- S&P 500 finishes week back above uptrend line since December bottom
- 2-year yield finishes week higher; 3-month and 10-year lower; 3-M:10-Y yield curve still inverted
- Dollar slips lower
Since a resolution on the U.S.-Sino trade conflict remains in limbo, at least until the scheduled next round of negotiations in October, and the Fed's upcoming rate cut appears to be a given later this month, stocks will likely drift during the week ahead.
On Friday, U.S. equities scraped out a third consecutive advance, sealing a second week of robust gains after Fed Chief Jerome Powell acknowledged, during a moderated discussion in Zurich ahead of the weekend, that Fed policy will continue to sustain economic expansion in the U.S., though there was some disappointment in Friday's nonfarm payrolls release, allowing for further easing.
Yields, however, closed lower while the dollar finished the trading week well off its lows, suggesting the Fed chief's remarks did little to alter the outlook.
Supply vs Demand Out of Sync?
The S&P 500 eked out a 0.09% gain on Friday, with sector performance mixed, indicating a lukewarm reception to both the lower than anticipated payrolls release and a dovish Fed.
Private payrolls came in at a three-month low, showing weakness but not devestation. This, along with Powell cementing a view toward additional rate cuts, should have provided ammunition for bulls, but it didn’t. Though the Dow (+0.26%) closed higher on the day, the NASDAQ Composite (-0.17%) and Russell 2000 (-0.47%) both finished lower.
The true tailwind for the SPX's weekly performance was the latest development in the ongoing U.S.-China trade relations roller coaster. The S&P 500 jumped 1.79% higher, with all 11 sectors in the green. Consumer Discretionary (+2.75%) and Technology shares (+2.48%) led the gains, while Utilities (+0.37%) lagged.
Technically, we are in a quandary regarding the S&P 500 index. We've been bearish on the benchmark due to congestion below the broken uptrend line since the December bottom.
However, the price provided an upside breakout and closed above the uptrend line for a second day—including ahead of a weekend, usually a very bullish signal.The difficulty with this pattern is that it’s within an ascending triangle, presumably bullish, as buyers overtake sellers.
Still, it's typically an interruption of an uptrend, though not after a 6.8% drop, seen from late-July to early-August. Also, it developed after falling below the uptrend line.
On the other hand, an ascending triangle could operate as a bottom. However, a 6% drop after a 29% advance since late-December, when it just broke below the uptrend line, doesn’t strike us the stuff of a bottom. Our conclusion: the normal supply-demand mechanism seems to be out of sync in today’s market.
Treasury yields finished mixed. While 2-year yields rose to 1.54% after Powell suggested the Fed’s “midcycle adjustment” might indeed turn into a policy change, the yield on the 10-year note dropped to 1.56%.
Nonetheless, the 3-month finished at 1.964%, so the yield curve remains inverted.
The dollar inched lower on Friday, for a fourth straight daily loss. Even so, the USD bounced well off the day’s lows, for a second day, suggesting support toward the bottom of a rising channel since June.
Oil eked out a third daily gain, fueled by hopes on trade and a dovish Fed. However it stopped short of crossing above its downtrend line since Apr. 23, after Thursday’s shooting star, which confirmed the downtrend line’s resistance.
In other words, global slowdown fears continue to loom large. The 50 DMA and 2000 DMA have been wrestling with the trend since July.
Week Ahead
All times listed are EDT
Sunday
19:50: Japan – GDP: expected to come in at 1.3% from 1.8% YoY and 0.3% from 0.4% QoQ, bolstering the global slowdown scenario.
Monday
4:30: UK – GDP: seen to edge higher to -0.1% from -0.2% QoQ, bucking the global slowdown trend, and somewhat poignant amid the current disorderly Brexit situation.
4:30: UK – Manufacturing Production: expected to increase to -0.1% from -0.2% MoM, reinforcing the GDP’s implications.
Tuesday
10:00: U.S. – JOLTs Job Openings: expected to fall to 7,300M from 7,348M previous.
Wednesday
8:30: U.S. – PPI: forecast to edge up to 0.1% from 0.2%.
10:30: U.S. – Crude Oil Inventories: seen to jump to -2.488M from -4.771M. Still, inventory numbers have lately had negligible effect on prices since the macro environment remains dominated by U.S.-China trade.
Thursday
7:45: Eurozone – ECB Interest Rate Decision: expected to remain at 0.00%.
8:30: U.S. – Core CPI: likely to edge lower to 0.2% from 0.3%.
8:30: Eurozone – ECB President Draghi Speaks; ECB Press Conference.
Friday
8:30: U.S. – Core Retail Sales: forecast to remain flat at 0.1%; Retail Sales expected to have dropped to 0.2% from 0.7% the previous month.