Hawkish FOMC Statement Possible Today – Watch For Wage Inflation Friday
Posted by Pete Stolcers on August 1
Posted 9:30 AM ET – Opposing forces have trapped the market. Strong earnings reports have been offset by political crosswinds. We are likely to tread water in a tight range for the next month as traders and politicians take time off.
Apple reported better-than-expected profits and this news will stop the bleeding in the tech sector. The NASDAQ 100 is below key support at $178 and we are seeing rotation into other sectors (financials, energy and industrials). More than 80% of companies have exceeded earnings estimates and valuations are reasonable at a forward P/E of 16.
Domestic economic growth has been excellent and this morning we learned that 219,000 new jobs were created in the private sector during the month of July. That is much better than expected and it bodes well for a big Unemployment Report Friday. We are below the natural real jobless rate and the demand for workers is high. That could force hourly wages to increase more than .3% and the Fed would be inclined to tighten in September.
The FOMC will meet today and a rate hike is not expected. The Fed has Friday’s employment data and if the wage component is “hot” their statement will point to tightening in September. The market can shoulder rising interest rates as long as economic growth is strong and inflation is moderate. Interest rates are still near historic lows and the Fed has an aggressive agenda.
The trade war news is mixed. The US and China will resume trade negotiations, but the tone has soured. Canada is not participating in the NAFTA meeting with Mexico. On the positive side, Europe is ready to forge a deal and Mexico is anxious to do the same.
China feels that it has the upper hand and that Trump will be forced to negotiate ahead of the November midterms. During the process their economic growth has stumbled. The official PMI was light for July and the Caixin-Markit PMI overnight showed that China’s manufacturing sector is growing at its slowest pace in eight months. It has been dragged down by declining export orders. The PBOC has been injecting liquidity. China’s market is also 30% off of its high from the year (bear market).
Trump has threatened to shut down the government if immigration reform is not addressed. The continuing resolution deadline is quickly approaching (September 30th). Politicians will take time off the next few weeks and investors will get nervous.
Swing traders should be in cash. The market is going to chop around the next few weeks and we will wait for a dip. If trade deals are signed and the market breaks out, we will enter at that time.
Day traders should look for opportunities in the tech sector this morning. Apple will keep a bid to the market and we could see a nice bounce in some of these names after a week of heavy selling. Make your money early and take profits. The price action will come to a halt ahead of the Fed. If the reaction is bearish favor the short side and use SPY $280 as your guide. That is the horizontal support level.
The tug-of-war between positive earnings releases and negative political statements will continue through Labor Day. This is the last round of major news and the summer doldrums lie ahead.
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