U.S. markets were slightly weak on Wednesday’s open and ahead of Fed Chairman Jerome Powell’s second day of testimony before the House Financial Services Committee.
The major indexes showed strength following his comments on monetary policy but were choppy afterwards while holding tight trading ranges.
Trade tariff spats could be improving and helped ease concerns on this front while earnings continued to impress. Volatility remained subdued after pushing a fresh monthly low and is signaling continued market strength.
The Dow extended its winning streak to 5-straight after advancing 0.3% while trading to a high of 25,215.
Lower resistance from mid-June at 25,250-25,300 held following the 4th-straight close above the 25,000 level.
The Russell 2000 was up 0.3% despite the morning backtest to 1,679. The small-caps have been in a mini trading range for 6 sessions with a close above 1,700 or below 1,680 signaling the next possible trend.
The S&P 500 rose 0.2% following the push to 2,816. January resistance at 2,825 held for a second-straight session with the index holding the 2,800 level for the 3rd time in 4 sessions.
The Nasdaq slipped 2 points, or 0.01%, after testing a high of 7,863 shortly after the opening bell.
Resistance at 7,950-8,000 remains in play as long as 7,800 holds on any near-term pullbacks.
Financials and Industrials led sector strength after soaring 1.6% and 1.1%, respectively. Health Care and Materials were up 0.1%.
Consumer Staples were the weakest sector after falling 0.8%. Utilities and Real Estate were down 0.5% and 0.4%, respectively.
Global Economy – European markets showed continued strength on news that European Commission President Juncker will meet President Trump next Tuesday to explore the possibility of starting negotiations on reducing car tariffs.
Germany’s DAX 30 gained 0.8% and UK’s FTSE 100 was up 0.7%. The Stoxx 600 Europe and France’s CAC 40 rose 0.5%. The Belgium20 added 0.1%.
Eurozone June core CPI was revised lower to 0.9% from the previously reported 1% gain.
UK June CPI was unchanged and rose 2.4% year-over-year, weaker than expectations for a rise of 0.2% for the month and 2.6%, respectively.
June core CPI rose 1.9%, weaker than forecasts of 2.1%.
The UK May house price increase rose 4% year-over-year, topping expectations of 3.7%.
Asian markets were mixed on light news and no new trade negotiations.
Australia’s S&P/ASX 200 jumped 0.7% and Japan’s Nikkei advanced 0.4%.
China’s Shanghai was lower by 0.4% and South Korea’s Kospi fell 0.3%. Hong Kong’s Hang Seng slipped 0.2%
MBA Mortgage Applications sank 2.5%, along side a 5.2% drop in the purchase index and a 2.2% decline in the refinancing index for the week ending July 13th.
The average 30-year mortgage rate rose 1 basis point to 4%.
Housing Starts plunged 12.3% to an annual pace of 1.173 million in June. Building Permits declined 2.2% to a 1.273 million rate. Expectations were for a 1.32 million rate for Housing Starts and 1.333 for Building Permits.
The Fed’s Beige Book revealed a rapidly expanding U.S. economy is running out of room to grow any faster as shortages of skilled workers and rising costs of raw materials handcuff businesses.
The report said the specter of increasing tariffs and a broad trade war is adding to the anxiety with the overall review of the economy notably more optimistic than it was just a few months ago.
The Fed found that 11 of 12 regions of the country were growing at a modest pace or even faster. Only the states around St. Louis reported slight growth.
Market Sentiment – Fed Chairman Powell of stay in his lane when asked about trade though repeated from Tuesday that a world of sustained tariffs would be bad for growth.
On the policy tools and IOER, the Fed chief said the FOMC is still deciding whether to go back to the corridor approach or stay with the floor system and expects a decision on that fairly soon.
Powell said the balance sheet’s size is largely determined by demand for currency and reserves, and it won’t be any larger than it needs to be.
He said there are no plans to change the pace of the balance sheet roll and expects it will get back to mostly Treasuries in about 3 or 4 years.
The Fed is watching out for financial bubbles, but he sees no evidence of such on the horizon.
He stated he is concerned about cyber risks and a successful attack. As far as addressing those risks, he warned we need to do as much as possible, and then double it.
Powell said inflation risk is roughly balanced and said analysts have just about reached the 2% objective, though maybe still leaning a bit to the downside.
On digital currencies, such as bitcoin, Powell said they have no intrinsic value and are only good if you are trying to hide or launder money. He went on to say the oversight of the digital currency market was not the role of the Fed but more a consumer protection issue. Despite talk that the Fed may be looking into developing its own cryptocurrency, he said this wasn’t the case.
Elsewhere, Kansas City Fed President George said the economy is in excellent shape, firing on all cylinders. He said the Fed’s large holdings of Treasury securities may be keeping longer-term rates below where they otherwise would be, and, therefore, distorting the signal from the yield curve.
The iShares 20+ Year Treasury Bond ETF (TLT) showed weakness for a 3rd-straight session with Wednesday’s low tapping $121.39. Fresh support at $121.50-$121.25.
The late June gap from the $120.50 area that cleared the 200-day moving average and $121 could be retraced on continued weakness. Lowered resistance is at $122-$122.25.
Market Analysis – The Spider Small-Cap 600 ETF (SLY) have been in a mini trading range between $74-$75 over the past 6 sessions.
The late day run and close at $74.82 cleared lower resistance at $74.75-$75 with continued closes above the latter being a more bullish development.
Support is at $74.25-$74 with a move below the latter likely confirming the short-term top of $75.31 from earlier this month.
RSI is back in a slight uptrend after clearing lower resistance at 60-65.
A close above the latter would signaling additional strength and a possible run towards 70-75 and June highs. Support is at 55-50.
The Technology Select Sector Spiders (XLK) traded in negative territory throughout the session with the low tapping $72.53.
Fresh support at $72.50-$72 held with a close below the latter likely leading to a continued backtest towards $70.50 and the 50-day moving average.
Blue-sky resistance is at $73-$73.25 following Tuesday’s trip to $73.03 and fresh all-time high.
Continued closes above $73.25 could lead to a push towards $74.50-$75.
RSI has been flatlining with current resistance at 65-70.
A close above the latter and early June highs would signal additional strength towards 75-80 and late January peaks. Support is at 60-55 with a move below the latter signaling additional weakness.
All the best,