Six Charts That Explain This Market from the Sevens Report

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Below you’ll find six charts, spanning asset classes and economic data.

The charts are divided up into two groups.

Group 1 is comprised of four charts that explain why stocks have rallied so nicely in 2017, and why, in the near term, the trend in markets is still higher.

Group 2 is comprised of two charts that look into the future, and show that despite a bullish set up right now, there are real, serious reasons to be worried about how long this rally can last. Point being, these indicators are telling you not to be complacent!

Group 1: Why Stocks Have Rallied

Chart 1:  Economic Data 

Chart 2:  Earnings Growth  

Earnings and Economic Data – The Unsung Heroes of 2017

We have said since the early summer that an acceleration in economic data and earnings growth have been the unsung heroes of the 2017 rally.

And, as long as both of these factors continue to trend higher, that will underpin a continued rise in U.S. stocks, regardless of noise from Washington, North Korea, Russia, etc.

Chart 3:  S&P 500 

The Trend Is Your Friend

The trend in stocks has been relentlessly higher since early in 2016, and the S&P 500 has held that trend line through multiple tests.

Bottom line, the technical outlook on this market remains powerfully positive.

Chart 4:  Commodities (Oil & Copper)

There are few better indicators of global economic growth than industrial commodities, and two or the most important (oil and copper) have been telling us for months that global growth is accelerating.

And, as long as oil and copper are grinding to new highs, that will be a tailwind not just on U.S. stocks, but on global stocks as well.

Group 2:  Risks to This Rally

While the four charts above explain why stocks have rallied and why the outlook remains, broadly, positive, there are still risks to this rally and this market.

Don’t be fooled into being complacent with risk management, because while trends in U.S. and economic growth, earnings and the stock market are all still higher, there are warning signs looming on the horizon.

Chart 5:  Inflation (Warning Sign #1)

Non-Confirmation: Why Isn’t Inflation Rising?

Inflation remains inexplicably low, considering that we’re near full employment and global economic growth is accelerating.

And, accelerating inflation remains the missing piece of a true “Reflation Rally” that can carry stocks 10%, 15% or even 20% higher over the coming quarters and years.

But, it’s not just about missed opportunity.

The lack of inflation is a big “non-confirmation” signal on this whole 2017 rally, and if we do not see inflation start to rise, and soon, that will be a major warning sign for stocks, because…

Chart 6: The Yield Curve – Will It Invert?

Yield Curve: Sending a Warning Signal? 

If the outlook for stocks is so positive, then why did the yield curve (represented here by the 10’s – 2’s Treasury yield spread) equal 2017 lows on Wednesday?

Simply put, if we’re seeing accelerating economic growth, rising earnings, potential tax cuts and all these other positive market events, the yield curve should be steepening, not flattening.

So, if this 10’s – 2’s spread continues to decline, and turns negative (inverts) then that will be a sign that investors need to begin to exit the stock market, because a serious recession is looming, and the Fed won’t have much ammunition to fight it.

If I was stuck on a desert island (with an internet connection and access to my trading accounts of course) and could only have one indicator to watch to tell me when to reduce exposure in the markets, this 10’s – 2’s spread would be it – and it’s not sending positive signals for 2018!

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“Should I buy more stocks because tax cuts are coming?”

“Should I buy more stocks because tax cuts are coming?”

I was asked that question three separate times this weekend at the local pumpkin patch, while my kids were running around grabbing pumpkins.

And, honestly, it’s a legitimate question, because on Friday stocks shot to new highs on rising investor optimism for tax cuts (at least, that’s what the financial media said).

But, here’s the problem: The answer to the question is… “No.” 

In fact, tax cuts pose more of a risk to stocks than they present an opportunity.

That’s because the outlook for tax cuts didn’t improve last week. In fact, it probably got worse.

But, as usual, that’s hard to discern through all the market and financial media “noise.”

Here’s what I mean:

Stocks rallied on Friday after the Senate passed a budget resolution that, potentially, paves the way for tax cuts.

But, as I said to paid subscribers in today’s Sevens Report:

“The market rallied on the passage of the budget resolution in the Senate last week, but that’s the equivalent of cheering because your team’s bus made it to the stadium for the game.”

That analogy prompted some great response from advisor subscribers:

“Hi Tom!  I really enjoy your analogies in breaking down industry jargon…and this has to be one of my favorites, in terms of you describing the budget resolution being passed.”  – A.L. Financial Advisor in Cleveland, OH.

Point being, last week’s vote, which was the catalyst for the Friday rally, didn’t improve the chances of tax cuts passing at all – it merely removed the prospect of spectacular failure!

But, the important truth is that right now, we should be more worried about tax cuts failing and causing a correction late this year, because tax cuts are already priced into the markets (I show you why below).

More broadly, is your subscription research breaking down the daily jargon and giving you explanations and analogies that help you impress clients?

Case in point, in Monday’s issue we told subscribers that Friday’s rally was misguided, so it didn’t surprise us, or our subscribers, that markets gave back those gains on Monday.

I created the Sevens Report because I know that most financial advisors and professionals are not glued to blinking screens from 9:00 – 4:00 each day.

They are discussing the financial goals of their clients and mapping a course to reach those goals.  Most of their time is spent building and fostering relationships, not analyzing Fed commentary, studying the yield curve, or digging through an oil inventory report.

Every trading day, at 7 a.m., we email our subscribers their morning Report, which contains the information they need to show their clients they are on top of the markets with a plan to outperform, regardless of the environment. And, our research continues to help our subscribers grow their businesses!

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.” –  D.M. Registered Independent Advisor.

Anticipation of tax cuts has once again become a major contributor to the recent rally in stocks, and at these levels I can confidently say that tax cuts are now priced into the market, so there is risk of a disappointment later in 2017 or early 2018. 

Given that, I want to make sure everyone is aware of 1) Where we are in the tax cut process, 2) What major hurdles remain and 3) How much stocks could pullback if tax cuts fail.

I’ve included an excerpt of that research below as a courtesy.

Sevens Report Excerpt: Tax Cut Update

Where Are We on Taxes? Answer: Not Very Close. I want to be clear here: The market rallied on the passage of the budget resolution in the Senate last week, but that’s the equivalent of cheering because your team bus made it to the stadium for the game.

The budget resolution (which will pass the House later this week) is a necessary step to even begin to discuss tax reform. It has little-to-no bearing on whether tax cuts will actually get passed. In fact, it’s pretty disheartening that it was so close in the Senate at 51-49. This was not reason for optimism.

What major hurdles remain? Answer: SALTs. The major hurdle with tax cuts now is how does Congress pay for them? If Congress is going to cut taxes, they must offset the reduced revenue by increasing taxes elsewhere (simply reducing government spending is out of the question).

Early in 2017, the idea on how to pay for tax cuts was “BATs,” or Border Adjustment Taxes. Basically, that would put a “value-add tax” on imported goods like they have in Europe, and that would offset the corporate tax cuts (I’m over simplifying for effect, but you get the idea).

Businesses pushed back on that idea big time because most American companies buy the raw materials or manufacture their products overseas, so that would be a big tax increase for them. So, BATS died.

Now, we’ve moved in to SALTs. SALTs stands for “State and Local Taxes,” or more specifically, removing the ability for taxpayers to deduct state and local taxes against their federal income taxes.

But, as you can imagine, people in high-tax states like New York, Connecticut, Massachusetts, California, etc., don’t like this idea at all, so it has met with some serious opposition. Bottom line, Republicans need to find a compromise on SALTs otherwise the tax cuts will likely significantly add to the deficit, and they won’t have the votes to pass the Senate.

That is the No. 1 issue in the tax cut fight, and it’s a very big (and difficult) one. 

Until the SALTs issue is resolved, the outlook for tax cuts is neutral at best (despite market anticipation). And, if SALTs die the same death as BATs, then the outlook for any tax cuts is outright dire—and that’s a risk to markets.

How much stocks could pullback if tax cuts fail? Answer: At least 5%. Here’s how I get to that number. For the last two-plus years (up until the September melt up this year) the S&P 500 has traded between 17X and 17.5X next year’s earnings. But, due to the recent melt up, the S&P 500 currently trades at nearly 18.3X the 2018, $140/share S&P 500 EPS.

If we believe the market still wants to trade at about 17.5X earnings, that means the market is pricing in $147/share for the S&P 500 for 2018, or about $7 more than the consensus.

I feel confident saying that all of that $7.00 is anticipation of tax cuts, because frankly there isn’t much else that can explain it (and it makes sense because consensus is for an additional $4-$10 dollars in S&P 500 EPS if substantial tax cuts are passed).

Point being, if the outlook for tax cuts dims between now and year end (and this is entirely possible despite current optimism) then we could easily see the S&P 500 drop to that $140 2018 S&P 500 EPS times 17.5 (the long-standing market multiple), and that equals 2450, or 110 points (about 5%) lower from current levels—and that’s assuming no additional negative surprises.

Bottom line, at this point, I feel safe saying that corporate tax cuts are at least partially priced into the market, and that’s important given the neutral outlook for tax cuts.

The post “Should I buy more stocks because tax cuts are coming?” appeared first on Sevens Report.

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Dow Theory Update, October 17, 2017

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Charles Dow’s famous (but simple) theory for stock market investing is based on a series of higher highs and higher lows registered by both the Dow Jones Industrial Average and Dow Jones Transportation Average, indicating bull market conditions. On the contrary, as soon as a set of lower lows and lower highs have been registered by both of the aforementioned indexes, the theory indicates bear-market conditions are likely.

Over time, investors have applied the tenets of Dow Theory to a wide range of time frames from intraday
charts to monthly bar charts. The success rate, number of trades, and maximum drawdowns vary from time frame to time frame, but for now, it doesn’t matter whether you are looking at a 15-minute chart or a
monthly chart; Dow Theory is bullish.

Starting with the industrials, the index just made new highs yesterday, and most recently made “higher lows” back in late September (on a faster time frame). That leaves a cushion of almost 1000 points in the Dow before the “faster” Dow Theory practitioners begin sounding the bearish alarm.

The Dow Transports, on the other hand, have been trading a little heavier over the last few sessions, but most recently made new highs last Friday. And while the Transports could very well break down further (as momentum has been decidedly bearish near term (over the last two sessions), but the recent new high leaves a still-bullish signal in the lesser-followed index.

Bottom line, a potential breakdown in the Transports in the weeks or months ahead would be notable, but because of the recent moves to new highs in both Transports and the Industrials, and the clear upside momentum still in the Industrials, the oldest technical theory on the financial markets continues to suggest the path of least resistance is higher—and that stock investors should continue to hold long positions.

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Weekly Market Preview, October 16, 2017

CPI Preview, October 13, 2017

Reflation Pause- Part 2, October 11, 2017

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Reflation Update Part 2—Why This Reflation Is Different

In Wednesday’s Report, we covered why the reflation trade that started again in early September has taken a pause, and the reasons are twofold.

First, the market is unclear about who the next Fed chair will be. If it’s Kevin Warsh, that will be a “hawkish” surprise and rates could rise too quickly to keep this reflation “virtuous.”

Second, it’s unclear if upcoming central bank meetings, which means primarily the ECB but secondarily the Bank of England, will be Goldilocks. If either bank is more hawkish than the market expects it could send global rates sharply higher, causing a
pullback in the broad market.

Conversely, if either bank expresses doubts about growth or inflation, it could undercut the whole reflation idea that’s propelled stocks higher.

Point being, there are some key events that need to be resolved before the reflation trade can move higher. And, frankly, that makes this 2017 version of the reflation trade unique compared to previous economic reflations, most recently from ‘03-’06.

For simplicity, the easiest analogy to describe a normal reflation trade is a beach ball. When a recession occurs, the beach ball (the economy) deflates. But, low interest rates and government stimulus act as an air pump, and eventually the beach ball (economy) reflates.

Accelerating economic growth and rising inflation (due to easy money) are the “air” that inflates our economic beach ball. From a market standpoint, economic reflations are usually wonderful things. Markets go up in concert, and the way to outperform is to add beta and be exposed to cyclical, growth-oriented sectors. During a normal reflation (the last one was in ’03-’06) everything goes up regardless of what else is going on in the world.

However, this reflation is different.

Eight years after the end of the financial crisis, our economic beach ball is only half full. That’s because we’ve pumped in the “air” of accelerating economic growth (GDP going from negative to 2.5%ish) but we haven’t pumped any “air” of inflation in, yet.

Despite that, stocks are at all-time highs. Valuations are as stretched as any of us have seen them in decades. And, now we’re very late in the typical economic cycle.

Given that, barring some big surprise on tax cuts or infrastructure spending, it’s unlikely that we’re going to see a material acceleration of economic growth. In reality, 3.5% – 4% GDP growth is quasi impossible given demographics in this country—specifically the large demographic of baby boomers entering retirement, and them being replaced by a smaller workforce.

Getting back to our beach ball analogy, if inflation finally accelerates there will be a shorter time of euphoria—as the other half of our beach ball inflates. We got a hint of that in September.

But given valuations, stock prices and economic growth all are at or nearing reasonable ceilings, the risk is that after a short bit, the “air” from rising inflation over inflates our economic beach ball, and a bubble (or multiple bubbles) develop and we burst the ball. Practically, what I’m talking about is the Fed hiking rates and inverting the yield curve, which would be our signal that the beginning of the end of this eight-year expansion is now upon us.

From an advisor or investor standpoint, this creates a difficult set up. For now, we must continue to be invested and, potentially, allocate to the reflation sectors. Yet we also must do so knowing that unlike most revelations, we’re not going to enjoy an easy rally that lasts years.

So, the now years-long game of market musical chairs continues, albeit with a potentially reflation accelerating the pace of the music. For shorter or more tactical investors, holding “Reflation Basket” allocations makes sense as we approach and navigate these upcoming events.

For longer-term investors, we continue to await confirmation from the 10-year yield that this reflation truly is upon us. A few closes above the 2.40% level will be the signal, in our opinion, to rotate out of defensive names and into part or all of our Reflation Basket—Banks (KRE/KBE/EUFN), industrials (XLI), small caps (IWM) and inverse bond funds (TBT/TBF).

Bottom line, at this point in the economic cycle, for stocks to move materially higher we need inflation to accelerate and cause that reflation trade, but weneed to realize that brings us one step closer to the ultimate “bursting” of the recovery. This market remains more dangerous over the medium/longer term than the low VIX would imply.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

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Reflation Pause, October 20, 2017

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Why Is the Reflation Rebound Pausing? Because It Should. Here’s Why…

After surging basically from Sept. 11 through Friday’s jobs report, the reflation rebound has taken a pause for the last few days, and I wanted to provide a comprehensive update of:

1) Where we are in the reflation process and specifically the key catalysts that are looming in the near future and that are causing this pause, and

2) Explain why this reflation trade is different from others, and requires A) A more tactical allocation to get the outperformance we all want, and B) Greater patience on the part of longer-term investors before abandoning what’s worked so well in 2017 and allocating to more reflation-oriented sectors.

Due to space constraints, I’m going to break this up into two parts covered today and tomorrow.

Reflation Update Part 1: Where Are We, and What Will Decide Whether It’s Going to Continue?

We’ve been saying since the July Fed meeting that inflation was now the most important economic statistic, and that markets needed inflation to start to rise to help fuel a “reflation rebound.”

Well, during the week between Sept. 11 and Sept. 15, Chinese, British and US CPIs beat expectations, and combined with an uptick in global economic activity, caused tactical investors to rotate into tactical sectors (banks, energy, industrials, small caps, inverse bond funds).

And, we were early on identifying that switch, and our “Reflation Basket” has outperformed the markets since we re-iterated it for short- and medium-term investors in the Sept. 21 Report.

However, also in that Report we cautioned longer-term and less-agile investors to wait for clear confirmation that the reflation rebound had started, and we identified two keys. The first was the KBW Bank Index closing above 100. This occurred both Monday and Tuesday. The second was the 10-year yield breaking above 2.40%.This has yet to happened.

So, while much of the mainstream financial press is now pumping the reflation trade (a month after it started) we’re acknowledging that it’s paused. Practically, that means we’re holding (not adding to) our “Reflation Basket” of KRE/KBE/IWM/EUFN/XLI/TBT/TBF, and think shorter-term/tactical investors should too.

I say that because I believe the first stage of this reflation trade is now complete, and in the next three weeks we will see two key events that will decide whether this reflation extends into November, pauses longer or potentially back tracks.

Near-Term Reflation Catalyst #1: ECB Meeting. Thursday, Oct. 26. Why it’s Important: As we’ve covered, markets have enjoyed a “virtuous” reflation recently because 1) Economic data has been good, but 2) Not so good that it’s causing global central banks to hike rates faster than expected.

Markets have a general expectation of what ECB tapering of QE will look like (somewhere around 20B per month) but we’ll get the details at this October ECB meeting.

If the ECB is more hawkish than expected, that could potentially send yields too high, too fast, and kill the
“virtuous” reflation. If that happened, banks and inverse bond ETFs would rally, but everything else would fall.

Conversely, if the ECB is too dovish, then markets might lose confidence in the reflation itself, and that would become a headwind.

Bottom line, the ECB needs to release a taper schedule that implies confidence in the economy and inflation, but that also isn’t so aggressive it kills the “virtuous” reflation rally.

Near-Term Reflation Catalyst #2: Fed Chair Decision.
The fact that President Trump will name a potentially new Fed chair in the next two weeks has been somewhat lost amidst the never-ending (and seemingly everescalating) Washington drama.

Right now, it’s widely believed there are three front runners: Kevin Warsh, Jerome Powell and Janet Yellen.

If Yellen is reappointed (and that’s seeming increasingly unlikely) then clearly that won’t cause any ripples in the reflation trade, and we can go back to watching inflation and yields. However, if one of the other two are appointed, things get interesting.

Warsh is considered the biggest “hawk” of the group,and if he becomes Fed chair we may see yields rise sharply, potentially endangering the “virtuous” reflation.

Powell is viewed as in the middle of the other two—not as dovish as Yellen, but not as hawkish as Warsh. But, it’s reasonable to assume that a Powell appointment would put at least some mild upward pressure on Treasury yields. It likely wouldn’t be enough to spur a killing of the “virtuous” reflation, but it would be cause for a pause in the move.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

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Macro Drama Playbook, October 10, 2017

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Macroeconomic Drama Rundown (It’s Not That Bad, Yet)

Over the past week, the macro environment has suddenly become populated with multiple headline grabbing (and seemingly dire) macroeconomic dramas, and I imagine you might be getting calls about these dramas from clients.

So I want to: 1) Cover each drama, 2) Explain why it’s not materially important to the market yet (despite the headlines) and 3) Identify what has to happen for these events to cause a pullback. I’ve covered each event in order of their respective potential importance to the markets.

Drama 1: North Korea
What’s Happened? More communication, some official, some not. Secretary of State Tillerson is apparently in direct talks with the North Koreans on some sort of deescalation. However, that comes as President Trump tweets vague threats implying the only option is military. It’s unclear if this is some geopolitical game of “Good Cop/Bad Cop,” or just an administration that’s not on the same page (the answer likely depends on which papers you prefer reading), but the point is that on the surface, rhetoric remains unnerving (at least the public rhetoric).

What’s Next? North Korea is expected to test another long-range missile sometime between Oct. 10 and Oct. 22.

Bearish Game Changer If: This has remained consistent: Talk is just talk and it won’t cause anything other than a brief pullback. But, this geopolitical drama becomes a reason to de-risk if North Korea shoots the missile at anything US, including planes, ships and Guam. At that point, the potential for a US military strike on North Korea goes up considerably, and we would advise getting more defensive in nature (i.e. buying Treasuries or going to cash).

Drama 2: Iran Nuclear Deal

What’s Happened? President Trump is expected to decertify the Iran deal on Oct. 12 (Thursday). This is important, because once President Trump announces that he believes Iran is not in compliance with the deal, a 60-day clock starts ticking. Over those 60 days, Congress must decide whether to reimpose sanctions on Iran (it’s not President Trump’s decision).

What’s Next? Thursday’s official announcement on the Iran deal (it’s not a sure thing that Trump will decertify the deal, so there’s some drama here).

Bearish Headwind If: Congress decides to reimpose sanctions on Iran, causing a total collapse of the
international agreement. This outcome would not, by itself, constitute a reason to materially de-risk (i.e. sell stocks). I say that because stocks rallied for years while there was no agreement in place. However, taken in the context of the North Korea nuclear program, Iran/Russia ties, etc., this entire situation would get potentially much more complicated and dangerous, as markets will take notice and it would be a headwind (but not enough to cause a material pullback).

Drama 3: Catalan Independence

What’s Happened? On Oct. 1, Catalonia (a region of Spain where Barcelona is located) held a referendum on independence from Spain. That referendum passed with 90% of the vote choosing independence. However, less than 50% of the population voted, so that’s more impressive than it seems (meaning the majority of Catalans didn’t vote for independence). The proper analogy to understand this situation is to think of this like a US state having a vote to try and se- cede from the nation. States can’t just vote to leave the US, and neither can Catalonia vote to leave Spain. The vote was illegal and meaningless, outside of the fact that it has stirred up a Spanish political hornet’s nest.

What’s Next? The President of Catalonia will speak on the matter tomorrow night, and will either declare independence (legally it will mean nothing) or will vow to negotiate with the Spanish government on enacting some changes to make the Catalan people happy.

Bearish Headwind If: This one has been a bit exacerbated by the press. First of all, Catalonia has wanted to secede from Spain pretty much since it was conquered by Spain in the 1700s. Catalan culture is different from Spain (they speak Catalan, which is different than Spanish) and the people always have considered themselves different from the rest of Spain. So, it’s not shocking they held the vote.

Second, this is as much a money issue as a cultural one (surprise!). Catalonia is wealthy compared to the rest of Spain. And, the Catalan people perceive (somewhat correctly) that they subsidize the rest of Spain, and they are tired of it (years of recession will do that).

At this point, there are three ways it can go:

The “Good” scenario is that the Catalan government and Spanish government negotiate this out (this is the likely outcome). The “Bad” scenario is the Catalan government declares independence and the Spanish government fires the entire Catalan government and assumes control of municipal services and holds a new election. The “Ugly” scenario is the Spanish government declares martial law and occupies Catalonia (this is very unlikely).

But, even if the “Ugly” scenario come to pass, this is still mostly a local problem. For it to become a bearish game-changer for European ETFs and US stocks, we’d need to see Catalonia achieve independence, and spur an independence movement across Europe. ZeroHedge is warning of this, but in reality, it’s very, very unlikely.

This drama is not something keeping me up at night.

Drama 4: Turkish Diplomatic Drama

What’s Happened? The US has stopped issuing all non-immigrant visas in Turkey, and the Turkish government retaliated and is doing the same. This conflict is just the latest drama surrounding Muslim cleric Fethullah Gulen.

Over the weekend, the Turkish government arrested a Turkish US embassy worker the government believes is linked to Gulen. The Turkish government blames Gulen for the failed 2016 coup, and this is a problem, because Gulen currently lives in Pennsylvania and the US won’t hand him over.

What’s Next? Diplomats are working through it, and it’s unlikely to metastasize into a bigger problem.

Bearish Headwind If: The US and Turkey suspend all diplomatic ties (which is very, very unlikely).

Bottom Line
Absent the North Korea flare up that began in August, 2017 has been largely devoid of any international dramas, which is a departure from most of the current decade. Yet clearly there has been an uptick in geopolitical uncertainty over the past few weeks.

However, while the financial media is quick to cover the worst-case scenarios from these events, the facts tell us that none of them, at this point, represent a reason to alter positioning or to de-risk. More importantly, tax cuts remain the key political and geopolitical event to focus on during Q4. That can obvi-ously change, but so far none of these dramas are nearly as important to stocks as whether we get tax cuts. And, if that changes, we will tell you first thing.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

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Weekly Market Preview, October 9, 2017

ECB Minutes Analysis, October 6, 2017

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There were no real surprises in the minutes of the September ECB meeting, but nonetheless the minutes caused a modestly decline in the euro, which fell 0.4% following their release.

The reason for the decline was the discussion of euro strength, and the risk it poses to the EU economy. Remember, one of the reasons the euro accelerated so much in August was because ECB President Draghi refused to take multiple opportunities to comment on euro strength, and the market took those omissions as tacit endorsements of the stronger euro.

But, yesterday’s minutes told us the ECB has indeed noticed the 12% rise in the euro vs. the dollar, and if the euro stays strong it may impact its upcoming tapering decision, due on Oct. 26.

To be clear, the stronger euro won’t delay that tapering decision, but it could make the reduction in QE more gradual. And that matters, because with the euro at 1.17 vs. the dollar, a very gradual tapering is not priced in, and that represents downside risk in the euro—perhaps into the low 1.10- 1.15 range depending on taper details.

That also matters for US stocks, because if the euro falls, the dollar will rise, and a stronger dollar will, at some point, become a headwind on stocks if we don’t see continued acceleration in inflation or economic data.

Bottom line, the ECB meeting is a real risk to our “Virtuous Reflation,” because if they are dovish and cause a dollar rally, that may indeed hit stocks. That’s not necessarily a problem until later in the month, but I do want everyone to be aware of it.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

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Jobs Report Preview, October 5, 2017

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Hurricanes Irma and Harvey have sapped some of the importance from tomorrow’s jobs report because it’s likely going to be temporarily distorted lower than it should otherwise be. Case in point, the expectation is for 100k job adds when it should normally be about double that. So, it’s likely we’ll get a soft number and it’ll be dismissed by the markets.

But, it’s not clear what impact the storms will have on the wage component (theoretically it shouldn’t be much). Regardless, the practical effect is that is we see a soft number tomorrow (jobs and wages) it will be handed a relative pass given the storms.

That said, the jobs report still remains very important from a “reflation rally” standpoint. This week, the Manufacturing and Non-Manufacturing PMIs and auto sales have all helped to push stocks slightly higher,
despite the market’s clear preference to see some profit taking in the reflation sectors. If tomorrow’s jobs
report is “Just Right” and the wage number is firm, that will add fuel to the “reflation rally.”

From a practical standpoint, I’ll be adding about 75k jobs to whatever the number is on Friday to account for one-time, Hurricane Harvey/Irma-related declines.

“Too Hot” Scenario (A December Rate Hike Becomes 100% Certain, Risk Increases for More than Three Hikes in 2018)

>200k Job Adds, < 4.1% Unemployment, > 2.8% YOY wage increase. A number this hot will reinforce that an economic reflation is in deed underway, and it’ll likely make the Fed marginally more hawkish. Likely Market Reaction: This would not result in a “Virtuous Reflation.”…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Just Right” Scenario (Leaves a December Rate Hike Likely But Not Certain)

• 50k–200k Job Adds, > 4.2% Unemployment Rate, 2.5%-2.8% YOY wage increase. This gap is really wide because of the hurricanes, but the best scenario for stocks would be a print at the upper end of this range. Likely Market Reaction: A continued “Virtuous” reflation…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Too Cold” Scenario (Economic Growth Potentially Stalling)
< 50k Job Adds, < 2.5% YOY Wage Gains. Again, this number is artificially low because of the hurricanes, but if we see a big disappointment in the jobs number and a further softening of wage inflation that will send bond yields lower, but it would also likely weigh on stocks as it will raise concerns about economic growth. Likely Market Reaction: Bonds and gold should…withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

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The Odd Central Bank Out, October 4, 2017

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Over the past month, we’ve seen some big policy turns at major central banks.

• At its September meeting, the Fed shrugged off low inflation and reiterated its expectation for a rate hike in December, and three hikes in 2017, a more hawkish-than-expected outcome.

• At its September meeting, the Bank of England shocked markets by stating that due to rising growth and inflation, rate hikes would likely be needed in the “relatively near term.” While it’s not certain, many in the markets think the Fed hikes rates in November.

• At its September meeting, the ECB confirmed it will announce details for the “tapering” of its QE pro-
gram, the first step to eventual rate hikes (likely in 2H ’18).

• The Bank of Canada quasi-shocked markets by hiking rates at its July and September meetings, becoming the first developed market central bank to execute consecutive rate hikes in over a decade.

• The Bank of Japan, at its recent meeting, reiterated its dovish stance and the BOJ’s Kuroda even hinted
that the bank may need to become more dovish for the Japanese economy to finally hit its 2% inflation
target.

So, which one doesn’t belong?

The BOJ is the “odd central bank out” in the global trend of less accommodation. I think that creates a potential opportunity in DXJ, the WisdomTree Japan Hedged Equity ETF. The logic behind this opportunity is simple: With global central banks become less accommodative, the yen should decline in value against its major trading partners.

On a basic level, a weakened currency and supportive central bank are still good for stock market performance.

So, if we see the yen weaken to 120 vs. the dollar and see similar declines against the euro and pound, that should be a respective tailwind on the Japanese stock market—just like it has been in the past.

Now, clearly there are risks to this trade, particularly North Korea. But barring a surprise economic or inflation slow-down in Britain, the EU or the US, the trend in rates and those currencies is higher vs. the yen. That should be positive for Japanese stocks over the medium and longer term.

Now, I realize that DXJ has run over the past month (as has everything), but the bottom line is that if dollar/yen goes from 112 to 120 (which is entirely possible if we see a “reflation” in the US) then DXJ will move substantially higher from here.

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Should We Buy Value to Get Growth?, October 3, 2017

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At the start of 2017, I incorrectly expected growth sectors of the market to outperform, as I anticipated inflation and economic data to steadily improve as the Fed continued to hike rates.

The latter expectation (Fed rate hikes) has been met, but the former two, until now, have not, as the dip in inflation and growth caused a drop in bond yields and resulted in the outperformance of defensive sectors (not growth/cyclical sectors) so far in 2017.

But things appear to be changing, and while past performance is no guarantee of future results, if we are on the cusp of a “reflationary” rally, then history suggests buying “value” funds will be the way to outperform into year-end.

On the surface, though, this doesn’t make sense. If we are going to see a reflation, won’t “growth” styles naturally outperform given the acceleration in inflation/economic activity?

The answer is “yes,” but here’s the rub: Growth-oriented sectors like banks and energy have massively underperformed this year and are now heavily owned by most value-styled ETFs. Meanwhile, growth-styled ETFs are heavily overweight tech, and stand to underperform in a reflation, just like they did in 2016.

The key here lies in the fund’s sector allocations.

My favorite “growth sector” ETF is actually the iShares S&P 500 Value ETF (IVE), which is allocated as follows: 28% financials, 12% healthcare, 11% energy. So, 40% of the ETF is weighed to sectors (financials and energy) that will surge in a reflationary rally. Conversely, utilities are just 6%, tech is 7% and consumer staples are weighted at 11%.

Up until September, this weighting has caused IVE to lag the S&P 500, but IVE rallied 2.7% in September, more than doubling the S&P 500. Looking further back, in the pro-growth, post-election rally between Nov. 8 and year-end 2016, IVE surged 17% compared to just 9% for the S&P 500.

Point being, lackluster inflation and economic readings in 2017 have created a scenario where outperforming sectors are predominantly “defensive” sectors. But, this big rally has caused these sectors (utilities, staples, super-cap tech) to be significantly underweighted in some value ETFs and mutual funds—and that creates this weird  set up where getting exposure to growth sectors that can outperform in an economic reflation means buying “value” ETFs and mutual funds due to their recent underperformance.

So, as we start the fourth quarter, if you’re reviewing client exposure, don’t forget that “value” funds, if we see a confirmed economic reflation, will provide the exposure to growth sectors we need to outperform.

Food for thought.

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Weekly Market Preview, October 2, 2017

Virtuous vs. Non-Virtuous Reflation Trades

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Can the economic data support a continued bullish “reflation” trade in the markets? So far, the events of this week (strong Durable Goods, “progress” on pro-growth tax reform) have supported that idea, and that’s why the S&P 500 is sitting at fresh all-time highs.

But, the next seven days will present both risks and opportunities for the reflation trade to accelerate, or falter.

In yesterday’s issue, I referenced a “virtuous” reflation trade—one that is positive for the broad stock market and especially positive for our reflation basket.

In this scenario, 1) Inflation firms and gradually accelerates, 2) Growth accelerates modestly, 3) Central banks gradually raise rates but not at a pace that unnerves the stock market or sends yields too high, to quickly.

That’s what we’ve seen from the data starting almost three weeks ago with the Chinese inflation numbers
(followed by firm British CPI and US CPI). That’s why stocks have rallied, and it’s why our reflation basket has outperformed.

Conversely, there is a “non-virtuous” reflation we need to be aware of. In this scenario, growth and inflation accelerate too quickly, and markets begin to price in a more hawkish Fed, ECB and BOE.

In this scenario, while banks and other ETFs listed in our reflation basket would either outperform on an
absolute basis and/or on a relative basis, the rest of the market might not fare as well (particularly tech).

This is what we saw in June, where the declines in tech weighed so much on the market that it began to “suck in” other, more cyclical sectors. This is the negative side of reflation we need to watch for in the weeks ahead.

Bottom line, the market now again nearing a tipping point, and the data today and next week will go a long way to telling us 1) Whether we’re seeing a legitimate reflation, and 2) Whether it’s virtuous (bullish).

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Reflation On? Why the Durable Goods Number Was Important, September 28, 2017

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Durable Goods
• August Durable Goods rose 1.7% vs. (E) 1.5%.

Takeaway
Wednesday’s Durable Goods report was a surprisingly strong number, and if it’s the start of a trend in the data, then we could finally be seeing an economic reflation.

The reason the Durable Goods number was so strong wasn’t because of the headline (it was a mild beat, but revisions largely offset it), but instead because of the key New Orders for Non-Defense Capital Goods ex-Aircraft (NDCGXA). NDCGXA surged 0.9% vs. (E) 0.3%, and the July number was revised sharply higher to 1.1% from 0.4%, signaling that business spending and investment accelerated during the summer.

That’s a legitimately positive surprise, as business spending and investment have been lackluster so far in 2017.

But if we see that activity pick up (and importantly close the gap between actual data and survey data), then that will help push broad economic growth higher. And if inflation keeps accelerating, then we’ve got a legitimate reflation.

Stocks reacted accordingly to this surprisingly good data, as the market rallied (growth is good) and was led higher by our “reflation basket” of banks (KRE), industrials, smalls caps, and inverse bond ETFs. That carried through to other assets, as bond yields surged on the news to new multi-week highs while the dollar also broke above 93.00.

Bottom line, this was a legitimately positive surprise for markets, and stocks and the dollar/bonds reacted accordingly. However, one number does not make a trend, so we’ll need to see continued acceleration in other data (industrial production) before we can confidently say the gap between very strong, “soft” survey data and actual, hard economic numbers is closing in a bullish way. Still, yesterday’s number was definitely a good start.

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Tax Cut Preview, September 27, 2017

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Today we should see the next  step in the tax cut drama, as Republicans unveil a more detailed tax cut plan. But while some of the headlines around this are sure to seem “pro-growth” and positive, it’s important to realize that almost nothing announced today will actually make it into any legislation (and it doesn’t remove the chances nothing gets done at all).

Still, tax cuts are the most credible and legitimate “bullish” or “bearish” wildcard remaining for the markers in 2017.

From a bullish standpoint, real tax cuts could easily push the S&P 500 up another 4% (to 2610) because that will increase expected 2018 EPS to (conservatively) $145/share.

From a bearish standpoint, while tax cuts aren’t fully priced into stocks, there is the expectation something does get done, especially regarding foreign profit repatriation. If tax cuts, like healthcare, fail, then we’re now sitting with a market at 18X next year’s earnings—and no identifiable future growth catalyst (and a Fed raising rates). That will cause investors to reduce exposure.

Regarding today’s announcement, here’s what’s (generally) expected:
1. Corporate rate cut to 20% from the current 35%.
2. 10% tax on foreign profits (this is the foreign profit repatriation piece).
3. Individual top rates cut to 35% from 39.5%.
4. “Pass through” rate cut to 25% from 39.5%.

Again, little (if any) of this will make into final legislation.

But, it’s the starting point for negotiations to a potential deal.

Bigger picture, the expectations for tax cuts (what makes them bullish of bearish) won’t change regardless of today’s details.

To review, from a corporate rate standpoint…

What’s Expected: Corporate rate cut to around 28%.

Likely market reaction: Mildly positive.

Bullish If: Corporate rate cut below 25%. Likely market reaction: Reflation basket outperforms.

Bearish If: Corporate rate doesn’t change. Likely market reaction: Modest Decline, but not a bearish game changer.

Foreign Profit Repatriation Holiday: Expected to pass.

Likely market reaction: (Withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Wildcard to Watch: I was actually surprised and encouraged to see that a “pass through” rate cut is in this proposal. This is very important to small businesses (like mine). Approximately 95% of American businesses are “pass through” (LLCs, S Corps, etc.) where the business owner is taxed at the individual rate. So, in many ways that makes corporate tax cuts just important for large corporations and shareholders.

A cut to the pass through rate lowers taxes for small business, and that could be a potentially significant (and unexpected) positive for the economy, if any of this actually gets passed into law (and that remains very much in doubt).

Bottom line, don’t let positive (or negative) headlines fool you today. The tax cut fight has only just begun, but how it works out will have potentially significant consequences for the economy. We will remain on top of it for you throughout the process.

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North Korea Update, September 26, 2017

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Starting at last week’s UN General Assembly, the war of words between US and North Korean leaders has been steadily escalating, but things got even more serious yesterday for two reasons.

First, the North Korean foreign minister said Trump had “declared war” on North Korea with his tweets.

Second, the same foreign minister said North Korea reserves the right to shoot down US bombers, even if they are not in North Korean airspace.

This is no doubt in retaliation to the US flying bombers very close to North Korea in a recent show of
force.

Of the two statements, the later is much more important than the former for this simple reason: The
war of words can escalate, but the event that makes North Korea a bearish game changer for stocks would be the firing (but not necessarily striking) of a missile or rocket at anything US, including planes or Guam.

The North Korean threat to fire a missile at US war planes operating outside of North Korean airspace ups
the ante and creates another opportunity for a potential incident.

From a market standpoint, despite the uptick in tension, and despite yesterday’s mid-day dip, I don’t think the North Korean threat is going to cause a pullback, at least not in its current situation. Taxes (will we get cuts?), rates (will they rise?), inflation (will it gain momentum?), the dollar (will it appreciate?) all are much more important in the near term for stocks than North Korea.

But, that said, clearly this is something that can still move markets and dominate the headlines, so we’ll continue to watch it for you and look for signs of it legitimately becoming a bearish game changer for stocks.

For now, and until North Korea shoots at something US, the situation remains more bluster than bearish (although it still makes me uncomfortable).

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Weekly Market Preview, September 25, 2017

When Will Rate Hikes Kill The Rally?

Is It Time to Buy Our Reflation Basket, September 21, 2017

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Trading Color and Bottom Line: Is It Time To Allocate to Our “Reflation Basket”?

There’s a simple question that we need to address following the Fed’s hawkishly interpreted announcement: “Is it now time to rotate out of defensives (super-cap internet, healthcare, utilities, staples) and into cyclicals/reflationary sectors?”

I bring this up for two reasons.

First, getting this rotation right was the key to outperforming in 2016, and I don’t think it will be different this year. Second, there are growing signs that it may be time to make this tactical rotation.

Looking at the sector trading yesterday, it was a classic “reflation rotation.” Tech, utilities and consumer staples (sectors that have outperformed YTD) all lagged the market while cyclical sectors (which have badly underperformed) rose. Meanwhile, banks surged 1.1%, energy rose 0.35% and industrials gained 0.73%, while consumer discretionary rallied 0.34%. Additionally, small caps (which have been laggards YTD but are playing catch up in a hurry), rose 0.35% and the Russell 2000 was again the best-performing major index.

So, to answer the question of whether we need to begin to rotate into these cyclical sectors, I believe the answer depends on your time frame.

For medium- and longer-term investors, I continue to believe the answer is “no,” or at least “not yet.”
However, for short term oriented, tactical traders/investors, legging into some reflation/cyclical sectors at
these levels could make sense.

For medium and longer term investors/advisors, I’m looking for two key indicators to tell me when to rotate
into cyclicals.

First, I want to see the bank index ($BKX) hit a new high for the year. That means trading above $99.77, and closing above $99.33 (so call it 100 to make it easy).

Second, I want to see 10-year yields close above 2.40% (currently 2.28%).

If those two signals are elected, then for medium- and longer-term advisors/investors, I would advocate booking (large) profits in healthcare (XLV/IHF/IBB), super-cap internet (FDN), consumer staples (XLP) and utilities (XLU).

And, I would advocate allocating those dollars to our “Reflation Basket” we introduced earlier this summer: KRE/KBE (bank exposure), XLI (global industrials), IWM (small caps), TBT/TBF (short bonds). Additionally, I view yesterday’s price action as position for European financials and EUFN specifically.

Again, for those investors who are nimble and can stand some pain, establishing positions now does make some sense. But, for the remainder (again medium– and longer-term investors) I’d wait until those two indicators (BKX and 10-year yield) have been elected.

Regardless, we are witnessing a potential sea change in the outlook for central bank policy, and that’s going to require more vigilance on the part of advisors and investors.

If the global rate-hike cycle is now underway, then the proverbial hour glass just got flipped and the sand is now running out on the eight-year bull market (more on that in tomorrow’s issue).

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Import and Export Price Analysis, September 20, 2017

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Import and Export Prices
• Import Prices rose 0.6% vs. (E) 0.4% in August
• Export Prices rose 0.6% vs. (E) 0.2% in August

Takeaway
A normally overlooked price report, Import and Export Prices came out yesterday and the release is worth mentioning. The headlines showed a decent upside beat in both import and export prices, which underscored the uptick in inflation we saw last week in several overseas CPI reports including China, Britain and India.

The reason this is worth pointing out is the bond market. Over the last several weeks, firming inflation overseas has become a recurring theme that has started to influence global fixed income markets, including Treasuries, pushing yields higher despite the fact that US inflation still remains very low.

Bottom line, yesterday’s Import and Export Prices report is showing the effects of both a weaker dollar, but also the fact that global inflation is beginning to edge higher.

From a macroeconomic standpoint that is encouraging for the reflation trade argument.

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FOMC Preview, September 19, 2017

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On the surface, tomorrow’s FOMC meeting is expected to be relatively anti-climactic. The Fed is expected to go forward with balance sheet reduction while keeping interest rates unchanged. But, this is a meeting where the Fed will produce updated “dots,” and combined with the fact that the market is very complacent with regards to a December rate hike (i.e. the market doesn’t expect it) there is the chance for a hawkish surprise.

From a practical standpoint, the key here is how the 10- year yield reacts. If the Fed is marginally (or outright)  hawkish and the 10-year yield pushes through short-term resistance at 2.27% and longer-term resistance at 2.40%, that could be a tactical game changer and warrant profit taking in defensive sectors, and rotation to more cyclical sectors.

Hawkish If: The Fed provides a (very) mildly hawkish surprise if the “dots” show one more rate hike in 2017 (so unchanged from June). Specifically, in June four Fed votes expected just two rate hikes in 2017. If that number decreases to three or two, it will be a mild hawkish surprise. The Fed will provide a more serious hawkish surprise if the dots show another rate hike in ’17 and an additional rate hike in 2018 (so the median dots staying at 1.375% for ’17 and rising to 2.375% from the current 2.125% in ’18).

Likely Market Reaction. Stocks: If it’s a mildly hawkish surprise, then it should…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Meets Expectations If: There are no changes. The median dots still signal a December rate hike is expected, but one or two Fed officials change their dot to reflect just two rate hikes in 2017. That would imply a December rate hike is far from certain (matching the market’s current expectation) and it would be taken as mildly dovish.

Likely Market Reaction. Stocks: Cyclicals and bank stocks would likely see some…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Dovish If: The dots show that more than four Fed voters switch their dot to reflect no rate hike in December. That would effectively put a December rate hike off the table.

Likely Market Reaction. Stocks: A decidedly week (on a sector level). Stocks would likely rally in an
algo-driven…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Wildcard to Watch: Balance sheet reduction. Everyone expects the Fed to commence balance sheet reduction tomorrow, but they haven’t ever explicitly said they will reduce the balance sheet in September. So, there is a slim chance they might not, and that they might opt to wait for the next meeting (in November). This is a remote chance, as the Fed has clearly telegraphed the balance sheet will be reduced in September, but it’s possible for a last-minute change.

Likely Market Reaction: Very dovish…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

In all likelihood, this Fed meeting should meet expectations, but that will leave the market at risk to a potential hawkish surprise later as investors are not pricing in a December rate hike despite the Fed signaling it all year.

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Weekly Market Preview, September 18, 2017

Is an Economic Reflation Finally Starting, September 15, 2017

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Assuming that North Korea is another temporary headwind on stocks (and again it will be temporary as long as they don’t shoot a missile at Guam), then the bigger story of the week is the outperformance of the cyclical sectors and the underperformance of YTD sector outperformers (super-cap internet, utilities, etc.).

I continue to believe that if we are going to see the stock market extend this 2017 rally, it will have to be driven by the expectation of an economic reflation. And, after months of lack luster inflation data, this week provided some hope for that cause. Now, today’s growth data needs to be better than expected to complete the week.

But, even then, one month does not make a trend—so I’m not saying abandon utilities, healthcare and super cap internet for banks and small caps. All I’m saying is that we need to be prepared to make a switch, if we get the compelling signals in the near future.

Regardless, the upcoming economic data (especially the Core PCE Price Index at the end of the month) just got a lot more important.

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CPI Preview, September 14, 2017

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I normally don’t do CPI previews (sometimes if it’s a non-event number, I won’t even bother you with a CPI review), but this number is different for two reasons.

First, the fledgling hopes of an economic reflation have pushed stocks to new highs. Second, if this CPI report does meet or beat estimates, then it might continue the sector rotation that has seen cyclical sectors (banks in particular) outperform this week at the expense of YTD outperformers such as utilities, healthcare and super-cap internet. So, it will raise the question of whether a tactical rotation is necessary.

Hawkish If: Core CPI beats the 0.2% m/m expectation.
Likely Market Reaction (assuming it’s a small beat): Stocks should continue to rally. Look for Treasury yields and the dollar to continue to rally, and for..(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Neutral If: Headline CPI meets the 0.3% m/m expectation while core CPI meets the 0.2% m/m expectation. Likely Market Reaction: A mild continuance of the…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Dovish If: CPI misses the headline or core expectations of 0.3% m/m or 0.2% m/m. Likely Market Reaction: An unwind of the…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

The post CPI Preview, September 14, 2017 appeared first on Sevens Report.

source https://sevensreport.com/cpi-preview-september-14-2017/

Green Shoots of A Global Reflation, September 13, 2017

Are We Seeing “Green Shoots” of A Global Reflation?
• Chinese August CPI rose 1.8% yoy vs. (E) 1.7% yoy.
• British Core CPI rose 2.7% vs. (E) 2.5% yoy.

Takeaway

Are there “green shoots” of inflation? I reference the Bernanke comments regarding economic growth here, because very quietly we’ve seen two better-than-expected inflation numbers in two big economies (technically three if you count the uptick in Indian CPI,although that’s not widely followed).

August Chinese CPI beat (it came out Friday but couldn’t be priced in until markets opened on Monday) but it was the big uptick in core British CPI that saw the market extend the rally on Tuesday.

So, the logical question, given these two surprise beats is, “Will US CPI also surprise markets?”

The inclination is to believe in the trend, but to be clear, higher Chinese and British CPIs have no real bearing on US CPI—so strong numbers in those two reports don’t increase the likelihood of a strong CPI number.

But, if it comes, expect some potentially big market moves across Treasury yields, the dollar, and in stock
sector trading (banks and cyclicals will scream higher while defensives, including parts of tech, will likely badly lag). But again, that will depend on tomorrow’s number.

From a market standpoint, looking at the effects of the strong Chinese and British CPI, the clear ETF winner is…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

I continue to believe that an economic reflation (better growth, higher inflation) remains the key to a sustained US and global stock rally. And while two numbers don’t make a trend, they were the first positive surprises we’ve had on inflation in months, and we think that’s potentially very important (if it continues).

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. Sign up for your free two-week trial today and see the difference 7 minutes can make. 

The post Green Shoots of A Global Reflation, September 13, 2017 appeared first on Sevens Report.

source https://sevensreport.com/green-shoots-global-reflation-september-13-2017/

New Stock Highs, September 12, 2017

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Stocks surged to a new record high on Monday after the damage from Hurricane Irma wasn’t as bad as feared, and in the absence of North Korea performing an ICBM test over the weekend. The S&P 500 rose 1.08%.

Stocks were higher from the start on Monday thanks to the two aforementioned positive catalysts: Hurricane Irma and North Korea. Both events turned out to be not as bad as feared, and that caused a classic “buyers chasing” rally.

Reflecting the fact that it was those two “not negative” macro catalysts that sent stocks higher on Monday was the fact that the S&P 500 gapped higher at the open and rallied throughout the morning on that buyers chase. Then, stocks spent the afternoon grinding sideways near the day’s highs.

Outside of Irma/North Korea, there weren’t any notable catalysts in the markets Monday. Economic data was non-existent, as was any notable political or geopolitical news (outside of North Korea). Also helping stocks rally was the fact that the week’s important events (CPI, Retail Sales, Industrial Production) are on Thursday and Friday, and there aren’t many looming catalysts on the calendar between now and then.

Stocks maintained their gains into the close to finish the day at a new all-time high.

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The post New Stock Highs, September 12, 2017 appeared first on Sevens Report.

source https://sevensreport.com/new-stock-highs-september-12-2017/