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After Friday's weak data, monetary policy hawks have a little less to crow about.
July's nonfarm payrolls data of 209,000 was below expectations of 230,000 though there were upward revisions in May and June. Meanwhile, hours worked remained unchanged. The result is a perfect combination of a disappointing but not statistically significant number. That should mute any dramatic move in interest rates.
Why is that good? Because there is near-unanimous agreement that the one factor that will force stocks into a correction is a sudden surge in rates. Modest moves up over time, with a slowly improving economy, is different. But if the 10-year yield goes from 2.6 percent to, say, 3.5 percent in a month, forget it—that spells correction.
More importantly, the factor that really matters, wage growth, is up only 2.0 year-over-year. That is below expectations of a 2.2 percent gain; separately, last month was revised down to 1.9 percent from 2.0 percent last month.
The bottom line is there are no wage pressures.That should mute, at least temporarily, any upward pressure on yields.
Man, what an ugly day. But also a strange day.
There were lots of obvious catalysts: Portugal. Ukraine. Argentina. Employment Cost Index (ECI) strong. Several companies (Adidas, Beazer Homes, Ryland Group and Roadrunner Transportation) with disappointing earnings.
And yet, it's strange. The S&P 500 was down two percent, but Treasuries were relatively flat, after a see-saw day. It is strange.
First, you can't say it's all about selling in small-cap names, since the big-cap S&P 500 is down about as much as the small-cap Russell 2000.
If this was about global flight to safety...if it was about everyone fleeing the turmoil abroad and coming to the U.S….bond yields should be much lower...but they're not.
That's what makes me think this is more about growth fears...digesting the strong GDP yesterday, the strong ECI today. Fears of a sudden spike in interest rates killing the rally.
Still, it is ugly. S&P goes negative for the month on the last day. 10-to-one declining to advancing stocks at the NYSE.
What would confirm the market was focused on growth issues? If we had a very strong jobs report tomorrow. Consensus is at 230,000...well above consensus would be anything north of, say, 250,000. And no downward revision of 288,000. And remember, the ADP was below expectations earlier this week.
That would almost certainly spike interest rates. Then we'll see how stocks handle TWO above-expectation reports.
Several factors are moving our markets, including:
1) The rhetoric in Ukraine is getting downright vitriolic. The Ukraine Prime Minister, Arseniy Yatsenyuk, said Russia was seeking to "revise the outcomes" of World War II by seizing the Crimean peninsula and fomenting war.
Stocks start up then move down. Why, you ask?
It's a disappointing day so far...the S&P 500 rocketed up almost eight points at the open, but within a half hour began a slow but steady decent into negative territory. What happened?
First: On the strong Q2 GDP, up 4.0 percent, there were detractors the minute the report came out.
A lot of inventory building, some complained. But most felt the numbers didn't change their outlook for the second half dramatically. Barclays is a good example: "We do not view the outperformance in this report as a signal that the outlook for growth has improved," they said.
Second: There's the inflation-fearing camp. Modest growth or not, many fear that interest rates could move dramatically on any sign the economy is putting together a consistent series of above-expectation economic stats.
Treasury yields are up this morning, and many are wondering if the Fed will make some comment about the possibility of a rate increase sooner than expectations (mid-to-late- 2015).
I'm not in that camp, but some are: Interest-rate sensitive stocks like Utilities, Telecom, Housing are all underperforming the market.
The U.S. economy expanded by 4 percent in the second quarter? Whoa!
That balances the anemic first quarter gross domestic product (GDP) of –2.1 percent. So what are we left with for the second half of the year? Roughly 2.5 percent growth, or perhaps a bit higher? That would average perhaps 2 percent growth for the entire year.
The problem for traders is that we are back to a choppy market. You get a down day like yesterday and an up day, and you can't stay hedged. Investors are looking for trends: for example, you're looking for 5 down days in a row. That's how you make a lot of money...when you get zigzag pattern, it eats your hedges away and the value drops materially.
Stocks go up, but your hedge gets much less valuable. The bottom line: you can't stay heavily hedged.
Still, big GDP numbers on a Federal Reserve decision day! The market needs to hold its early gains.
Earnings and revenue misses: Is this the start of a trend? It was not a great morning for earnings.
Consider: New York Times (NYT) missed as ad revenues dropped; UPS (UPS) missed on earnings and lowered 2014 guidance; Eaton (ETN) missed and lowered the high end of its 2014 guidance; Corning (GLW) missed; and Eastman Chemical (EMN) missed on revenues.
All are trading down notably mid-afternoon.
Is this the start of a trend? I don't think so. True, there have been a few other high-profile misses, notably Whirlpool (WHR), Amazon (AMZN), Mattell (MAT), and DR Horton (DHI), but they are outliers.
With 262 companies reporting (52 percent of the S&P 500), 68 percent of those reporting are beating expectations (above the long-term average of 64 percent), and both earnings and revenues have been improving since the beginning of the quarter:
Source: S&P Capital IQ
8.4 percent earnings growth is the highest since Q3 2011!
What matters most to the stock market, however, is not reported earnings, it's guidance. And it's been better! 55 companies in the S&P 500 have provided guidance for Q3: 29 are negative, 14 positive and 12 in line. That is a ratio of 2-to-1 negative-to-positive announcements, a significant improvement of the Q2 guidance of 8-to-1 negative-to-positive announcements.
Don't look now, but European bond investors are sending yields to lows unseen in at least 200 years. Yes, you read that right. Spanish 10 year debt now yields about 2.45 percent. That is below U.S. 10-year Treasury rates, which is at 2.46 percent.
That's right: the price of Spanish bonds are now more expensive than their U.S. counterparts.
The dragon is roaring again! China's Shanghai Index rallied another 2.4 percent overnight; the market is in the midst of a 4-day upswing that has seen the index rise 6 percent to close at the highest levels this year.
Chinese economic data have been improving recently, fueling the rally and spilling over into Hong Kong's market. The Hang Seng is now at the highest level since 2011.
Rep. Scott Garrett, chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises (which oversees the SEC), is holding a roundtable Monday in Washington on what, if anything, should be done about the way stocks are traded in this country.
I know, you've heard this before. In the wake of Michael Lewis' book "Flash Boys", there have been several hearings in Washington. This one is a little different, though. Here's why:
1) The 19 people attending are the cream of Wall Street's trading community. The heads of all the exchanges will be there, including many of the biggest market makers/brokers and key industry representatives. Everyone who knows anything about market structure will be part of the parade. You will probably never get all these people in the same room again.
2) The man putting on the event, Garrett, R-N.J., is well-regarded by the Street as a thoughtful lawmaker. What does he want to accomplish? He says his goal is to "produce more efficient markets, less investor confusion, better competition, and increased job creation."
Fair enough. Last year he held a similarly well-attended roundtable from academics; this time he wants the Wall Street community to weigh in. What he seeks is to forge a consensus on what, if anything, should be done. So what should we expect (or not expect)?
Over the last two days, initial public offerings (IPOs) have hit a speed bump--again. The market has absorbed more disappointing pricings ahead of what promises to be a huge week.
Pipe maker Advanced Drainage Systems priced 14.5 million shares at $16.00, well below the price talk of $17—$19; biotech firm Ocular Therapeutics priced 5.0 million share at $13.00, well below the price talk of $14—$16. Orion Engineered Carbons (OEC), a maker of carbon black, priced 19.5 million shares at $18, way below the price talk of $21—$24.
However, El Pollo Loco priced 7.1 million shares at $15.00, the high end of the price talk of $13—$15. This is in the hot fast-casual restaurant space, a space Chipotle has inhabited successfully.
Of the 8 IPOs that have priced in the past 36 hours, 6 have priced below the price talk, 1 at the low end of the price talk, and 1 at the high end. That is a disappointment.
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