"My life motto is 'Do my best, so that I can't blame myself for anything.'" -- Magdalena Neuner (biathlete)

The Empire State of Decay

The just-released Fed Beige Book illustrated an economy that's starting to run a little colder than it was. I love ... no, wait ... I actually hate when those who write these things up for the Fed use the words "moderate" and "modest". Are these words good? Do they indicate strength? Well, I guess it's safe to say that "moderate" is akin to "mediocre", and that "moderate" is also one step better than "modest". Thanks, Sarge. No problem. Glad I could help, gang.

It appears that growth in seven of the 12 regional Fed districts could be described as modest (again, not so hot). That growth was seen as moderate (sort of decent) in four districts; but wait, one district is missing. New York, New York!! Oh, yeah, remember that negative headline print for the Empire State Manufacturing Survey? Yeah, you do. Growth in the New York region is currently seen as "flattened out". Pow!! Do I need to translate that one? My guess is that no, I do not.

Labor markets have continued to tighten. We knew that. Wage growth is generally seen as modest to moderate. That, simply put, means that the situation is not improving much. Inflation was modest across most of the 12 districts. Again, not much improvement there. I think telling is that the last Beige Book described six districts growing moderately, and six districts growing modestly. So, what you have here, is worsening conditions in at least two districts, and a complete lack of forward progress in perhaps the financially most important district. Other than that, all sunshine, and gummy bears.

Whoa!! That May Leave a Mark

You guys catch the Caixin Manufacturing PMI out of China last night? No. Well, this is the privately done Chinese PMI, the one that focuses more on smaller and mid-sized firms than does the official governmental data that the CFLP (China Federation of Logistics and Purchasing) put to the tape on Tuesday evening. That item, not surprisingly, though coming in slightly below trend, did beat expectations. Last night's print? Not exactly. The Caixin number printed in headline contraction. The number was 49.6 vs. expectations of 50.2, and the lowest number seen in the space since June. What does this mean?

I think this tells us that smaller and mid-sized firms are not seeing the benefits of China's recent boom in construction and of the broad fiscal stimulus. Beneath the hood, this report shows Chinese manufacturers reducing costs and cutting payroll. Keep in mind that firms of this size comprise 80% of China's industrial jobs and 60% of that output. A reason to be nervous about China? Maybe. The "One Belt, One Road" initiative will likely be massive, but who gets left behind remains to be seen. This survey clearly indicates that sales are slowing for these kind of firms. But interestingly, the survey also shows optimism among the same firms going out 12 months, and an optimism backed up by inventory building at that. No conclusion. Not yet, anyway.

Overnight China data was mixed at best.
Overnight China data was mixed at best.

Trader Focus: The Banks

Still doing the ugly, especially after that JP Morgan (JPM) news on Wednesday. The most important ingredient in stock prices, believe it or not, is corporate earnings. First-quarter earnings roared. Huzzah. Old news, though; move on. We've got a spread between the yields on two-year U.S. paper and 10-year U.S. paper that decreased even from yesterday. That spread is now down to 0.919% (2.213%-1.294%). What that does is reduce drastically the money that the banks can possibly make off standard banking operations. In plain language, it squeezes the margin that these firms make from their simplest businesses. On top of that, several firms are cautioning that their next earnings release will illustrate a reduction in trading revenue thanks to less volatility at the long end. Want more? OK, here's more: despite the lower rates, there are concerns across the industry that loan growth will be a little saltier this quarter than hoped for.

Play the space? I still have a couple of small equity longs in names where I am still up. Took strategic profits in names that ran up last year into the first month this year. Not comfortable really doing anything in the space at this time. Rock and a hard place. Any less exposure would be to abandon the space completely. Don't want to do that. I would need to see this spread that we speak of often approach a full percent before I would be okay initiating new positions in the space with my money. Anyone considering playing the space through single stock options would be tempted to go out at least six months or more on expiration just to make the play more interesting, and give it time to develop.

Quick Thought on Climate Change

The media has been running this morning with the story that the president will likely announce today the removal of the U.S. from the Paris Accord. Gang, this accord is non-binding. Any country can change their own emissions standards any time they want, with or without completely withdrawing from this treaty. This may sound cold. I do not mean it that way, but I don't really care that much. This move does not come unexpected. A change in policy could be accomplished without complete withdrawal, but you know what? That's above my pay grade.

My mission is to interpret a changing environment in a way that I may with any luck excel. Period. How will this impact energy names, the railroads, auto makers, miners, etc.? These are the questions that I will be interested in answering. You may have feelings on the matter. There is nothing wrong with that. Separating emotion from execution is part of basic professional discipline. Carry on.

Macro

All Day - Total Vehicle Sales (May): Expecting 16.9 million, April 16.9 million annualized. April vehicle sales rebounded mildly from the deep slide that we saw in March. That said, the last two months have been the two weakest in this space since last June. Expectations are that last month's level at least holds in place. This information is released piecemeal throughout the day by the individual automakers, so there is no potential for any kind of reflexive market impact at the time of any single release.

08:00 - Fed Speaker: Federal Reserve Gov. Jerome Powell will be in New York City this morning to discuss the economy and monetary policy. Powell, a voting member of the FOMC will also appear on CNBC later on. Keep in mind that Powell has been named as the Fed's point-man on banking regulation in the wake of Daniel Tarullo's retirement.

08:15 - ADP Employment Report (May): Expecting 179,000, April 177,000. Throughout the first four months of the year, there really is not much of a correlation between this item and the number that it is intended to predict, which is the nonfarm payrolls data scheduled for release by the BLS tomorrow. To date, the ADP print has averaged 246,000 a month for 2017, while the BLS number has only averaged 192,000. Will this even up as the year develops? If 2016 is any kind of guide, it will. That said, this release will matter if you are trading equity index futures in the pre-opening hours, but by tomorrow, not so much.

08:30 - Initial Jobless Claims (Weekly): Expecting 239,000, Last Week 234,000. Don't look to the most regular data series in economics to spice up the marketplace. The four-week moving average for this release is now 235,250, which is just slightly higher than last week's total of first-time filers. A mild increase is expected today. The futures markets will likely snooze through this one.

08:30 - Non-Farm Productivity (Q1-rev): Flashed -0.6% q/q SAAR.

08:30 - Unit Labor Costs (Q1-rev): Flashed 3.0% q/q SAAR. The advance release of this item showed production back in the hole after two months of progress. Unfortunately, the same data showed a huge increase in labor costs making for a trend that has been all too common over the last few years. The rising costs associated with employment coupled with a dramatic lack of production has only served to put unwanted pressure on wages. More on that tomorrow.

09:45 - Markit Manufacturing PMI (May-f): Flashed 52.5. Markit's version of the U.S. Manufacturing PMI, though still showing expansion at the headline, has been trending lower for three consecutive months. That will be four if the number that flashed on 23 May. Though this number may get some attention from economists, traders will pay it no mind, as the much more highly focused upon ISM print for this space is due 15 minutes later.

10:00 - ISM Manufacturing Index (May): Expecting 54.6, April 54.8. Like it's less followed sibling, the ISM Manufacturing Index has been trending lower over the last few months, but is still comfortably in expansionary territory, and actually still closer to the high end of trend. This item is definitely important to market participants, and has great potential for impact.

10:00 - Construction Spending (April): Expecting 0.5%, March -0.2% m/m. The economy has not been kind to this data-point since the start of 2016. Over the 16 monthly prints that have been released by the Census Bureau over that time frame, only six have managed to show positive growth. Expectations are for a seventh today. This item is important enough to move markets, but will be overshadowed by the higher profile, more timely ISM release scheduled for the same time.

10:30 - Natural Gas Inventories (Weekly): Expecting 80 billion, Last Week 75 billion cubic feet. We expect to see a ninth consecutive weekly build in this space, and that will not be all that welcome in the marketplace for this commodity. Yesterday, the $3.15 level that we had spoken of before broke as support, allowing Nat Gas to sink to $3.06 in the overnight. If you trade this, the spot you worry about now becomes $2.92.

11;00 - Oil Inventories (Weekly): API -8.67 million, Last Week -4.432 million barrels.

11:00 - Gasoline Stocks (Weekly): API -1.726 million, Last Week -787,000 barrels. Last night, the American Petroleum Institution reported sizable draws for both crude and gasoline, but especially crude. Market prices for oil rebounded sharply in after-hours trading after what had been a rather rough day in the space. A confirmation of that data in today's EIA numbers would be most welcome for this beleaguered commodity.

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: 2439, 2426, 2417, 2410, 2404, 2397
RUT: 1392, 1386, 1376, 1370, 1363, 1355

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (DG) ($1.00), (MBLY) ($0.24)

After the Close: (AVGO) ($3.50), (COO) ($2.25), (FIVE) ($0.13), (LULU) ($0.28), (VMW) ($0.95), (WDAY) ($0.16)

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

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