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Wyoming Watch: Choppiness Possible In Low Volume As Jackson Hole Gets Underway

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August 24, 2017

(Thursday Market Open) As the sun rises over Wall Street, investors look west toward the Rocky Mountains in hopes of a catalyst that might help wake the sleepy markets. Low volume continues to shape the action this week, and stocks might be vulnerable to sudden, sharp moves.

The Jackson Hole economic symposium dawns today, and the question is how much new information we’ll get from Friday’s speeches by Fed Chair Janet Yellen and European Central Bank President Mario Draghi. The answer might be not much. Last year’s Yellen speech didn’t move the markets, and it doesn’t seem likely she’d want to shake things up with new language just a week after the release of July’s Federal Open Market Committee (FOMC) minutes.

Still, listen closely for any hints about the Fed’s balance sheet or interest rate plans. As of early Thursday, chances of another hike by the end of 2017 stood at about 38%, down from above 40% last week and above 50% a month ago. Stubbornly low inflation — a subject the FOMC minutes turned to early and often — continues to raise questions about the likelihood of rates moving higher anytime soon. It also brings uncertainty about when the Fed might start unwinding its balance sheet. Ideas that the Fed might address the balance sheet beginning in September seem to be waning, in part because the minutes last week seemed vague about a start date.

The ECB’s Draghi faces pressure from inflation, too, but in his case, it’s higher inflation in Europe that’s causing some economists to wonder when the ECB will lift its foot from the gas pedal a little. Though European inflation remains relatively low, it doesn’t appear that deflation is necessarily an issue any longer. In a speech earlier this week, Draghi didn’t comment specifically on when the ECB might begin tapering its stimulus program, CNBC reported. It could be interesting to hear if he shows more of his hand once he takes the long flight to Wyoming.

Another thing to watch, also associated with the Jackson Hole symposium, is for company announcements that sometimes come out in conjunction with the event. There’s no guarantee we’ll see any important company news surface, but it’s something to be mindful about these next two days.

In the markets early Thursday, European stocks traded higher while oil and U.S. Treasury bonds fell. The VIX keeps heading lower, down 4% to below 12.

Over on retail row, Tiffany (TIF) posted better than expected results and the stock is up significantly from a year ago. Clearly the high end is back. That’s a good sign for the economy overall that people are out spending money and the little blue box still has some cachet. Earnings later today include Brocade (BRCD) and Marvell (MRVL).

After most sectors rose on Tuesday, the brakes slammed on Wednesday. Eight of 11 S&P 500 sectors saw red, with industrials and consumer discretionary taking the worst hits. Real estate stocks rose more than 1% despite disappointing new home sales data (see below). We continue to see people looking for yield, as utilities and telecom also climbed.

That’s a shift from the less defensive trading we saw Tuesday. It’s possible that in the current low volume atmosphere the market isn’t really following any particular pattern, and this might continue until investors have some solid news to chew on. Durable goods on Friday (see below), along with speeches at Jackson Hole could provide catalysts.

Looking at the technical picture, the S&P 500 (SPX) continues to enjoy support in the 2423-2441 range, said research firm CFRA. Resistance is well above current levels at 2475.

Euro/Dollar

FIGURE 1: EURO GAINING ON DOLLAR

The euro gained against the dollar early this week after hitting two-week lows, while the dollar lost ground against the yen (purple line). Concerns about the potential for a possible U.S. government shutdown this fall appeared to hinder the dollar Wednesday. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Housing Headaches: More worries surfaced this week about the housing market following recent light housing starts and building permits numbers. New home sales in July were well below analysts’ expectations, falling nearly 9% to a seasonally adjusted level of 571,000 from a revised 610,000 in June, the government said Wednesday. Wall Street had expected 615,000, Briefing.com said. New home sales growth remains slow despite strong employment numbers and low mortgage rates, while prices continue rising faster than inflation. Additionally, Lowes (LOW) reported quarterly earnings that fell shy of expectations, raising questions about the home improvement market. On the plus side, the government did upwardly revise new home sales from previous months, taking some of the sting away from the July number. Existing home sales are due today.

GDP Watch: One question is how the relatively weak housing numbers might ultimately play into the government’s estimates for economic growth. While Q3 gross domestic product (GDP) estimates remain a long way off, the second estimate for Q2 GDP is due next Wednesday. The first estimate of 2.6% represented a big hop from Q1, but keep in mind that average growth for the first half was below normal at 1.9%. Next Wednesday’s GDP number could work its way into the Fed’s thinking as it considers next steps on rate hikes and balance sheet unwinding. As for Q3, the Atlanta Fed GDP Now indicator still sees growth at 3.8%, but is scheduled to come out with a revised figure tomorrow. We’ll see if it goes lower based on the July housing data.

Durable Goods Seen Dropping: Another key data point that could help shape the Fed’s strategy is July durable goods orders, due tomorrow morning before the open. Durable goods, like housing, can serve as something of a synthetic consumer confidence indicator. When consumers feel flush, they’re more likely to buy big-ticket durable items like washers and dryers, dishwashers, and the odd refrigerator or two. The headline number surged in June, but that followed six consecutive months of tepid readings. The June boom isn’t expected to continue in July, with analysts expecting a 6% drop in durable goods orders, according to Briefing.com.

Good Trading,
JJ
@TDAJJKinahan

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