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How Strong Is this Economic Recovery? Beige Book Will Show, May Move Markets

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June 1, 2016

(Wednesday Market Open) Welcome to June, a month that has had a rollercoaster return rate in the last five years—down in 2011, up in 2012, down in 2013, up in 2014, down in 2015—at a time when volatility appears to be the name of the game. Will this June end higher or lower?

Going into a data-packed day, stocks were heading lower while crude oil prices continue to pull back after touching a high in midday trading yesterday. Any piece of economic data out today like the ISM index, auto sales and, later on, the Federal Reserve’s Beige Book, could turn sentiment, according to many analysts. The real mover may come with Friday’s job numbers. Can we hold on until then?   

Tuesday proved to be a choppy day of trading to end the month as the markets made a nice late comeback with the Dow Jones Industrials (DJIA) and the S&P 500 (SPX) closing narrowly lower, off the troughs of the day, while the Nasdaq (COMP) managed to eke out a gain. Like much of last week, it appeared that the markets were looking for a catalyst to move in either direction and the only one out there right now seems to be the Federal Reserve’s decision on whether to raise interest rates this summer.  

Given Chair Janet Yellen’s comments on Friday, it appears that a rate hike is likely this summer. She noted that it could be in June or July, but the CME Group’s FedWatch tool that measures Fed fund futures prices, is leaning toward a July hike. The implied probability is at 59% for July with June’s falling to 23%.

Despite the mixed ending to the day, the three major benchmarks landed higher on the month. What happened to “go away in May”? It was the fourth straight monthly rise for the DJIA, up a light 0.1% in May, and the third for the SPX, higher by 1.5%. The COMP has had a jumpy four months, but finished May with its strongest advance, at 3.6%.

We’ve been charting the SPX closely as it has attempted to break through the 2,100 ceiling and stay there—and it looked yesterday like it might happen. It started the day appearing like it might reach its record May 21, 2015, high of 2130.82, when it broke through that resistance level. But its stay was short-lived, for barely more than an hour, before the pullback.

West Texas Intermediate (CLN6) crude prices also reversed course during the day after breaking through their resistance level of $50 a barrel. It tapped a high of $50.10 a barrel before settling lower at $49.10 a barrel, off $0.23 for the day. On the month, the prices are up roughly 6.9%, and you may have noticed that at the gasoline pumps this past weekend.

S&P 500

FIGURE 1: THAT ELUSIVE 2,100 LEVEL

Yesterday’s choppy trading pushed the S&P 500 (SPX), plotted through Tuesday's close on the TD Ameritrade thinkorswim platform, through the 2,100 resistance level for a little more than an hour in early trading. And then it fell to close below it again. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

New Cars Cost More. In the more-fodder-for-the-Federal-Reserve folder comes news that new-car transactions rose 3.5% last month over the year-ago period, according to Kelley Blue Book. As often happens when gas prices plummet, sales of SUVs and trucks climb. Greater demand thus leads to higher prices—and that’s what fueled the gains, KBB says.  “The overall share of light trucks in May 2016 should be around 60%, up from 55% in May 2015,” says Tim Fleming, KBB analyst. “The Detroit automakers are benefitting most from this trend, as their transaction prices are up between 4%-6%.” The estimated average price for light vehicles in the U.S. was $33,845. General Motors (GM) and Ford (F), both makers of popular trucks, are posting the biggest gains, at 5.5% and 5.1%, respectively. We’ll also see just how much those higher prices are ringing up sales as automakers’ May results roll in throughout the day. Many analysts have said they see auto incentives, particularly on luxury car sales, weighing on profits.

Your New Lender? Your Company. It’s hardly widespread, but there appears to be a movement among employers to offer cash-strapped employees a way to handle emergency funding without getting buckled down with pricey payday loans or other costly financial products, according to the Wall Street Journal. It’s also helped slow borrowing from 401(k) retirement plans, WSJ says. Why? Because managers are finding that when their workers are stressed with financial woes that then puts a strain on workplace productivity. According to the report, a recent PwC survey of 1,600 full-time employed adults found that 40% are having a tough time meeting monthly household expenses and 51% consistently carry balances on their credit cards. What’s more, 20% of all eligible 401(k) participants have dipped into their 401(k)s. Companies are turning to firms like Kashable LLC, Ziero Financial Inc. and Zebit Inc. to help fund and service loans, according to WSJ.

Good Trading,

JJ
@TDAJJKinahan

Economic Report Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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JJ Kinahan

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

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