Hello [MM_Member_Data name=’firstName’],
U.S. stocks are changing course Tuesday as investors put an end to a two-day drop for technology companies. Banks and retailers like Amazon are also recovering to trade higher while traditionally safe, high-yielding investments like household goods makers and phone companies slip.
Global Economy – European stocks are up as a rebound in technology stocks leads global markets higher. Trading activity has been muted ahead of the 2-day FOMC meeting that begins today.
The upside in European stocks was limited after a gauge of German investor confidence declined after the German Jun ZEW survey expectations of economic growth unexpectedly fell.
UK May CPI rose +0.3% m/m and +2.9% y/y, stronger than expectations of +0.2% m/m and +2.7% y/y with the +2.9% y/y gain the largest year-on-year increase in nearly 4 years. May core CPI rose +2.6% y/y, stronger than expectations of +2.4% y/y and the largest increase in 4-1/2 years.
The German Jun ZEW survey expectations of economic growth unexpectedly fell -2.0 to 18.6, weaker than expectations of +1.1 to 21.7.
The Japan Q2 BSI large manufacturing business conditions fell to -2.9, the lowest in a year.
U.S. Economy – Inflation at the wholesale level stayed unchanged in May as food and energy prices slipped.
The Labor Department said Tuesday its producer price index, which measures inflation before it reaches the consumer, was flat in May after a 0.5 percent monthly gain in April. Over the past 12 months, producer prices have risen 2.4 percent — with rising gasoline and natural gas costs being a key driver.
A rebound in energy prices and other commodities over the past year had been pushing producer prices higher. But the trend weakened slightly in May ahead of the Federal Reserve’s June meeting on Tuesday and Wednesday to assess the possibility of raising a key interest rate in response to the relatively strong job market.
Market Sentiment – The Federal Reserve will meet Tuesday and Wednesday, and investors expect the central bank to raise interest rates for the third time since December.
Super-low unemployment, gains in factory output and other economic data pointing to a recovery in the U.S. economy have led investors to believe that the Fed will lift rates.
Technically, bonds are headed lower and more downside is anticipated over the near term time frame. 10 day RSI is balanced and leaves more room to downside till RSI reaches into oversold territory, which will happen approximately at the time bonds reach for the 50 day moving average to the downside.
The probability that the Federal Open Market Committee will increase interest rates at tomorrow’s meeting is 99%, which compares to 96% yesterday.
Anticipate more downside from the bond market in the near term and higher volatility as we head into FOMC tomorrow. The FED has been doing a tremendous job of being transparent, which kept volatility lower, but typically we will see a pick up surrounding the FOMC meeting, which is typical.
Stock Market Analysis – Broader market is rebounding and approaching all time highs once again. I’m still very concerned with vulnerability in the tech sector and it’s impact on the overall market.
However, funds are not expected to make big moves till after FOMC comes out tomorrow, which will limit volatility levels and cause consolidation in most stocks over the near term time period.
All eyes are focused on semiconductors since they are the driving force behind tech at this time. While most analysts are focused on Apple stock, the biggest influence right now is semiconductors, which have some degree of correlation to Apple as well.
Higher volatility levels are negative for momentum and over the next few sessions, we will more than likely see consolidation, which is typical after strong period of trading range.
One positive is the renewed strength coming from NYSE and blue chips, which is causing some degree of momentum to enter the blue chips at this time.
NYSE is near all time highs, but similarly to what we witnessed from the tech sector, blue chips are reaching overbought price levels, which is causing increased vulnerability in industrial stocks over the near term.
Expect consolidation and less direction from the stock market as we move deeper into summer time. The bearish move in tech began to create some balance between blue chips and tech stocks, which is positive, but not enough to generate sufficient balance to create upside momentum levels at this time.
Anticipate less direction and lower volatility in the days ahead.
I will update you tomorrow as usual.
Roger Scott