.
Global Economy – European stocks are down after the ECB warned in its Financial Stability Review that “risks to financial stability stemming from financial markets remain significant.
ECB Vice President Constancio said “we don’t see yet the domestic factors of inflation materializing to reassure us that we will be on a sustained path of inflation without the accommodative policy that we presently have.”
Losses were limited due to strength in energy producing stocks as crude oil prices posted a 1-month high in overnight trade after API data late yesterday showed U.S. crude stockpiles fell -1.5 million bbl last week.
China’s Shanghai Composite fell to a 1-1/2 week low after Moody’s cut China’s debt rating to A1 from Aa3 and changed the outlook to negative, citing the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances.
Chinese stocks recovered their losses and closed higher, however, after China’s Ministry of Finance said the ratings company underestimated the capability of the government to deepen reform and boost demand.
U.S. Economy – Purchase applications for home mortgages fell a seasonally adjusted 1 percent in the May 19 week, but refinancing applications rose 11 percent from the previous week to the highest level since March.
The drop in purchase applications follows a 3 percent decrease in the prior week and takes the year-on-year purchase index gain down 6 percentage points to 3 percent.
Americans pulled back their pace of home-buying in April, as shrinking inventories and rising prices are giving them fewer and fewer options.
The National Association of Realtors says sales of existing homes declined 2.3 percent last month to a seasonally adjusted annual rate of 5.57 million. Still, home purchases are 1.6 percent higher than a year ago amid solid demand from buyers.
But the housing market is getting squeezed by tight supplies. The number of properties listed for sale has plunged 9 percent over the past 12 months to 1.93 million. Homes are staying on the market for a median of just 29 days, the shortest period since the Realtors began tracking the measure in 2011.
Market Sentiment – Bonds are exhibiting very little directional bias or trading range, which is not unusual ahead of major FED data. Tomorrow FED releases jobless claims and Friday we have the quarterly GDP report, which may be a major catalyst for interest rates in the short term.
Investors will be analyzing the minutes from the Fed’s May meeting for any clues on future rate increases, as well as plans to begin reducing its $4.5 trillion balance sheet.
The probability of a rate hike at the June 14 Federal Open Market Committee meeting is 83%, which is unchanged from yesterday.
Technically, don’t expect too much out of the long bond over the near term, unless either job data or GDP is completely out of line, which is not expected.
Bonds are waiting for direction from the FED and during summer months, there’s typically less activity. Price should remain within the range that’s been created over the past few months.
Stock Market Analysis – Looking at major sectors over the past 30 days, it’s clear that major blue chips are struggling at this time.
The weakest sectors over the past month include the same sectors that rallied to new highs after Presidential election in November and most importantly, without seeing major upside from at least 3 out of four of the sectors, the upside in the overall market is limited.
At the present time, transports are bouncing south off the 50 day moving average and if you look at historic rallies, you will notice that transports usually gain momentum during major bull runs, which is not the scenario we are seeing at the present time.
Another sector that’s not responding nearly as well as investors had expected following the election is the basic material sector. If you recall, materials were leading in late November and early December, due to expected industrial growth that President Trump had hoped for.
In reality, basic materials are lagging behind major sectors and are showing very little directional bias, which tells me that institutions are not nearly as focused on basic material, as investors had expected earlier in the year.
Expect more congestion and possibly more downside, if FED doesn’t take acton in coming weeks.
The overall market continues to lose direction and volatility, which is not unusual ahead of major FED data. The next major catalyst may be the GDP report on Friday, but if numbers are not outside of expectations, I’m anticpating that individual sectors will continue to consolidate.
Keep in mind: there’s two ways for individual sectors to reach balance. One way is sharp corrective pressure that takes less than 2 weeks. The other way is extended consolidation, which produces the same result, but takes longer.
We will see within the next few days, which of the two scenarios is playing out at this time.
I will update you tomorrow as usual.
Roger Scott