Market Recon: ISM Manufacturing Index, Construction Spending Data on Tap

As the last month of the year begins, traders have a dangerous road ahead. How do you map out the journey, taking care to avoid the potholes?

I'm not sure what I think is more important. On one hand, the unexpected OPEC deal caused a euphoric push into WTI crude, and everything energy. That move seems to have held overnight, despite the fact that the spike started to smell like a short squeeze as the highs of the day were approached.

On the other hand, strength in the U.S. dollar supported higher yields (lower prices) for U.S. Treasuries. This made the financial sector, particularly the banks, irresistible.

Then, there's a third, ugly hand. On that hand, there was a severe beat-down forced upon six or seven sectors that were led lower by the most defensive among them. More rotation? Money has to come from somewhere.

GDP Now and Later

The Atlanta Fed stayed in the shadows yesterday, well camouflaged by everything going on around them. Remember the Atlanta Fed's GDPNow forecaster model that had the fourth quarter of 2016 running at 3.6%? The U.S. economy seemed to be absolutely cruising, especially after the Bureau of Economic Analysis revised the third quarter up to 3.2% from 2.9% on Tuesday.

That GDPNow model adjusted its running forecast for the fourth quarter from 3.6% (smokin' hot) down to a much more pedestrian 2.4%, all in one move. Why? Good question. Why even run a model that can be so far off from perceived reality on any given day?

It all came down to Personal Spending. Consensus view for spending had been up at a 0.5% increase on a month-over-month basis. The print hit the tape at 0.3%, but that 0.3% was off of a September number that was revised itself from 0.5% up to 0.7%, so the 0.3% increase was off of a higher base.

Under the hood, the pace of spending on goods actually increased, while spending on services contracted. The Atlanta Fed took the hatchet to fourth quarter GDP expectations because of a lack of spending on services.

Super. More good news? Today's ISM Manufacturing Index, and Construction Spending report will both impact any expectation for GDP, so you'll hear from the Atlanta Fed again. On top of that, the Census Bureau's Construction Spending print is not even a reliable number to go off of upon its initial release. Huzzah.

Confidence

If you stopped and listened to the players that President-Elect Trump has proposed to his economic team, you have to be encouraged. I am. From Steven Mnuchin's confidence going forward in the ability to repatriate money, and rewrite the tax code (lower corporate taxes!) to the quiet confidence of Wilbur Ross describing how negotiations with Mexico, and China might go, the U.S. economy and subsequently the marketplace both have more than a serious shot here. The environment provided, which is the one thing that none of us can control is about to change for all of us from an investment perspective, for the better.

Trader Focus

The immediate focus is obviously the relationship, within your portfolio, of the energy sector to everything else. Beyond the immediate, currency exchange valuations and Treasury yields will remain the tail that wags the dog -- the dog being the productive part of what you're trying to do.

As long as the bond market maintains control over yields, and not the FOMC, then all parts of the financial sector remain significant plays. Banks, capital markets, consumer finance ... the trader can fly in and out, but the investor probably needs a minimum level of participation here.

The fly in the ointment would be GDP expectations that were further lowered on today's data. That would hand some power back to the FOMC.

Macro (all times ET)

All Day -- Total Vehicle Sales (November): Expecting 17.8 million, October reading 18.3 million annualized. Vehicle sales will be released piecemeal by the individual auto makers, and market participants will likely react to those numbers is such fashion. October was an excellent month for new vehicles -- in fact the best month of the year. That said, as evidenced in yesterday's Beige Book release, we expect this item to fall back toward its 2016 norms.

08:30 -- Initial Jobless Claims (Weekly): Expecting 252,000, Last Week 253,000. Fewer layoffs are a good thing, unless it's because so many folks in the labor force are working part-time, or working multiple jobs. (That makes the notion that we're at full employment absurd and it is why the Phillips Curve has not worked for the academic crowd.) From an economist's view, this series does not carry its former significance and that is the reason. From a trader's point of view, the sheer long-term consistency of the series has diminished its ability to impact the marketplace.

08:30 - Fed Speaker: Cleveland Fed Pres. Loretta Mester will speak from Washington, DC. Mester, who will vote in December, spoke in Pittsburgh just yesterday and made clear that she feels that interest rates may fall behind the curve if the Fed does not act soon. Mester is known as one of the more hawkish members of the FOMC.

09:00 - Fed Speaker: Dallas Fed Pres. Robert Kaplan also spoke yesterday, and he indicated his ongoing preference for a rate hike in two weeks. Kaplan also sounded a little squeamish regarding the incoming administration's economic plans. Kaplan, who will vote in 2017, speaks today from San Antonio, and will take questions from the audience.

09:45 - Markit Manufacturing PMI (November-final): Flashed at 53.9. The Markit data, like the old football sheets, are strictly for entertainment purposes only. As far as the markets are concerned, this series has never really developed a following, and the crowd will wait the fifteen minutes for the ISM print. You can go get that fourth coffee now.

10:00 - ISM Manufacturing Index (November): Expecting 52.2, October 51.9. After the long, cold winter that the U.S. manufacturing sector has been through, there suddenly seems to be a measure of hope in the space. The headline number for this series has printed in expansion for two months running now. On top of that, for November, all five regional Federal Reserve districts that publish manufacturing data actually did so in a state of expansion for the first time since November 2014. It is important to note that the strength behind all of this warm and fuzzy data is actually New Orders (where you want it). There is no business here without those, so this suddenly positive trend is actually just that. Positive. This item has the potential to move the markets, and will impact GDP.

10:00 - Construction Spending (October): Expecting 0.5%, September -0.4% month over month. Some words of caution on construction spending. One, the series is mildly dated information upon its release. Two, the data are also somewhat unreliable, as the Census Bureau is often forced to drastically revise these numbers one month after they initially hit the tape. For that reason, marketplace participants usually hold their fire on this one, and economists tend to look at the revision as the actual release, meaning that today would be looked at as September's print.

10:00 - Natural Gas Inventories (Weekly): Expecting -25Billion, Last Week -2Billion cubic feet. Last week, the string of 15 consecutive weekly inventory builds came to a sudden halt in a real nail-biter. Today, we'll look for a second consecutive draw. Like with many other items in the financial universe, November was a month to remember for natural gas. Wilbur Ross spoke about pushing the liquefied version on the Chinese in order to try to even up the trade balance. Maybe, just maybe, we'll see a return to the days when these futures were one of the scariest things you could possibly trade on a Thursday morning.

Sarge's Cash Levels (Levels where I think indices could turn or pause)

SPX: 2218, 2212, 2204, 2196, 2187, 2180

RUT: 1340, 1335, 1327, 1320, 1314, 1307

Thursday's Earnings Highlights

(Consensus expectations in brackets)

Before the Opening: DG ($0.93), KR ($0.41)

After the Close: GIII ($1.54), ULTA ($1.37), ZUMZ ($0.36)

At the time of publication, Stephen Guilfoyle had no positions in the stocks mentioned.

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