"There is no medicine like hope; no incentive so great, and no tonic so powerful as expectation of something tomorrow." -- Orison Swett Marden
A Spoonful of Sugar
The U.S. economy ran soft in the first quarter. Growth, inflation, retail sales, and even the most recent jobs data all came in sloppy. That sure is some bitter medicine. Know what? It's all OK, because the negative vibes given off by this economy are likely just "transitory". As evidence of a future filled with limitless potential, I offer the Atlanta Fed's GDPNow forecaster, which currently shows the second quarter breezing along at 4.3% annualized growth. Not that either the FOMC, not the Atlanta Fed's model has made a history of extreme accuracy, but the Fed seems optimistic to me. Optimism can be contagious. With the wonder of a 10-year old boy who wants to believe, let's explore.
The FOMC unanimously left interest rate policy unchanged yesterday. That was expected. The Fed statement left prior language in place as far as managing the balance sheet, as in "don't bother me right now, I'm thinking". I have done this when not willing to address a question brought up by my children, when I am not sure where I want to go with the answer. I think the key takeaway from yesterday's events is that the trajectory of monetary policy in this nation remains on course. The intent is still as plain to see as it was late last year. This committee remains on mission, and wherever the bar lies as far as derailing this trajectory, that first quarter sluggishness did not come close. The uncertainty of prior years is gone. Poof.
In the wake of this "upbeat" official statement, fed funds rate futures trading at the CME moved from a 67% probability for a June increase to a 94% chance, as the probability of a second hike in September also moved a few points higher. Do they know something we do not? They always know something that we do not. Kids. Is the reflation trade dead? Hmmm... No. The reflation trade lives, for now. Better buckle your chinstrap, though.
Fire Trucks and Trains
Since we were young, we loved to look at awesomeness. Fire trucks, garbage trucks, trains, military hardware. Awesome. We grow into adults trying to provide. We still love to look at awesome things, and changing environments. We learn to adapt. We learn to improvise. We notice the paradox of weakening small caps, yet a simultaneously softening utility sector, a softening real estate sector, and a softening telecom sector. The bond proxies are between gas stations, and are checking their GPS for rest stops. Yields are rising again. So are the financials. The Financial Select Sector SPDR ETF (XLF) is on the move. After sputtering from early March into late April, XLF found support above the January lows, and now is closing in on the 50-day SMA (Simple Moving Average). Kind of looks like the poster from the movie "Jaws" on the charts.
That spot currently stands at $23.95, $0.11 above the last sale. Using the (Andrews') Pitchfork model, and even beginning the model with that January low instead of the recent low (a more conservative approach), one can see that should that 50-day break, and hold (no small task, as that line has worked as resistance for six weeks), that there is very little traffic on the road for almost a full dollar. OK to get back aboard the banking bandwagon? Starting to like it. You kids know if you follow me that my favorite names in that space remain Action Alerts PLUS charity portfolio name Citigroup (C) and KeyCorp (KEY) . I remain long both, and have a larger stake in KEY. I did get out of a long in BAC in early March. That was the right move at that time. I will be looking for a new point of entry in that name, but I will need a down day, as I would like to shave $0.50 off the last sale.
House Majority Leader Kevin McCarthy spilled the beans last night. "We will be voting on the health-care bill tomorrow (today) because we have enough votes". Apparently, Michigan Republican Fred Upton, who I believe was a "no vote", introduced a new amendment to the bill that improves protection for patients with pre-existing conditions. Now, will the new and improved version of the ACHA actually be better than Obama-Care? Will it lower premiums? Will it lower deductibles? Will it empower folks to seek medical help when they need it? We can only hope so, but I'll care about all of that stuff when my family needs it. Right now, I'm just about making some dough.
This is a necessary brick, a building block. With the passage of a healthcare reform bill, which still has to get through both houses of Congress and land on the president's desk, the business of the nation can move on to tax reform. That, my friends, is where it's at, because the business of the nation should be business itself. That is why there is still hope across the land, and that is what will unleash the beast. That is also why I cannot get net short the marketplace anytime soon. Negative on a specific item? Buy a specific put. Overvalued? Only if the agenda fails. Fire trucks, garbage trucks. trains, and military hardware. Hope.
08:30 - Initial Jobless Claims (Weekly): Expecting 247,000, Last Week 257,000. Last week, this data-point "gapped" up to the highest level seen in a month. The four-week moving average, which is how economists view this item, now stands at 242,250. Traders barely view this item at all anymore, due to its regularity at historically low levels. The entire range of opinion that I have seen for this one today spans just 5,000, from 245,000 to 250,000. For those still keeping score, first-time jobless claims have now printed at levels below 300,000 for 112 consecutive weeks.
08:30 - Trade Balance (March): Expecting $-44.6 billion, February $-43.6 billion.
08:30 - Imports (March): February $236.4 billion.
08:30 - Exports (March): February $192,9 billion. The trade balance will not have an immediate impact on the financial markets. What it will do, however, is impact second-quarter GDP expectations, which according to the Atlanta Fed are currently running at a gaudy 4.3% annualized. Yeah, we'll see. Remember, the more negative the trade balance, the heavier the drag on GDP. Maybe why this is such an issue for the president.
08:30 - Non-Farm Productivity (Q1-adv): Expecting 0.1% q/q, Q4 1.3% q/q SAAR.
08:30 - Unit Labor Costs (Q1-adv): Expecting 2.5% q/q, Q4 1.7% q/q SAAR. Labor costs have grown faster than has productivity in six of the nine last quarters, and most of those six were not close. This has been one of the more troubling themes of this recovery. Yes, wages are part of the cost of labor, and rising wages are a positive, but the weight of benefits is also a factor here, and without congruent improvements in productivity, the incentive to hire will eventually wane. This data matters more in the grand scheme of things than most realize.
10:00 - Factory Orders (March): Expecting 0.5%, February 1.0% m/m. This series looks to be headed for its fourth consecutive month-over-month increase. That's positive. What is not so positive is that the pace of this growth appears to be slowing with each and every print. The trend, however, remains upbeat, as does most of our manufacturing data of late. Expansion is still expansion.
10:30 - Natural Gas Inventories (Weekly): Expecting +63 billion, Last Week +74 billion cubic feet. The last weekly prints in this space have both been the largest builds since November, and today's expectation, though below last week's number, is close enough for those trading Natty Gas futures to watch for it. That said, the underlying commodity seems to have found stabilizing support well above the $3 level, despite the recent change in the direction of supply levels.
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, 2398, 2392, 2386, 2378, 2369
RUT: 1407, 1400, 1392, 1385, 1376, 1367
Today's Earnings Highlights (Consensus EPS Expectations)
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