2017/05/30 Commentary: Still Happy and Friendly?
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Commentary: Tuesday, May 30, 2017
Still Happy and Friendly?
Chances are that things may remain ‘friendly’ yet may not be so ‘happy’ as they have been of late. While we have been signaling that there was a very happy ‘hysterical headline hiatus’ (see last Wednesday’s post including that designation) due to President Trump being on his Middle East and European first foreign trip over the past week and a half, that’s over now. And even as his detractors were very consistent in maintaining their criticism of him during that trip, his positions in various overseas meetings took a more prominent place in the headlines. Yet even as he had barely returned to the US into the Memorial Day holiday on Monday, he could not resist getting back to heavy tweeting. This time it is on what he claims is the ‘phony’ nature of the investigation of Jared Kushner’s contact with Russian officials to set up ‘back channel’ (i.e. unofficial) communications.
Whether that contact between Kushner and the Russians was normal, and importantly who initiated it, are moot. The fact that it is being investigated and Kushner has agreed to cooperate with whichever officials might want to look into it should make it a non-story for now. And the President himself has retained some very competent counsel to defend him on all matters Russian (going back to the alleged election campaign collusion to influence the US election.)
So what’s the big deal? Quite simply it is that the President is tweeting again. And in the past that has triggered enough distraction to weigh on progress of the important Trump administration tax reform and infrastructure stimulus legislative agenda. It has been easy for US equities to squeeze up to modest new serial all-time highs (above March 1st levels) over the past couple of weeks in the absence of the drama of the President’s fights with the media and others. Now that he is back and not as scripted as he was on his foreign trip, can we expect this to continue?
Frankly, we are skeptical. So the happy ‘hysterical headline hiatus’ may be over. If more distraction and tumult result from the President returning to previous form are indeed what we see next, expect the US equities and US dollar to weaken once again, and the govvies to maintain their recent bid. Yet there is still one ‘friendly’ equities factor that is being reinforced, even if in a perverse manner on recent form…
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NOTE: Given the likelihood the US economy will now get the structural reform that we (along with Mario Draghi and others) have been loudly complaining was not forthcoming since our dual It’s Lack of Reform, Stupid posts in January 2015, we need to adjust our view that a potential economic and equity market failure is coming. We previously referred you back to our December 8, 2015 post for our major Extended Perspective Commentary. That reviewed a broad array of factors to consider Will 2016 be 2007 Redux? While a continued regime of higher taxes and more regulation (i.e. under Clinton) might have fomented a continued weak or even weaker US economy, the tax and regulation changes proposed by the Trump administration will hopefully still be approved by the Republican Congress and diminish the similar fears we had to what transpired in 2007-2008.
▪ …and that is the ‘Friendly Fed’ noted over the past couple of weeks, confirmed by much of the previous FOMC meeting’s minutes released last Wednesday afternoon. Yet that is a bit perverse in its way. Not that Fed gradualism is any surprise. It is always the preference of central bankers that policy can be incrementally implemented. Due to the long lead times involved in the impact of any central bank policy outside of the occasional major reaction to a crisis, central banks are right to take an incremental approach.
After such a long spell of weakness earlier this decade they all seem amenable to letting inflation increase a bit. In fact, they are actually quite pleased with it. As many central bankers have noted and analysts like us have reviewed, they are not nearly as well prepared to fight deflation as inflation. As such, they are very happy to see some sustained inflation return.
Yet much as with the Fed (and especially the European Central Bank) they are still only going to plan on incrementally removing accommodation. This was apparent in last Wednesday’s FOMC meeting minutes alluding to the plan to only very gradually reduce the Fed’s Quantitative Easing-bloated balance sheet. The plan looks very sensible, and leaves room to suspend that action if any US economic weakness should warrant.
Still Friendly
And speaking of US economic weakness, that is also why the US equities are so secure in their view that they don’t need to fear any accelerated tightening from the Fed. That has been a key driver for recent higher equities prices. Yet as noted above, it is back as the somewhat perverse influence which it was during the extended post-Crisis weak economic phase where much of the equities strength depended on Fed largesse.
The issue now is the Fed’s assessment that the Q1 2017 US weakness was yet another example of a weak first quarter that has seen substantial rebounds in Q2 each year. That has been the pattern, with Q2 showing an immediate bounce back from the unusually (and previously unexpected) weak Q1 each of the past several years.
Q2 Rebound?
However, it is now well into Q2 and the economic data has remained weaker than many expected over the past couple of months. That has been for Durable Goods Orders, the US Trade Balance that has implications for GDP, and some housing numbers among others. Due to the dual UK and US holidays on Monday, this very heavy reporting week (more below) began rather quietly. Yet this morning somewhat weaker-than-expected Euro-zone confidence indications were followed by roundly weak US numbers.
That was for US Core Personal Consumption Expenditure (a favorite of the Federal Reserve) slipping to 1.50%. That was the low of serial lower readings for the past three months. Consumer Confidence also had a surprising slide to 117.90 versus last month’s 120.30 (and estimates of only slightly below 120.00.) The not very broadly followed Paychex US Small Business Employment Index dropped to its lowest levels since 2015. While it had strengthened on the optimism in the initial wake of President Trump’s somewhat surprising US election victory, small businesses are now taking a more cautious view of the US economic future.
US Economic Agenda
And that is directly related to President Trump’s failings. His administration’s tax reform and infrastructure stimulus legislative agenda depends on Congress having the time to reconcile their differences over the exact nature of those programs (not to mention health insurance reform that is a further essential tax reform element.) The small business owners who were enthused that some relief might be forthcoming on all those fronts are neither blind nor deaf.
They are seeing that the Trump agenda is needlessly embattled by the President’s lack of ability to maintain focus on that agenda, allowing himself to be distracted by what are ultimately side shows on the various attacks from his detractors. It is possible that the cyclical recovery in the US can accelerate without Trump administration legislative agenda success. Yet it is also a bit of self-fulfilling prophecy that the US equities were glad to believe in right after last November’s election.
Accident Prone
So while US equities might remain bullish overall, they have demonstrated that they can be accident prone when there is enough distraction from implementing the Trump legislative agenda. That is exactly what happened two weeks ago when the mention of ex-FBI Director Comey’s memo regarding the President’s alleged “go easy on Michael Flynn” discussion came to light. That attracted criticism from within the Republican Party as well.
All of those allegations, which now include Kushner’s contact with the Russians, may amount to something, or amount to nothing. Yet whatever the case may be, we know that the President’s detractors will also be launching fresh assaults. Whether he can muster the discipline to ignore them, and let his highly regarded attorneys and Special Counsel Mueller deal with any fresh or existing allegations (often specious at best) will be a major influence on his legislative agenda.
If he chooses instead to be more circumspect and cautious in his pronouncements, it will be possible for Congress to concentrate more so on the agenda. If not, it will be more damaging distraction for Congress that will weaken the economic and market psychology.
Quick Market Take
▪ We are once again concentrating on the US equities, as their activity is also reflecting on the other asset classes. The background remains that due to sustained increases in weekly MA-41, June S&P 500 future extended weekly Oscillator levels are still moving up roughly $5 each week in spite of the selloff since March 1st. It was important the extended weekly Oscillator threshold above the 2,300 area rose to 2,369-74 in mid-March.
After it failed below the 2,370 area and interim 2,350 congestion in mid-March, 2,370-75 was exceeded again by late April, which it remained above in early May; and importantly both weekly MA-9 and MA-13 were up into the 2,365-70 area. While those were temporarily violated on the mid-May selloff, pushing back above them later that same week was a strong sign.
Higher resistances remained around the 2,401 March 1st front month futures high, with a buffer to that same mid-May week’s early 2,404.50 next all-time prior to the selloff. Now that June S&P 500 future has Closed above those levels, the next Oscillator resistance is up into the 2,425-30 range this week. And the ultimate Oscillator resistance (last seen at the early March high) is up to 2,455-60.
Of course this is all in the wake of the market holding 2,350 area congestion on that Mid-May selloff. It held the 2,347.50 fine line level in that area, which was the April 21st weekly Close prior to the gap up in the wake of the positive round one result of the French election. And that it held in overnight trading right before that Thursday’s opening was impressive at the bottom of such a sharp selloff.
▪ Yet the govvies are not bothered by this new US equities high, as the gradualist tone from the Fed seems to indicate that inflation is not yet a problem. This is reflected in the June T-note future pushing back up into the low-mid 126-00 area resistance. Gilts and Bunds remain firm as well after holding lower support. And the foreign exchange still generally reflects a weaker US economic tone, as the US Dollar Index remains challenged overall. Most important is EUR/USD holding around the 1.1200 area.
▪ The Extended Trend Assessment with full Market Observations were originally going to be updated after Tuesday’s US Close. Yet there was little movement and it was obvious the more telling indications would evolve From Wednesday activity into and after the Federal Reserve’s Beige Book release. That would more effectively prepare for the additional major economic data and central bank influences into Thursday major top of the month economic data that culminates of course in the next US employment report release as almost the only economic data on Friday.
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