Early morning equity market weakness yesterday gave way to a late afternoon reversal largely as a result of the release of the June FOMC minutes. The Nasdaq posted a gain of 0.75% while the Dow Industrials rose 0.43% and the S&P 500 rose 0.53%. Volume on both the Nasdaq and NYSE expanded by a healthy 9.69% and 5.11% respectively. Impressively, winners beat losers by a margin of 2-1 on the NYSE. All three major equity market indices also managed to recapture their respective 50 and 200 DMAs. It was a better day than expected for investors by most metrics.
In the June FOMC Minutes mention of “caution” ahead of the Brexit referendum was the single largest take away for investors. Read “caution” to mean no move in rates over the near term. That message was greeted with relief by investors but why? Did investors expect something other than caution by the FOMC ahead of the referendum? Should they have? Has the Federal Reserve messaged any certainty that rates were on a launch pad? No. As a result, I must admit to being a bit mystified by the reversal that materialized yesterday though I have expected price action to be choppy and range bound this week as you know.
To a degree, we may have received an enthusiastic response from investors to the economic data released yesterday. Maybe. For example, the June ISM Non-Mfg. Index reading came in at 56.5, well above the consensus call of 53.3. The Gallop US Job Creation Index held steady at 33, matching the previous month’s reading. MBA Mortgage applications rose an unexpected 14.2% for the week ending 7/1 versus the previous week’s negative reading of 2.6%. The PMI Services Index hit consensus coming in at 51.4. Certainly the economic data on the day was modestly better than expected. Maybe that tailwind coupled with the FOMC’s “wait and see” stance on rates gave investors some confidence.
One of the themes I have harped on for weeks was the likelihood that we can expect the Fed to adopt a “wait and see” or cautious attitude on rates for at least one if not two quarters, given the temerity with which the Fed has addressed any additional tightening following the 25 bps raise in December of last year, as a result of the uneven economic readings we have received over the past month. Additionally, with global sovereign yields at record lows, negative in more than a few cases, simply not raising rates is in fact a relative tightening monetary posture. That default position has provided significant cover to Fed and an extended runway for more of the same.
In fact it is precisely that lack of movement in rates here in the United States and the record low rates around the globe that have pushed investors, at their own peril, into equities among other asset classes. That migration of capital into equities brings with it risk if the underlying valuations and economic landscape don’t support them. As I suggested in Monday’s note, a great deal is riding on Q2 earnings season, which gets underway next Monday.
Choppy price action interrupted by flashes of faux confidence and risk off panic will dominate the equity market landscape unless of course today’s ADP report buttresses yesterday’s modestly better than expected data. The real test comes tomorrowwith the June Employment Report. Consensus is calling for a monthly gain of 180k non-farm and an unemployment rate of 4.8%. Little movement is expected in the Participation Rate, Average Hourly Earnings or Average Work Week sub sectors of the report. Next week the focus shifts into overdrive with earnings front and center.
It almost seems like an eternity but it was only a short two weeks ago that British voters stunned global markets, embarrassed EU officials and laid bare the fault lines of what is certain to become a public display of pan-European friction; North versus South, East versus West and nation state versus surrendered sovereignty. More on that next week.