U.S. markets were choppy throughout Wednesday’s action as trade news dominated headlines that led to a mixed finish.
Canada appears ready to offer the U.S. limited access to its dairy markets, one of the current sticking points in trade negotiations, in order to help forge a new NAFTA deal.
Afternoon strength was attributed on word Treasury Secretary Steven Mnuchin recently invited Chinese counterparts to another meeting to talk about bilateral trade.
This would give China another opportunity to address concerns over trade issues before implementing additional tariffs on imports.
The Dow was up 0.1% following the morning peak of 26,145 and slightly weak open. Resistance at 26,000 held for a 9th-straight session.
The S&P 500 climbed a point, or 0.04% while reaching a high of 2,894.
Resistance at 2,900 held for a 7th-straight session with a close above this level being a slightly bullish signal.
The Nasdaq fell 0.2% after trading lower throughout the session while bottoming at 7,884.
Upper support at 7,900-7,875 held for the 5th-straight session with a close below the latter signaling additional weakness.
The Russell 2000 traded mostly lower throughout the session while also giving back 0.2% and tapping a low of 1,704. Mid-August support at 1,700 held with a close below 1,690 being a bearish development.
Consumer Staples showed the most sector strength after surging 1.1%. Health Care and Energy added 0.5%.
Financials led sector weakness after sinking 0.9%.
Technology and Communications Services were lower by 0.4% and 0.3%
Global Economy – European markets closed higher on chatter the U.K. and European Union are preparing for a special summit to sign a deal in November, with the meeting possibly being announced by week’s end.
France’s CAC 40 jumped 0.9% while the Belgium20 and the UK’s FTSE 100 gained 0.6%. The Stoxx 600 Europe and Germany’s DAX 30 were up 0.5%.
Eurozone July industrial production fell 0.8%, missing forecasts for a decline of 0.5%.
Asian markets were lower across the board with China’s Shanghai falling 0.3% to a new 2-1/2 year low as the country’s push to cut leverage in the financial system has triggered higher default rates.
Hong Kong’s Hang Seng and Japan’s Nikkei also fell 0.3%.
Australia’s S&P/ASX 200 slipped 0.1% while South Korea’s Kospi slipped a third-point, or 0.01%.
China August new yuan loans increased by 1.28 trillion yuan, below expectations of 1.40 trillion yuan.
August aggregate financing rose 1.52 trillion yuan, topping estimates of 1.30 trillion yuan.
MBA Mortgage Applications were down 1.8% for the week ending September 7th.
The Producer Price Index slipped 0.1% in August for both headline and core, below expectations for a gain of 0.2%. Compared to last August, PPI grew at a rate of 2.8% year-over-year, and the core rate was 2.3%.
Goods prices were unchanged versus the prior 0.1% gain while services prices dipped 0.1%, as was the case in July.
September Atlantic Fed Business Inflation Expectations was up 2.2% for the year.
The Fed’s Beige Book revealed the economy expanded at a moderate pace, and indeed, that was the operative phrase.
Additionally, consumer spending continued to grow at a moderate pace while manufacturing activity grew at a moderate rate. Transportation activity expanded, with a few saying it was robust.
Home construction and commercial real estate were mixed, while home sales were softer on balance.
Businesses generally remained optimistic about the near term outlook, though most Districts noted concern and uncertainty over trade tensions, and particularly, though not only, among manufacturers.
A number of Districts noted that such concerns had prompted some businesses to scale back or postpone capital investment. Labor markets continued to be characterized as tight with most Districts reporting widespread shortages.
Wage growth was mostly characterized as modest or moderate. Prices of final goods and services continued to rise at a modest to moderate pace.
Tariffs were reported to be contributing to rising input costs, mainly for manufacturers. Businesses’ input costs have generally been rising more rapidly than selling prices, though there have been increased efforts to pass along cost hikes to customers.
Market Sentiment – St. Louis Fed James Bullard said interest rates may be high enough already and believes rates are neutral to restrictive. He continues to worry about an inverted yield curve and the increased recession risk it portends.
He said inflation surge is unlikely and market-based inflation expectations remain subdued, with TIPS showing investors doubt the FOMC will achieve the 2% target over the next 10 years.
Bullard went on to say growth can likely continue at a 3% year-over-year pace this year, but slow some next year, while adding he may upgrade his forecast of long term growth beyond 2% next year if the growth remains strong.
He believes forecasters will start to mark up projections, and will stop saying potential growth is 1.5%-1.75%.
In closing, Bullard said the political change has made a difference as this is a more pro-business administration, and business confidence has indeed improved.
He noted growth alone may not be sufficient to increase rates, as the feedback to inflation has not been very strong and inflation expectations remain low.
He concluded saying that these things make sense that the stock market would be more highly valued than in the past, given corporate tax cuts and global growth.
Fed Governor Lael Brainard reiterated that gradual rate hikes are an appropriate path over the next year or two, basically the FOMC’s position for some time.
She added that the Fed may have to raise rates above the neutral rate and a position held by several policymakers.
Brainard expects growth is likely to remain solid with the labor market remaining strong. She is not too concerned over the flatter yield curve, though it bears watching as a signal of financial conditions.
She sees some financial vulnerabilities building, with some notable risks in the corporate sector, while leverage lending is also on the rise.
Brainard also remarked higher asset values could push up short term rates. She said trade issues are causing uncertainties and growth abroad is slowing, presenting some downside risks to the United States.
The iShares 20+ Year Treasury Bond ETF (TLT) continued its back-and-forth action for a 5th-straight session after rebounding to reach a peak of $1 19.17.
Lowered resistance at $119-$119.50 held with additional hurdles at $119.75 and the 200-day moving average. Near-term support remains at $118.50-$118.
Market Analysis – The PowerShares QQQ (QQQ) fell for the 5th-time in 7 sessions with Wednesday’s low reaching $181.01. Shaky support at $181-$180.50 and the 50-day moving average held.
A close below the $180 level would be a slightly bearish signal.
Near-term resistance at $183-$183.50 with a move above the latter being a bullish development for another run at record all-time highs.
RSI is trying to hold support at 50 with risk to 45-40 on a close below the latter. Resistance is at 55.
The Industrials Select Sector Spider (XLI) closed up for the 4th-time in 6 sessions after trading to a high of $78.53.
Early March resistance at $78-$78.25 was split with a close above $78.50 being a continued bullish development. The January and all-time high is just south of $81.
Near-term support is at $77.50-$77 with a close below the latter signaling a short-term top.
The 50-day moving average cleared the 200-day moving average earlier this month to form a bullish cross.
This is typically a bullish technical pattern for higher highs.
RSI is trying to clear resistance at 65. A close above 70 would be a more bullish development and signal continued strength.
Support is at 60-55 with a move below 50 signaling additional weakness and a near-term top.
All the best,
Roger Scott