The Week Ahead: Is This A Tipping Point?

Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine. My record is pretty good, with recent topics including Fedspeak, increased volatility, and a focus on interest rates – all very accurate.

Sometimes there is no clear theme, and I try to be honest about that. In the past I have described it as a "lull before the storm" and as "waiting for evidence." This week I see an absence of major new data. At the same time the markets are at a crucial point for both technicians and traders. That is the main reason for the recent volatility. I see the following key questions?

• Is this a potential tipping point for markets – both bonds and stocks?
• What is the real "new normal?"

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
2. It is better than expectations.

• The employment report beat expectations. Job gains did not run high enough to stimulate Fed Fear. The market celebrated the news, but those paying attention understand the shortcomings:
  • Gene Epstein, writing in Barron's, sees a recovery as at least a year away. That merely extrapolates the current growth rate without adjusting for changes in the work force.
  • The pace of net job gains is not fast enough (although a recent study suggests that anything over 80K cuts unemployment (via GEI).
  • Other employment indicators were not as strong. Regular readers know that I like to view the BLS as one of several sources. I am delighted to read Goldman Sachs economist Jan Hatzius says the same. See the helpful article from Cardiff Garcia.
  • The wage increases are lagging job gains (See Martin Hutchinson at Breakingviews).
• Mortgage debt is down and household net worth is higher. Calculated Risk analyzes the latest Federal Reserve Flow of Funds report. We should note, however, that the gains are skewed to the upper end of the wealth and income ranges.
• CFOs are optimistic about the U.S. economy according to the quarterly Duke survey. The Optimism Index rating of 61 is a rebound from last quarter's 55 and above the long-term average of 59. Latin American and Asian CFOs are even more positive. Despite this, spending plans are only modestly higher. There are a number of interesting findings here, so it is well worth checking out.
• The IMF recognizes excessive austerity in Europe. More economic growth in Europe would help everyone.
• Home prices show strong gains from the CoreLogic NSA series. Calculated Risk is the place to monitor the housing rebound, where Bill McBride writes as follows:

• The Hindenburg Omen is back! Look out below, since it has been confirmed. Three years ago I explained that this indicator was the poster boy for a bad research method – widely followed by those with multi-year forecasts of recessions and "worst times" to invest. A twitter friend suggested that I should also mention that some see it as an "alert" rather than a prediction. Read the explanation and see if you find it helpful. MarketWatch's "The Tell" has the right conclusion:
  "Either way, the HO this past week showed how much attention you can garner with an ominous sounding name in times of market skittishness, and generated its share of Tweets."
• China's flash PMI was below 50. The market seemed to shrug this off on Monday morning, but we should still watch Chinese economic growth carefully.
• The ISM index was 49, down from 50.7 last month. The ISM sees this as consistent with GDP growth of 2.1% based upon historical data. (We are in a trend of manufacturing lagging overall growth). Many believe that their research on this relationship needs updating.
• The sequester effects are starting to hit. The effect is probably about 0.5% in GDP (via Rick Newman at The Exchange).
• Initial jobless claims have broken the bullish trend. I know that last week's number was a little better than expectations. I also know that a really good number dropped out of the four-week moving average. Steven Hansen at Global Economic Intersection takes a deeper look. He compares the current moving average (which is everyone's top choice to reduce the noise in the series) and compares it to the prior year. Both are seasonally adjusted. See the entire article for discussion and several good charts, but here is an important one:

• The St. Louis Financial Stress Index.
• The key measures from our "Felix" ETF model.
• An updated analysis of recession probability.

1. The S&P 500 is up about 40%.
2. The unemployment rate has dropped from 9.0% to 7.6%."

• Initial jobless claims (Th). Employment will continue as the focal point in evaluating the economy, and this is the most responsive indicator.
• Michigan Sentiment (F). Sentiment is a good coincident indicator for employment and consumer activity.
• Retail Sales (Th). The consumer is still a big story.

• Industrial production (F). This remains a key factor in overall economic health.
• PPI (F). This will be important at some point, but there is no sign of inflation so far. A calendar quirk means that we will not see the PPI and CPI on consecutive days, as is most often the case.

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• Find a safer source of yield: Take what the market is giving you!

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