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).

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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. 

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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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