"I am the wisest man alive, for I know one thing, and that is that I know nothing." -- Socrates
In The Corner
The Fed will release their official policy statement for May this afternoon at 2pm ET. There will be no press conference, no adjustment to projections for GDP, unemployment, or for inflation. No song or dance. I would think that the FOMC will attempt to signal their collective intent to stay on trend as far as a gradually normalizing monetary policy goes. Their intent has been clear to this point. That would mean leaving the emphasis on gains made over time, and attempting to gloss over to some degree the weakening macro-economic environment. Let's keep in focus that although fed funds futures markets are pricing in almost no chance of a rate hike this afternoon, those same markets are pricing in a better than two in three chance of an increase on June 14, and then close to a one in three chance of another hike on Sept. 20.
The official statement made this afternoon will be your macroeconomic event of the week, even with a BLS employment report due on Friday. After that first quarter GDP surprise to the downside, consumer level inflation took one giant step backward. After vehicle sales, housing starts, and some key measures of manufacturing health have all appeared to slow, mentioning the balance sheet at all this afternoon will be very tough. Look for nothing that comes close to a commitment in this space. The language concerning inflation will, however, need to be addressed. Perhaps an optimistic message would be to refer to the recent data as "transitory". They like that word, and it acts as an escape hatch when covering something uncomfortable. A less optimistic message here would likely be noticed by the marketplace.
On top of this, some kind of acknowledgement of a strengthening global environment, I would think, would be in line. Last year, the Fed overtly implied that global conditions were a threat to the U.S. economy. Well, how about when those global conditions are outperforming domestic economic conditions? Yet, global central banks seem quite comfortable in their far easier monetary policy clothes than does our central bank. I would love to hear something mentioned on foreign monetary policy. Don't count on it.
Let's Make a Deal
The annualized pace of vehicle sales for the month of April did bounce a bit from what we saw in March. Still, the bounce was less than hoped for by the industry, and significantly lower (-4.7%) year over year. Pick a manufacturer, any manufacturer. They were all losers this month, and the biggest problem may not be sales itself, but overwhelming inventory. General Motors (GM) , for one, supposedly has about one million vehicles scattered across the nation on dealer lots.
It would appear that factory shutdowns, and perhaps further discounting, will be required by the majors in order to work down these inventories. Let's be honest, the industry has been extremely hot over the last few years. One, I don't know how often they expect folks to go out and acquire new wheels, especially while the rest of the macro universe seems to be on shaky turf. On top of that, it is clear for anyone to see that the U.S. consumer, though seeing some relief on the income side, has changed behavior. That consumer is a long way from being OK, and unless forced by a lease that's coming to an end date, is far less likely to splurge on a large purchase than they might otherwise be. This may be conjecture, but from talking to people in supermarkets, and in line at big box retailers, the average person does not trust any gains that he or she may have made in recent years. Many folks still expect to be hurt again. My sample size is obviously small, but at least in my neck of the woods, this seems to be a commonality.
Dodd-Frank Overhaul? Yeah, Right.
Representative Jeb Hensarling's bill that would eliminate portions of Dodd-Frank and slow down regulation of the financial sector is going nowhere. From ordering a vote on whether to even consider the bill to reading aloud the entire document (a three-and-a half hour endeavor, and quite unusual), those opposing the bill are pulling out all the stops in an effort to slow, or even force the bill's failure.
This bill does away with powers now held by regulators, as well as those held by the Consumer Financial Protection Bureau, while allowing the banks to do an end around most of the rules by committing to a 10% capital ratio. How do I feel about this? I hold shares in several banks, so in my own personal interest, I'm in favor of anything that increases shareholder value in the space. That said, this bill does not appear to have much of a chance of getting through the Senate, even if it could get through the House. Wasting time and effort is not my idea of a good time. If you cannot easily make minor changes that will pass both houses of Congress, then move on. Healthcare reform and tax reform are greater priorities for me and for the nation.
The small caps, gang. The Russell 2000 has been in underperformance mode for roughly three trading sessions. Still, the index is outperforming the broader marketplace over the course of a month's time. Profit taking? Maybe. A vote on the likelihood of the administration's agenda passing any way, shape or form? Probably. More than the media, this index of domestically based, highly taxed public companies will very possibly be your guide.
08:15 - ADP Employment Report (April): Expecting 174,000, March 263,000. Last month, this item, which is supposed to be somewhat comparable to the private payrolls portion of the BLS' nonfarm payrolls number on Friday, printed at its highest level since December 2014. Something wrong here? Maybe we expect a higher revision to that BLD data later this week. That would be my hunch. This item will move the futures markets upon its release and set the tone for what you see on the opening bell.
09:45 - Markit Services PMI (April-rev): Flashed 52.5. The advance number shows a slowing in the pace of growth for this item. That said, the crowd will wait for the ISM number 15 minutes later before making any decisions based upon the health of the service sector.
10:00 - ISM Non-Manufacturing Index (April): Expecting 56.3, March 55.2. New orders slowed for this item in March, as did several other key sub-components. Still, last month's headline number showed healthy enough expansion to avoid this item becoming a major concern. This particular data-point is significant enough to impact market trajectory on its own. However, with the ADP print earlier, oil inventories, and the FOMC all making some noise today, this information could end up being overlooked.
10:30 - Oil Inventories (Weekly): API -4.2 million , Last Week -3.6 million barrels.
10:30 - Gasoline Stocks (Weekly): API -1.9 million, Last Week +3.4 million barrels. Although supplies of gasoline lurched higher last week, inventories of WTI Crude have contracted for three weeks in a row, totaling an aggregate draw of -6.8 million barrels. Markets are watching this number very closely today after yesterday's significant drop in market prices.
14:00 - FOMC Policy Announcement. No change in the target for the fed funds rate is expected at this meeting today, given that there is no dog and pony show scheduled for later this afternoon. The Fed took the plunge at the last meeting, which ended on March 15. The next scheduled decision on policy is scheduled for June 14. Futures markets are pricing in an approximate two in three chance of a hike at that time, and that announcement will be followed by a press conference, and a revision to the Fed's economic forecasts.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2404, 2397, 2391, 2385, 2377, 2369
RUT: 1413, 1407, 1400, 1393, 1384, 1376
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (ALB) ($0.96), (AIG) ($1.07), (CW) ($0.68), (FB) ($1.12), (FIT) (-$0.18), (KHC) ($0.86), (MET) ($1.28), (SQ) ($0.02), (SUN) ($0.18), (TSLA) (-$0.81), (RIG) (-$0.07), (WMB) ($0.18), (AUY) ($0.01)
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