Hello [MM_Member_Data name=’firstName’],
U.S. stocks are falling Wednesday as energy companies tumble along with oil prices. After a weak retail sales report, investors are looking for safety and buying government bonds and high-dividend stocks.
As expected, the Federal Reserve raised interest rates for the third time in six months and volatility levels are increasing once again.
Global Economy – European stocks are up as strength in technology stocks leads the overall market higher.
Optimism in the global economy is another positive for equity prices after the IMF raised its China 2017 GDP estimate to 6.7% from a 6.6% estimate in Apr.
European stocks also found support after data showed Eurozone Q1 employment rose +1.5% y/y, the largest increase in 9-years.
Weakness in energy stocks limited gains in the overall market as Jul WTI crude oil slid -1.08% after API data late Tuesday showed U.S. crude inventories rose +2.75 million bbl last week.
Trading activity in Europe was light ahead of the conclusion of today’s FOMC meeting where the Fed is expected to raise the fed funds target range by 25 bp, but the markets will look to future Fed guidance and when it may begin to reduce its balance sheet.
China May industrial production rose +6.5% y/y, unch from Apr and stronger than expectations of +6.4% y/y.
Eurozone Apr industrial production rose +0.5% m/m and +1.4% y/y, right on expectations.
U.S. Economy – Consumer prices declined in May, reflecting a big drop in energy prices and smaller declines in a number of other areas. It was the second monthly decline in the past three months and underscores how inflation has been a no-show in the slow-growing U.S. economy.
Consumer prices edged down 0.1 percent last month following a small 0.2 percent increase in April, the Labor Department reported Wednesday. Prices had fallen 0.3 percent in March. In addition to a drop in energy costs last month, the price of clothing, airline fares and medical care also declined.
Core inflation, which excludes energy and food, rose a slight 0.1 percent in May.
Americans cut spending at gasoline stations, department stores and electronics shops in May as retail sales registered their biggest drop in 16 months, a cautionary sign for the economy.
The Commerce Department said Wednesday that retail sales dropped 0.3 percent, the first decline since February and the sharpest since a 1 percent decrease in January 2016. Economists had expected sales to increase slightly in May after rising 0.4 percent in April.
Over the past year, retail sales have risen a solid 3.8 percent.
Market Sentiment – The Federal Reserve has raised its key interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy. The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.
The increase in the short-term rate by a quarter-point to a still-low range of 1 percent to 1.25 percent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers. The Fed foresees one additional rate hike this year, unchanged from its previous forecast. It gave no hint of when that might occur.
The Fed chose to raise rates again despite economic weakness at the start of 2017 and a further slowdown recently in inflation, which remains persistently below the Fed’s 2 percent target rate. Fed officials reiterated their belief that that both inflation and economic growth will pick up.
Technically, bonds are breaking out higher, but with RSI moving into the 70 level and with the main trend pointing lower, the upside remains extremely limited and we should see reversion to the main trend over the near term time frame.
Stock Market Analysis – I’m seeing increased vulnerability in the overall stock market for several reasons.
First, blue chip and industrial stocks are overbought according to 10 day RSI, which creates increased pressure for downside corrective trading action in the short term.
Second and equally as important is the retail sector, which is breaking lower. Very few rallies have been able to sustain themselves historically, when the retail sector trades lower and at the present time we are seeing retail trade well below the 50 day line to the downside.
Furthermore, fundamentals reinforce the current technical scenario, which points to further weakness. Keep in mind that retail in one of the biggest factors that contributes to GDP and if the numbers remain at the current level, FED will be forced to keep rates low for several months to come.
Lastly, tech appears to be headed higher to test the previous high price. The problem with tech is the fact that it’s becoming more sensitive to downside pressure and semiconductors are not breaking out to new highs, which is going to take some momentum away from the overall QQQ.
Watch for strong overhead resistance at or sligthly above the current price level. If chips can make higher highs, then the odds are strong that the rest of the NASDAQ will follow.
If on the other hand semiconductors don’t resume their strong bull run, the odds are high that techs will remain choppy without much directional bias.
I will update you tomorrow as usual.