U.S. markets showed some strength during Friday’s first half of action but took a turn for the worse midday after President Trump said another $267 billion in China tariffs could be imposed, in addition to the $200 billion waiting in the wings today.
The President also confirmed reports that he was beginning to take aim at Japan trade negotiations.
The developments outweighed a mostly healthy August jobs report with the major indexes ending with weekly losses on heightened volatility.
The Dow declined 0.3% after testing an intraday low of 25,818.
The index has been in a trading range between 25,800-26,000 the past 5 session with a close below or above these levels possibly signaling the next short-term trend.
The Nasdaq gave back 0.3% following the intraday pullback to 7,873.
Upper support at 7,875-7,825 and the 50-day moving average held along with the 7,900 level for the 2nd-straight session.
For the week, the blue-chips slipped 0.2% while Tech plummeted 2.6%.
The Russell 2000 dipped 0.1% after making a backtest to 1,706.
Fresh support at 1,700-1,690 and held with a close below the latter and the 50-day moving average being a bearish development
The S&P 500 slipped 0.2% to extend its losing streak to 4-straight while trading to a low of 2,864.
It represented the 6th-straight lower low and the close below 2,865 keeps risk open to 2,850.
The S&P 500 was down 1% for the shortened week while the small-caps sank 1.5%.
Consumer Services and Healthcare were the only sectors to show strength after rising 0.2%. Real Estate and Utilities led sector laggards after falling 1.3% and 1.2%.
For the week, Utilities rallied 1.2% while Consumer Staples jumped 1.1%. Industrials rose 0.6% to round out the winners. Consumer Services sank 3.1% to pace sector losers while Technology and Energy were hit with declines of 2.7% and 2.2%, respectively.
Earnings growth for Q2 reached its highest level since 2010, eclipsing the pace set in Q1 2018, with 24.5% earnings growth on 8.5% revenue gains.
There will still be major earnings announcements this month from companies in different quarters and fiscal years but the main focus now turns towards Q3 results beginning in early October.
Total earnings for the S&P 500 index are expected to be up 18.1% in Q3 from the same period last year on 7.2% higher revenues, the 6th time in the last 7 quarters of double-digit earnings growth.
Q3 earnings growth is expected to be in double-digits territory with Energy, Finance, Basic Materials and Technology sectors showing the strongest growth.
Conglomerates and Autos expected to experience modest earnings declines.
For the small-cap S&P 600 index, total Q3 earnings are expected to be up 21.1% from the same period last year on 7.3% higher revenues. This would follow 30.9% earnings growth on 5.2% revenue growth in 2018 Q2.
For full-year 2018, total earnings for the S&P 500 index are expected to be up 20.8% on 6.5% higher revenues.
For full-year 2019, total earnings are expected to be up 9.7% on 4.9% higher revenues.
The implied ‘EPS’ for the index, calculated using current 2018 P/E of 18.3X is $157.68.
Using the same methodology, the index ‘EPS’ works out to $172.95 for 2019 (P/E of 16.6X).
Global Economy – European markets were mixed following data out of Germany, Europe’s largest economy, that showed signs of a slowdown.
However, France, Europe’s second largest economy, showed signs of strong growth.
France’s CAC 40 was up 0.2% while the Stoxx 600 Europe climbed 0.1%. Germany’s DAX 30 added 4 points, or 0.04%, but dropped 3.3% for the week. The UK’s FTSE 100 fell 0.6% and the Belgium20 gave back 0.3%. For the week, France’s index stumbled 2.9%%, while the FTSE tumbled 2.1%, their worst weekly losses since late March.
German July industrial production unexpectedly fell 1.1%, well below forecasts for a rise of 0.2%.
The German July trade balance shrank to a surplus of 16.5 billion euros, below expectations of 19.5 billion euros. July exports slipped 0.9%, missing estimates for a gain of 0.3%. July imports rose 2.8%, topping forecasts of 0.1%.
French July industrial production rose 0.7%, topping expectations for a rise of 0.2%.
Asian markets closed mostly lower with Japan’s Nikkei logging its 6th-straight loss after a jump in the yen while China outperformed the other major indexes.
Japan’s Nikkei lost 0.8% while South Korea’s Kospi and Australia’s S&P/ASX 200 declined 0.3%. Hong Kong’s Hang Seng slipped a point, or 0.01%. China’s Shanghai rose 0.4%.
Japan July labor cash earnings rose 1.5% year-over-year, missing forecasts of 2.4%.
July real cash earnings rose 0.4%, weaker than expectations of 1.1%.
Non-farm payrolls rose 201,000 in August, topping forecasts of 198,000. The unemployment rate was steady at 3.9%. Average hourly earnings increased 0.4% month-over-month and climbed 2.9% year-over-year.
Quarterly Quarter Survey Information Revenue was up 3.5% for the quarter and 8.5% for the year. QSS figures revealed a 5.3% Q2 year-over-year gain in the aggregate selected services, topping the 5.1% rise in Q1.
For the larger components, there was a 6.6% y/y surge in the finance and insurance component, and a 4.5% y/y rise for the healthcare and social assistance component.
Expectations for Q3 GDP growth is at 3.5%, with a 3.2% growth rate for real consumption.
New York Fed’s Nowcast boosted its Q3 GDP growth estimate to 2.23% from 1.98% previously, while forecasting growth of 2.76% in Q4.
Baker-Hughes reported that the U.S. rig count was unchanged from last week at 1,048 rigs, with oil rigs down 2 to 860, gas rigs up 2 to 186, and miscellaneous rigs unchanged at 2.
The U.S. Rig Count is up 104 rigs from last year’s count of 944, with oil rigs up 104, gas rigs down 1, and miscellaneous rigs up 1. The U.S. Offshore Rig Count is up 1 rig to 19 and up 3 rigs year-over-year.
Market Sentiment – Cleveland Fed Loretta Mester said the pretty strong payroll report supports the gradual rate hike path and believes the policy rate should be gradually moving toward neutral.
Her forecast on the economy has strengthened since her June estimate and she sees inflation will be sustainably at 2% by the end of this year. Mester went on to add the president’s comments don’t sway the Fed focus from its mandate.
Dallas Fed Robert Kaplan welcomed the wage growth in the jobs report, which overall was consistent with his view of the strong economy.
He said the Fed ought to be moving to neutral as analysts are through full employment and approaching the 2% inflation goal, while forecasting 3-4 more hikes to a 2.5%-2.75% area to reach that point.
Kaplan said the jobless rate will probably go below 3.9% current level, while the Fed is meeting its inflation target. He expects that GDP growth will slow to 1.75%-2.00% by 2020-2021 and the forecast of sluggish growth in the out-years is a factor in thinking about the pace of rate hikes.
He also reiterated that trade deals with Mexico and Canada are clearly in the interest of the U.S. and is optimistic there will be a resolution to NAFTA and trade issues with Europe in the near future.
If there’s a fight to be had on trade, the one with China is the right one, which could last years.
In closing, Kaplan said he expects more wage pressures in future job reports. He noted firms are more confident in passing on price increases to consumers, and have been discussing passing on tariff pressures to prices.
He said he will be watching the yield curve closely and said it is not likely to invert versus the funds rate if the 10-year holds near current levels or backs up a bit.
Boston Fed Eric Rosengren said gradual rate increases over the course of 2019 make sense, and remains worried over the consequences of leaving rates too low for too long.
He said the economy is doing very well and he expects growth in the 3% area, but added inflation is one reason not to tighten too quickly.
The iShares 20+ Year Treasury Bond ETF (TLT) resumed its recent downtrend after falling for the 4th time in 5 sessions. Friday’s low tapped $118.99 with fresh and early August support at $119-$118.75 holding.
There is risk to $118.50-$118 on a close below the latter.
Lowered resistance is at $119.75-$120 and the 200-day moving average.
The 50-day moving average is showing signs of rolling over after holding during the prior session.
RSI is back in a downtrend with support at 40-35. A close below the latter could lead towards a retest of the 30 area and April/ May lows. Resistance is at 45-50.
Market Analysis – The Spider Small-Cap 600 ETF (SLY) showed weakness for the 4th-straight session after trading to a low of $76.65. The index has been in a tight trading range between $77-$78 for nearly 3 weeks, or 13 trading sessions, with the bottom of the trading range now in play.
Short-term support at $76.75-$76.50 was split but held. A move below the later would suggest continued weakness towards $76-$75.50 and the 50-day moving average.
Lowered resistance is at $77-$77.50.
A close above the latter could lead to a retest of $78 and the top of the trading range. The late August and all-time high reached $78.25.
RSI is approaching late June and July support at 50-45.
A move below the latter would be a continued bearish development for lower lows. Resistance is at 55-60.
Communication Services (XLC) snapped a 5-session slide after bouncing to a high of $47.95. Near-term resistance at $47.75-$48 held with continued closes above the latter signaling a possible bottom. A more bullish development would occur on continued closes above $48.50.
Shaky and undefined support is at $47.25-$47 with the prior session low tapping $47.17.
A close below $47 could lead to a continued backtest towards the $45.50-$45 area.
XLC is down roughly 10% down from its July peak north of $52. We mentioned last month this new ETF would be volatile as companies are added and due to the makeup of the stocks.
Currently, the top 5 and top 10 holdings represent 58% and 76% of the XLC’s weight.
RSI is signaling slightly oversold levels after testing late July support just above the 30 area. Resistance is at 40.
The percentage of S&P 500 stocks trading above the 50-day moving average closed Friday at 63.56% with the low reaching 60.99%.
Mid-August support at 60%-59% held with risk to the 55% area and the August low on a move below the latter. Resistance is at 63-65%.
The percentage of Nasdaq 100 stocks trading above the 200-day moving average closed at 60.19% with the session low tapping 58.25%.
The mid-August intraday low reached 59.22%.
A close below the 60% level of another move below 59% could signal additional weakness towards the 55%-53% area and early July lows. Resistance is at 62%-63%.
All the best,