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Plans for Long Weekend? Contemplate Revised GDP Data, Yellen Speech

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May 27, 2016

(Friday Market Open) The long weekend beckons, but before it starts there’s updated U.S. growth data, a Janet Yellen speech, and disappointing economic news from China to ponder.

The U.S. government reported a revised 0.8% rise in Q1 gross domestic product (GDP), up from its first estimate of 0.5% but below consensus of 0.9%. With almost two months of the second quarter now under the economy’s belt, there’s growing interest in what Q2 growth might be, and the Atlanta Fed recently pegged it at 2.9%.

Fed Chair Yellen is scheduled to speak at 1:15 p.m. ET today during an event at Harvard University. The consensus appears to be that she won’t say much of note about the economy or interest rates, and that the speech to watch is the one she’s scheduled to make June 6 in Philadelphia. Nevertheless, whenever Yellen speaks, there’s the potential it could move the markets as investors digest any interest rate policy indications. Going into Friday, Chicago Mercantile Exchange (CME) Fed funds futures indicated about a 25% chance of a June rate hike and a 55% chance of a July hike.

The Chinese economy, a huge source of concern earlier this year, was in the spotlight a little less over the last couple of months. One school of thought is that the recovery in commodities, particularly oil, from lows set in February, may have indicated new strength in China.

But recent weaker data from the Asian giant casts light on the government’s policy statement earlier this month about dialing back debt-fueled stimulus, Bloomberg reported. The latest disappointing news came Friday, when China reported profit growth at its industrial firms rose just 4.2% year over year in April, compared with growth of 11.1% in March. Profits for the first four months of the year were also down from the year-ago figure.

Crude oil, which had topped $50 briefly on Thursday, slipped back under $49 in early action Friday, burdened by a rising U.S. dollar, less concern about outages, and speculation that OPEC may not take definitive action to slow production at its meeting early next month. Oil’s huge gains over the last two months have helped fuel the equities market rally, but it’s important to note that $50 is a price where production may become profitable for many U.S. frackers, which could mean opening the spigot to more U.S. output after months of decline.

From a technical standpoint, things look much as they did yesterday, with resistance in a band between 2096 and 2100 for the S&P 500 index (SPX). Many technicians say a persuasive move above 2100 is needed for the market to test last year’s record high level of 2134. There’s quite a bit of division among analysts as to whether the SPX could break through that all-time high water mark anytime soon, and the market fell back pretty quickly from the 2100 level last month and hasn’t re-tested it with any real authority since.

S&P 500

FIGURE 1: STILL ON TRACK FOR BIG WEEKLY GAINS.

The S&P 500 (SPX), plotted through Thursday on the TD Ameritrade thinkorswim platform, couldn't extend its rally, but remains up nearly 2% for the week and up about 1% for the month of May. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Sign ‘em Up! Robust existing and new home sales data last week and earlier this week helped get the recent equities rally underway, and the good news on homes keeps coming. Pending home sales for April rose 5.1%, the National Association of Realtors reported Thursday. Pending sales are signed contracts to buy existing homes, and these sales are now at their highest level of the decade and up 4.6% from a year ago. "The ability to sign a contract on a home is slightly exceeding expectations this spring even with the affordability stresses and inventory squeezes affecting buyers in a number of markets," said Lawrence Yun, the National Association of Realtors' chief economist. "The building momentum from the over 14 million jobs created since 2010 and the prospect of facing higher rents and mortgage rates down the road appear to be bringing more interested buyers into the market."

Housing Booms As Wages Rise, But Watch Inflation: Could all this strong news from the housing market, as well as recent booming car sales, reflect increasing wages? Average hourly wages are up 2.5% this year, and could rise closer to 3% by the end of the year, according to S&P Global Market Intelligence, which said in a recent note that the degree of bargaining power has recently shifted toward workers. But rising wages can go hand in hand with concern about inflation. “A pick-up in wage growth remains the inflationary key,” S&P Global wrote. S&P Global expects economic data released between now and the Fed’s June 14-15 meeting to prompt a rate hike in June, with a July fallback. Remember that next Friday brings the May Nonfarm Payrolls report, which will include data on wages. April delivered a 0.3% rise in hourly earnings.

Investors Emulate Switzerland: Neutral, that is. A majority of investors surveyed don’t expect the stock market to move much in either direction over the next six months, according to the weekly sentiment survey from the American Association of Individual Investors. Neutral sentiment for the week ended Wednesday climbed 6.3 from a week earlier to 52.9%, the highest recorded since April 1990, a time when some of today’s investors may have still been in pre-school. Bullish sentiment fell 1.6 this week to 17.8%, and bearish sentiment fell 4.7 to 29.4%. Current neutral sentiment is far removed from the long-term average of 31.2%. However, these reports aren’t necessarily predictive. For instance, in the spring of 2008, just months before the markets plunged to their lowest levels in a decade, more than 50% of investors said they were bullish. The following March, just as the market was about to embark on what is now a seven-year bull run, 70% of investors said they were bearish.

Good Trading,
JJ
@TDAJJKinahan

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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