A short trading week led to a positive outcome as trade war fears ebbed and a weak employment report gave traders what they want with more Federal Reserve cuts assured. A quite weak manufacturing reading Tuesday was a 1 day annoyance. Technical conditions in the S&P 500 chart especially improved; the NASDAQ to a degree – the Russell 2000 still looks poor.
We watch the ISM numbers quite closely in these parts – and the manufacturing number went below 50 Tuesday. The reading was 49.1 which is the lowest since early 2016, and 2.1 lower than the prior month. Economists expected a reading of 51. So of course the market didn’t fall apart in mid 2016 but we are in a different spot of the economic cycle with tariffs hampering manufacturers. This is now a number people should be watching like a hawk each month in the coming 12-18 months.
The ISM data was “weaker than expected, with the market impact of the 2.1 point drop likely magnified by the level dropping below the 50 mark,” wrote Jim O’Sullivan chief U.S. economists with High Frequency Economics, in a note to clients. Though the reading isn’t enough to signal a coming recession, as manufacturing PMIs usually hit the low 40s during an economic contraction, “the report will undoubtedly add to fears that more weakness is ahead.”
“Grim. No sign of hitting bottom despite better regional surveys,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
ISM Services – a much larger part of the economy – also fell dramatically from 53.0 to 50.7 (!!) but the market ignored it – that was interesting.
While people clap like seals each time Trump says “things are going great” on the trade talks – Bloomberg reports the U.S. and China are finding difficulty in even scheduling any talks. But no worries – the phone calls are going splendid.
Chinese and U.S. officials are struggling to agree on the schedule for a planned meeting this month to continue trade talks after Washington rejected Beijing’s request to delay tariffs that took effect over the weekend, according to people familiar with the discussions. Despite efforts by President Donald Trump to soothe financial markets and portray the talks as making progress, the world’s two biggest economic powers have yet to agree on basic terms of re-engagement, with mistrust on both sides.
In conversations over the past week, the two sides have failed to agree on at least two requests — an American appeal to set some parameters for the next round of talks and a Chinese call to delay new tariffs, two of the people said.
That said markets were cheered on by more stimulus apparently coming this time in China.
Reports indicated the People’s Bank of China will soon implement cuts in the reserve requirement ratio for Chinese banks, in a move that analysts predict will boost growth and signals willingness by the government to take steps necessary to combat the effects of higher U.S. tariffs on Chinese imports.
The employment data for August showed a gain of 130,000 jobs. Quite a few of those jobs were due to the hiring of census takers. The unemployment rate remained at 3.7%. Employment gains for July and June, meanwhile, were revised down by a combined 20,000.
But what really matters:
“I think this report will be positive for investors in that its going to continue to strengthen the case that the Fed should cut rates at the next meeting” said Michael Arone, chief investment strategist for State Street Global Advisors.
While some overall prospects improved bulls have the “wrong” sectors leading – utilities and consumer staples should not be leaders in a bull move; those are cautionary sectors.
For the week, both the S&P 500 and NASDAQ gained 1.8%.
Here is the 5 day weekly intraday chart of the S&P 500 …via Jill Mislinski.
The week ahead..
The European Central Bank is expected to cut rates this week, and the Federal Reserve is expected to follow the week after that! Not sure if much more matters to markets nowadays.
Short term: the S&P 500 and NASDAQ both jumped over key resistance Thursday – with the S&P 500 in a bit of a stronger position.
The Russell 2000 is back in the range it has been for mos of the year. That said the chart looks poor.
The NYSE McClellan Oscillator was positive all week, so we seem to be in a good place in the near term!
Long term: a pullback here on the weekly chart but big picture bulls can only be happy.
Charts of interest / Big Movers:
Tyson Foods (TSN) fell 7.8% Wednesday after the processed foods manufacturer lowered its earnings-per-share guidance for the full-year 2019 after the markets closed Tuesday. That said — heck of a move up the past few months!
Coupa Software (COUP) announced second-quarter earnings results that beat analyst expectations Tuesday evening. The business software provider’s stock rose 8.7% Wednesday.
Michaels (MIK) rallied nearly 12% Wednesday after the arts-and-crafts retailer topped estimates for its fiscal second quarter and offered upbeat guidance.
Signet Jewelry (SIG) rallied 26.7% Thursday, after the jewelry retailer reported second-quarter earnings that beat expectations while raising its full-year outlook. The company’s stock had hit a 10-year low Wednesday.
DocuSign (DOCU) reported earnings after the close of trade Thursday, beating analysts revenue forecasts for the second-quarter providing bullish third-quarter guidance. Shares rose 22% early Friday.
Have a great week and we’ll see you back here Sunday!