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Washington Watch Persists, But Focus Shifts To Housing Data, GDP, Fed Minutes

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May 22, 2017

(Monday Pre-Market) In the absence of notable earnings this coming week, several items could catch investors’ attention. They include Fed minutes, home sales, and, of course, the possibility of more Washington, D.C., drama. 

The market enters the pre-Memorial Day week still up sharply year-to-date and not far from record highs. But last Wednesday’s Washington-related washout brought a new note of caution, and volatility awoke from its long slumber. Some of the traditional safe havens like gold, bonds, and the Japanese yen began scraping higher, and odds of a near-term Fed rate hike retreated slightly.

As the Fed’s June meeting approaches, investors would be wise to carefully examine Fed minutes from its May meeting this Wednesday for any clues of what might come. Earlier this month, odds of a rate hike by June climbed above 80%, in part a reflection of strong April jobs growth and rebounding retail sales. Then odds fell below 60% during last Wednesday’s sell-off before clawing back above 70% by midday Friday, according to Fed funds futures.

Unfortunately, the Fed’s last meeting occurred a few days before political controversy really began flaring up, so officials wouldn’t have had any idea just how exciting things were about to get. That means the minutes could look slightly dated. Additionally, it’s the Fed’s job to determine monetary, not fiscal policy, so even if Fed officials had known about the Washington excitement, they wouldn’t necessarily have commented in regards to its possible impact on fiscal policy like tax reform. That said, the minutes are always worth perusing and often contain a useful tidbit or two.

Economic data looks a little light to start the week, but new home sales on Tuesday could be worth checking. April housing starts and building permits were lighter than analysts had expected, though that could reflect warm winter weather pulling some demand earlier into the year. New home prices have continued to rise amid falling supplies, but sales still climbed sharply in March from the previous month, so we’ll see if that continued. Existing home sales follow on Wednesday.

Later in the week there’s a little more data, including the government’s second estimate for Q1 gross domestic product (GDP). Check if that number ticks up from the anemic first estimate of 0.7%, a possibility considering the strength of corporate earnings during the quarter.

The oil market could grab some headlines Thursday when OPEC meets, though Russia and Saudi Arabia already stole some of OPEC’s thunder earlier this month when they appeared to agree to a nine-month extension of current production cuts. That extension won’t become official, however, until OPEC decides. U.S. oil futures climbed back above $50 a barrel on Friday as supplies fell in the U.S. (see below).

While oil rose, the U.S. dollar index found itself under pressure, trading near its lows for the year. To some extent, the weaker dollar reflects stronger economies abroad, especially Europe. On the other hand, a drop in 10-year Treasury yields sent less optimistic signals about the U.S. economy, which could weigh on the dollar. Yields fell below 2.2% at mid-week, but seemed to stabilize at around 2.25% by midday Friday. That’s still well under the recent high of 2.4%.

From a technical perspective, the key level to watch in stocks is 2369, approximately the 50-day moving average for the S&P 500 Index (SPX). The index pivoted around that point in late-week trading.

All this said, everything could quickly retreat into the background if dramatic headlines surface from Washington this coming week. If there’s anything investors have learned since Jan. 20, it’s to be on the lookout for political controversy, and although the market climbed pretty steadily most of the year in spite of the politics, that came to a major halt last Wednesday.

President Trump is traveling abroad, but that doesn’t mean market-moving events can’t happen inside the Beltway. There were media reports Friday that former FBI Director James Comey might testify to Congress in the coming days. If that gets on the schedule, it’s likely to take front and center, with the market on tenterhooks for possible new revelations.

Gold

FIGURE 1: GOLD TAKES A POWDER

Gold, plotted through midday Friday on the thinkorswim® platform from TD Ameritrade, took a break from the mid-week rally as political drama subsided a bit. The VIX (purple line) also retreated. Gold and VIX both can serve as reflections of market fear, and each remains well above recent lows despite the declines on Friday. Data sources: CME Group, CBOE. For illustrative purposes only. Past performance does not guarantee future results.

What Do The “Bellwethers” Tell Us? Biotech and semiconductor companies, sometimes seen as bellwethers — especially at times when the market recovers from weakness — were among the stocks that gained late last week after Wednesday’s sell-off, Briefing.com noted. The Dow Jones Transportation Index (DJT), another marker that some analysts track as something of an economic proxy, also climbed, though it’s down over the last month. Meanwhile, the financial sector — which took it on the chin Wednesday and is frequently thought of as an influential one for the market — was recovering very nicely by midday Friday. It might be wise to continue monitoring these telltale sectors, as they could provide more insight into underlying economic health even if headlines distract from the fundamentals.

Lost in the Shuffle: Amid all the political upheaval last week, some good economic data might have been overlooked. The Philadelphia Fed Index for May doubled Wall Street analysts’ expectations, pointing to strength in manufacturing. Additionally, U.S. oil stockpiles fell for the sixth consecutive week, possibly a sign of strong demand that can often accompany economic growth. The Atlanta Fed’s GDP Now indicator rose to 4.1% in its Q2 gross domestic product (GDP) estimate, and April industrial production rose much more than expected.

Thinking Beyond Fear: Considering all the strong data and the robust earnings season that just ended, perhaps what the market has to fear now is “fear itself,” to borrow language from President Franklin D. Roosevelt. The fear factor seems to be based in Washington, D.C., for the moment as skepticism grows about whether the administration can deliver on its fiscal promises. But with all the crazy news, there are good things happening in the economy, and it’s important not to lose sight of that.

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 1: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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