Market Recon Monday

Good Morning,
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European Banks.
                     It didn’t take long for Friday’s late session ugliness to continue into this week. Major global equity indices are all off more than a percent, with European banking shares leading the way lower. Actually, it’s Deutsche Bank that’s leading those banking shares. DB is own a rough 6%, while the broader group is off around 3.5%.  The culprit seems to be an article in the German magazine “Focus” in which Chancellor Angela Merkel claims to be against providing state aid to the bank in the wake of the US Justice Department’s proposal that DB pay $14B to settle a mortgage securities investigation should the bank need more capital. Is counter-party risk an issue? Is the Chancellor playing tough? The US Financial sector will let us know what markets think at 09:30 ET.
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Presidential Debate: Market Impact.
                    There will be no immediate impact on the economy, nor on the general marketplace for that matter, but it is undeniable that tonight’s Presidential debate between Democrat Hillary Clinton, and Republican Donald Trump will be front and center in terms of attention given. Any market reaction to this first debate will most likely be a short-term trading opportunity. That said, there are two political footballs to keep your eyes on. Healthcare, and Energy. Depending on who appears to come out on top tonight could provide direction to these two sectors. Energy is a regulation play, while Healthcare becomes about the perceived success or failure of Obama-care. These two candidates have very different ideas on these two areas, and an upper hand on Tuesday morning for either candidate could provide movement.
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Trader Focus.
                    The week ahead is jammed with potential roadblocks and detours. On the macro side, after today’s New Home Sales, we’ll see data on Durable Goods, a last look at Q2 GDP, and on Friday, perhaps most importantly Core PCE for the month of August. Oil traders, and those involved in the Energy space will be watching for headlines out of this quasi-OPEC meeting in Algiers that culminates on Wednesday as well. It is, in my opinion, however, that “Fed Speak” will by the end of the week, be what has impacted the marketplace the most. There are several speakers out there today, but not real newsmakers. This Wednesday, I am tracking six scheduled speeches. Included in the six are the Fed Chair, the unpredictable James Bullard, perma-dove Charles Evans, and two of the dissenters from the last FOMC decision (Mester & George). That’s the day where you’ll see some cages being rattled.
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Macro
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09:30 – Fed Speaker: Minneapolis Fed Pres. Neel Kashkari speaks on “Too Big to Fail” from Minneapolis. Kashkari does not vote on monetary policy until 2017, and likey will not go there in his speech. However, he can move the Financial sector with his word at times.
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10:00 – New Home Sales (August): Expecting 597K, July 654K SAAR. This item is very important, not only for what the data represents at the headline, but also for implied job creation, but for all of the peripheral spending implications that can also be applied to buyers of new homes.  The July number was an absolute blow out print….way above expectations, and at the highest annualize rate since 2007. As focused on as the headline number will be today, the revision to July will be just as focused upon.
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10:30 – Dallas Fed Manufacturing Survey (September): Expecting 1, August -6.2. This, while not a high-profile event, is a very interesting event. Dallas has printed in contraction for 20 consecutive months. December of 2014 was the last month that the Dallas Federal Reserve District printed it’s manufacturing data in state of expansion. There is hope. Every market has a bottom, and the similarly streaky Kansas City has shown expansion in two of the last five months. That’s a winning streak in this league.
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11:05 – ECB Speaker: ECB Pres. Mario Draghi will be in Brussels to testify before the European Parliament’s Committee of Economic & Monetary Affairs. Draghi will need support if he intends to further ease policy as inflation remains stubbornly below ECB expectations. Traders will also be on the watch for any clues on his thinking regarding the Bank of Japan’s targeting of the yield curve. This speech as much as any event on this day could impact exchange rates, which in turn would impact almost everything else.
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11:45 – Fed Speaker: Federal Reserve Gov. Daniel Tarrullo speaks from Yale in New Haven on the evolution of stress testing the banks. As a Governor, Tarullo’s vote on the Committee is permanent, but he is not very outspoken on monetary policy. He likely will stick to regulation today.
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13:30 – Fed Speaker: Dallas Fed Pres. Robert Kaplan will speak from San Antonio, Texas to the Independent Banker Association Convention. Kaplan is not known for making attention grabbing headlines, and will not be a voting member of the FOMC until January. There will be a Q&A session with the media following the event.
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Monday’s Earnings Highlight
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Before the Open: CCL (1.89)

Market Recon Friday

Good Morning,
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Hawks On Deck
                    After a nice two day run for US equities that was inspired by nothing more than a decision to do nothing, one must ask themselves a question. Is the uncertainty that was priced out of the marketplace over the last two to three weeks, priced back in yet? In other words, is it time for a little profit taking going into the weekend? Certainly, nobody is all that comfortable with where markets are right now, so you would think that at least in spots, that today…there will be movement. There are also a bevy of Fed hawks lined up as speakers for the day.
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Trader Focus
                    Currency exchange rates, and interest rates control everything in the modern marketplace, so let’s start with the US Dollar. The Japanese Yen may have finally hit resistance vs. the greenback, and Service Sector Flash PMIs across Europe, more specifically Germany showed real weakness. The DXY, at least for now, is showing some early strength. Should this strength carry over into the regular session, that will move money out of the Energy, and Materials spaces where much of the positive movement since Wednesday afternoon has been seen. Bear in mind that Crude prices, and subsequently Energy stocks will remain subject to the Rig Count later today, and any head fakes delivered by the OPEC crowd that will meet next week.
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Hiding Spot
                   Money is again flowing back into Treasuries this morning. The US 10 Year Note spent most of the Summer yielding between 1.5% and 1.6%. In fact, the 50 day SMA is currently 1.58%, and the charts certainly seem to be saying that we’ll see that level again … soon.  As long as this keeps up, Utilities, or really any high yielding dividend type name will remain impervious to general market direction (as they were earlier this year), and be a good place for unsure money to hide.
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Macro
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09:45 – Markit Manufacturing PMI Flash (September): Expecting 52, August Final 52. For August, Markit’s manufacturing numbers were not in line with what we saw from the ISM, from Durable Goods Orders, from Industrial Production, or from the regional Fed districts. Otherwise, they were spot on. This data-point will not cause a market reaction today.
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12:00 – Fed Speaker: Philadelphia Fed Pres. Patrick Harker will deliver the opening remarks to the following panel that will discuss “the Role of the Fed in the Community” from Philadelphia. Harker is not one of the more outspoken officials at the Fed, nor is he a voting member of the FOMC this year. Harker is perceived as hawkish, and will vote in 2017.
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12:20 – Fed Speakers: From Philadelphia, the previously mentioned Patrick Harker, Atlanta Fed Pres. Dennis Lockhart, and Cleveland Fed Pres. Loretta Mester will participate on the also already mentioned panel. This panel consists of a rather hawkish crowd. In fact, Loretta Mester was one of the three dissenters in favor of a rate increase at this week’s FOMC meeting. Mester will lose her vote in 2017. Atlanta does not vote again until 2018.
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12:30 – Fed Speaker: Dallas Fed Pres. Robert Kaplan will speak from an Energy forum in Houston, and will answer questions. Kaplan sounded hawkish throughout the Summer, but seemed to back away from that stance as the calendar turned to September. Kaplan is not a voting member of the FOMC this year, but like Harker, will have a vote in 2017.
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13:00 – Baker Hughes Rig Count (Weekly): Last Week Overall 506, Oil 416. As usual, our last domestic economic data-point of the week is a fairly important one. With Crude trading a rough three dollars a barrel higher than it was a few days ago when markets were impacted by that huge draw on inventories, and the weaker dollar, there could be less of a pop in the number of operating Oil wells than we’ve grown used to.

Market Recon Thursday

Good Morning,
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Market Reaction
                     The September FOMC policy announcement has come and gone. What is clear is that although there were three dissents, perhaps four if you count Stan Fischer, the Vice Chair. The decision to leave interest rates unchanged for now was the correct decision at this time, but as you can see, markets seem to be pricing a possible December hike back into the various instruments that were impacted over the last couple of weeks when due to all of the hawkish “Fed Speak”, the possibility of a September rate increase had to be rapidly priced in. Down goes the US Dollar. Up goes Gold, and Crude, as well as Energy, Material, and Utility names. What may be good for the portfolio, may not be good for Federal Reserve credibility. Will markets continue to trust anything said by the nation’s central bankers going forward?
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Credibility
                     Between the Fed’s Statement, and the Fed’s Economic Projections, which were also released at 2pm yesterday, there were some moving parts that just did not fit.
1) Statement: “Labor Markets continue to strengthen” Projection: Increased the central tendency and the lower end of the range for 2016 Unemployment.
2) Statement: “Economic activity has picked up” Projection: Cut the central tendency and the range for 2016 GDP.
3) Statement: “Household Spending has been growing strongly” Projection: Cut the central tendency and the range for 2016 PCE inflation.
                    Clearly, the statement, and the hawkish sentiment behind it are not truly supported by the group’s own expectations for the economy. Not the best recipe for fostering trust. In fact, going out to 2019, not one member of the Federal Reserve Board, nor one regional President sees GDP above 2.2%, yet at least one contributor sees a Fed Funds Rate of 3.8%.
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Global Cognizance
                     With the Bank of Japan out of the way, and that nation’s markets closed for a holiday today, global equities did rally on the news from the Federal Reserve. There is still some chance that foreign central bankers will impact our markets today. ECB President Mario Draghi will address the European Systemic Risk Board today at 9am ET in Frankfurt, and Bank of England Gov. Mark Carney speaks from Berlin at 1pm ET. Either one of these two speakers is very likely to impact currency exchange rates….. which would subsequently impact those previously mentioned Energy, and Material names.
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Macro
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08:30 – Initial Jobless Claims (Weekly): Expecting 261k, Last Week 260k.  The time has come once again for the most consistent series in domestic macro-economics. The range for today spans a whopping 7k, from 258K to 265K, and the four week moving average is now 260,750, just 250 individuals below our expectation, and 750 individuals above the week prior. This one will not likely disrupt your trading session.
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09:00 – FHFA HPI (July): Expecting 0.3%, June 0.2% m/m. Our domestic HPI’s are both rather dated information, and those following along choose to follow the Case-Shiller variety due to it’s broader scope. That one will be released this Tuesday.  As this item only covers single family homes with mortgages backed by Fannie Mae & Freddie Mac, this number will pass unnoticed by the marketplace.
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10:00 – Existing Home Sales (August): Expecting 5.44M, July 5.39M SAAR. This, the largest slice of the housing pie, disappointed in July after New Homes Sales had knocked the cover off of the ball the day prior. That made the disappointment seem even more dramatic than it should have really been for a number that was in line with 2016 norms. This is the most important macro-economic data-point to be released today.
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10:00 – CB Leading Indicators (August): Expecting 0.1%, July 0.3% m/m.  Exect this data-point to illustrate the economic slow-down in August from July. Do not expect the market to move on it. In more than 30 years on Wall Street, I have never heard anyone without the word Economist in their title mention this one.
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10:30 – Natural Gas Inventories (Weekly): Expecting 55B cf, Last Week 62B cf. Will Natural Gas supplies ever contract again? This weekly number looks to expand for the seventh consecutive week, and for the 22nd week in the last 23. You will only be impacted by this print if you are specifically trading the space.
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11:00 – Kansas City Fed Manufacturing Index (September): August -4. Not as messy as Dallas, but still a mess. Kansas City has fully participated in the “Depression” that the US Manufacturing sector has been going through for several years now. Considered a minor regional Fed number, this will not have the market impact of the Philly Fed, which btw put a nice headline number out there this month, but without support from the right sub-components.
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Thursday’s Earnings Highlights
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Before the Open: AZO (14.24), RAD (.03)

Market Recon Wednesday (BOJ/FOMC)

Good Morning,
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Central Banking
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Bank of Japan Policy Announcement.
                          The Bank of Japan changed gears a bit last night. There were no new additions to the central bank’s stimulus programs, though the BOJ did announce that they plan to keep their aggressive QQE program in place until consumer level inflation “exceeds” 2%. What they did add to the program was yield curve control. The most noticeable change to policy is the targeting of a specific yield for the Japanese 10 year note, which will be “close to zero”. Attacking the yield curve is not a surprise, as it was leaked to the media last week that something like this was in the works. Interest rates on the short end were left in place for now. Japanese markets seem to have reacted well. The Nikkei 225 roared to the tune of almost 2%, obviously led by the Financial sector. At first the Yen weakened, and the Japanese ten year, though already negative rallied. Both are well off of their overnight extremes. In fact, there really was nothing in this announcement that I see that would have caused such a knee-jerk for the Yen. That currency is back in the 101.50 range vs. the US Dollar after kissing 103 earlier.
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14:00 – FOMC Policy Announcement.
14:00 – Federal Reserve Bank Economic Projections.
14:30 – Fed Chair Janet Yellen Press Conference.
                        The belief across the marketplace is that there will be no increase announced today for the Fed Funds Rate…. for a number of reasons. You may choose your poison, be it a much weaker Q3 for the US economy in general than was anticipated as recently as three weeks ago, the looming Presidential election, a recently stronger US Dollar, or simply the lack of consistent wage growth and the inflation that such growth would bring with it. Should rates already be higher for some time? Of course, but that’s not today’s fight. Today, we try to anticipate the Fed, and find a way to profit from what they do or say.
                        In all likelihood, the statement will show an increased willingness to raise rates before the end of the year (with the removal of a dot). I think you will see more dissents from a decision to leave rates where they are than we have seen in the past. Kansas City’s Esther George might not stand alone. She may be joined by up to two or three others. The only iron-clad dove left is Lael Brainard. To justify more hawkish posture, the economic projections made by the Fed will have to show a consensus increase from current positions for GDP (1.9 to 2%) for 2016, and Core y/y PCE Inflation (1.6 to 1.8%). Tweaking that last item (Core PCE) is imperative, leaving the forecasts where they are would be seen as dovish.
                       It is true that monetary conditions have already tightened. conditions have been getting tougher since early July. Still, if you get all of these hawkish leanings, there will be a reaction. You will see the US Dollar move higher against it’s peers. You will see a rally in the Financial sector, particularly Banks, Capital Markets, and Consumer Finance names. This should also provoke some selling pressure on the Utility sector, and on Gold. Treasuries, seemingly already having priced in some uncertainty may behave very interestingly, and will be a tough call to make, as they are also so very impacted by foreign central banking policies.
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Macro
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10:30 – Oil Inventories (Weekly): Expecting +1.1M, Last Week -600k barrels.
10:30 – Gasoline Stocks (Weekly): Expecting -800k, Last Week +600k barrels. Crude prices soared last night after the API numbers were released. WTI is now trading above $45 a barrel. For the second week in three, the American Petroleum Institute reported a massive draw for both Crude supplies (-7.5M bar), and Gasoline stocks (-2.5M bar). Large gaps between expectations, and reality are nothing new to the Crude space. Should we see a confirmation of this API data today by the EIA, this will be taken as very supportive not only for the underlying commodity, but for the Energy sector as a unit.
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Wednesday’s Earnings Highlights
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Before the Open: KMX (.88), GIS (.75)
After the Close: BBBY (1.16), JBL (.25), RHT (.54)

Market Recon Tuesday

Good Morning,
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Bank of Japan.
                     The FOMC goes into their two day meeting today, as did the bank of Japan this morning. We will not hear from the FOMC today, but by the time I send this note tomorrow, the BOJ will have made their announcement, and Gov. Hiruhiko Kuroda will have held his press conference. If leaks and rumors are to be believed, the Bank of Japan is looking to steepen their yield curve by possibly pushing the short end deeper into the negative while allowing the long end to trade freely in the marketplace. In theory, the move improves conditions for lenders, and ultimately promotes inflation. In concept, is this easing or tightening? Currency markets are acting as if they don’t know, or doubt it’s effectiveness. Will the Bank move at all? Only roughly two thirds of Japanese economists surveyed, think they will. The BOJ has surprised the marketplace before. This is still a wildcard event.
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Financial Sector.
                     It was a day that started out strong enough. The general marketplace did sell off throughout the afternoon, and the S&P 500 closed nearly unchanged. The Financials were among the best bid sectors yesterday, particularly the banks. The focus on that space will be put squarely on Wells Fargo CEO John Stumpf, who must testify before the Senate Banking Committee at 10am ET. An entire sector’s performance for the day could rely on how well this goes, especially with the quiet markets that we can see preceding central banking policy decisions.
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Paradox.
                     The marketplace is clearly unprepared for an increase in the Fed Funds rate at tomorrow’s announcement. For those who follow the markets very closely, there were a number of mixed signals present yesterday. For one, the odds of a hike as interpreted through futures markets increased to about 18% for tomorrow, and to about 55% for some time this year, both a touch higher than late last week. We’ve already mentioned the out-performing Financial sector, especially the banks. Those would do well with a rate increase. They themselves, though, were out-performed by Utilities, whose stocks prices should benefit if the Fed decides to stand pat for longer. The US Dollar itself has been softening against it’s peers, which could be a function of expectations of an extended period of easy money, or merely expectations of disappointment abroad (BOJ). Then there’s the Small Caps, who simply ran well ahead of all other major indices yesterday. A bet on the domestic economy?…  Or a hedge against a stronger US dollar going forward? One thing is for sure. By Thursday, the puzzle pieces should fit together a little better, and either Lael Brainard, or Esther George will have officially lodged a dissent. So, so, so intellectually fascinating.
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Macro
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08:30 – Housing Starts (August): Expecting 1.19M, July 1.21M SAAR.
08:30 – Housing Permits (August): Expecting 1.17M, July 1.15M SAAR. Start printed in July at their highest level in about half a year. The fact is that Starts have printed higher than Permits on an annualized basis for six months running, which I would usually take as a caution sign. Usually. Housing data in general has been putting up the strongest numbers in the domestic economy of late, and who can argue with the September home-builder optimism survey that hit the tape yesterday? I do not think this number, though important will highly influence the FOMC’s decision tomorrow by itself. We’ll hear from a couple of those home-builder today.
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08:55 – Redbook (Weekly): Last Week 0.4% y/y. the growth in this space last week was a little tepid compared to the two weeks prior. Still, In September, the year over year growth is averaging 0.6% as compared to the 0.3% this item averaged in August. we like to see an average of at least 0.5% in this space.
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Tuesday’s Earnings Highlights
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Before the Open: LEN (.95)
After the Close: ADBE (.72), FDX (2.79), KBH (.39)

Market Recon Monday

Good Morning,
Weaker US Dollar.
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               You’ll notice this morning, a weaker US dollar. Then you’ll notice firmer market prices for Gold, Crude, and Equity Index futures. With last week’s continuance of the recent run of rather weak US macro, the chances of a rate hike announcement by the FOMC this Wednesday are perceived by most economists to have diminished somewhat. Thus, at least for the moment, the dollar weakens. Chances are that if the Fed is to take a pass until after the election, the Bank of Japan policy meeting, which is still something of a wildcard will impact exchange rates more so than the US central bank.
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Oil Volatility. 
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               The volatility in Oil this morning is in response to some mixed signals that traders are seeing on top of those currency fluctuations. Over the weekend, Mohammed Barkindo (Sec. Gen. of OPEC) tried to scale back expectations of any agreement on a production freeze being put together at the informal meeting being held next week in Algiers. After that, we see the President of Venezuela, Nicolas Maduro declaring that he had a long meeting with the leaders of Iran, and that a deal between OPEC & non-OPEC producers is very close. Who to believe? Right now, markets are going with the last thing they’ve heard.
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Trader Focus.
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               While the macro is very light this week, and earnings, are for the most part, in between seasons, the moves in Oil (and subsequently the impact in the Energy sector, and Transportation space) will likely be where traders go early on Monday. What traders also want to cognizant of today, are Bayer AG’s analyst meeting. It’s no secret that MON’s stock price has not behaved correctly if one believes that this deal will get through apparent regulatory hurdles. I would think that some kind of strategy regarding completion of this deal might come out of the meeting. It is also expected that Japan’s Prime Minister Shinzo Abe will speak at the UN on his economic growth plan. While it is doubtful that he will comment on monetary policy days ahead of that BOJ meeting, it is not at all unlikely that Abe will detail the progress made on the fiscal side.
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Macro
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10:00 – NAHB Housing Market Index (September): Expecting 60, August 60. This item is also referred to as the Homebuilder Optimism Index. Simply put, this is a survey of roughly 900 homebuilders from around the country, and they are asked to rate the current environment as well as their future expectations. After a very strong second half of 2015, this item has ranged for most of this year between 58 and 60. Regardless, there will be little market reaction to this item, especially with August Housing Starts just one day away.

Market Recon Friday

Good Morning,
 
Consumer Level Inflation
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                  The one and only thing that could actually force the Federal Reserve Bank to raise the Fed Funds Rate would be a burst of consumer level inflation. What markets watch for, are the year over year Core numbers. The Fed watches the y/y Core PCE as it runs below the CPI, and has allowed them more flexibility in making policy decisions. If you read me often, you know that I have long argued for recognition of the CPI, and for an earlier normalization of interest rate policy. Recently though, you’ve heard me argue against, because it does appear to me that the economy is slumping a bit this year. Whether or not this economy is heading into a recession, near recession-like conditions, or just a temporary slow-down is unknowable. We do know that if we enter a recession after a hike in rates, the Fed surely will take the blame, losing what credibility the central bank might still have.
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Grading The Fed.
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                  In case you are keeping score, Core year over year CPI has run at or above the Fed’s stated 2% target for nine consecutive months. On top of that, Core CPI has also run at or above 2% for parts of 2011, 2012, 2013, 2014, and 2015. Going back to 2011, while GDP has been volatile, there have been many quarters that printed well above 3%, or even 4% when annualized (Several years printed above 2% as well). The point is that the FOMC had ample opportunity to normalize rates (or at least get the ball rolling) while there was simultaneous growth mixed with consumer level inflation. Wouldn’t it be nice to think that in the face of possibly lower trending macro-economic data-points that the FOMC could behave normally. It becomes extremely difficult to overstate the lack of preparation to insulate the US economy when entering rough seas. That would have been productive work. Constantly grabbing the microphone in order to opine on policy? Not so productive.
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Trader Focus.
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                Yesterday, we mentioned a few trading levels. The equity index levels were good, but the 43.50 level for WTI Crude that I spoke of… is looking more and more like a 43.25 level. That’s where we have now repeatedly seen support, and is the spot that must break in order to see the 40.75 level. First resistance for Crude is now in the 44.25-44.50 range. The impetus for a break one way or the other could very well come this afternoon with the release of the Rig Count information. This will impact Energy stocks, and could tilt the broader equity market ahead of what should be a rather intense closing bell at 11 Wall Street. Traders will be pricing in not only the quarterly rebalances, that will include to some degree the creation of an 11th sector (REITs), but the “Quadruple Witch” expiration as well.
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Macro
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08:30 – CPI (August): Expecting 0.1% & 1.0%, July 0.0% m/m & 0.8% y/y.
08:30 – Core CPI (August): Expecting 0.2% & 2.2%, July 0.1% m/m & 2.2% y/y. As stated above, consumer level inflation may force the FOMC’s hand. This is not Janet Yellen’s preferred dat-point in this space, but a shock to the upside would move the needle for the Fed Funds futures market, and for the marketplace in general, but primarily the Financial sector.
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10:00 – U of M Consumer Sentiment (September-p): Expecting 90.0, August 89.8. This is an item that can sneak up on you if you’re not ready for it. Like all consumer-based surveys, markets do sometimes react, and even over-react at the time of their release. Sentiment has been trending decidedly lower since June, but expectations are for if not something of a rebound today…at least a halt to the decay.
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13:00 – Baker Hughes Rig Count (Weekly): Last Week 508 total, 414 oil. Those who trade Crude, the Energy space, or parts of the market reliant upon the Energy space watch the number of rigs involved in the production of oil nearly as closely as they do the Wednesday inventory print. That number has been on the rise, adding seven last week. I would think given the relatively bearish moves in Crude prices of late that the urge to increase capacity would start to wane at some point.
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16:00 – TIC Net Flows (July): Expecting $25B, June $-3.6B. This dated measure of cross border net demand for investment surprised to the downside for June. This item will not impact your trading session today, but I think it’s one of the most interesting series in our macro world. Chinese and Japanese accounts easily hold the top two spots in US Treasury holdings. I bet most of you did not know that, at least as of June…. Irish accounts had moved into the third spot.

Mid-Day Recon

Good Morning,

                     For those of you still concerned that the FOMC would decide to increase the Fed Funds Rate next week, today’s macro-economic data-points should put those immediate concerns to rest. A sentient economist would most likely have to be either acting against instinct, or under orders to vote in favor of such a hike after what we have recently seen in the August data… or for most of 2016 if truth be told.
                     I wish rates were already higher.  Actually, interest rates should be higher for quite some time now.  Fed Chair Janet Yellen will at some point, have to admit that she had her pitch a few years ago, in fact more than one pitch, and she (they) whiffed.
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Let’s look at today’s key data-point takeaways.
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Retail Sales (August): Badly disappointing at both the Headline, and at the Core.  Suddenly this two month losing streak for the headline looks a lot worse when you realize that there really have been only two good months in the last eight.  The Core number, which did have a nice four month run going at one point, has now printed in contraction for two straight months.
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Industrial Production (August): Expectations were for contractions in both headline Industrial Production, and Capacity Utilization.  That’s exactly what we saw, except in both cases the print was even worse than the expectation.  This was coming off of a fairly robust July, which by the way was revise slightly lower. In fact, in each of the last four positive prints for Industrial Production (which takes us back more than a year), they have all been revised lower one month later.
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Philly Fed (September):
A rather robust looking 12.8 print hit the tape in this space, soundly beating expectations of merely 1.4.  Wait a minute, New orders barely held their ground, and that’s what drives manufacturing.  On top of that … Shipments, Unfilled Orders, and Inventories all collapsed.  The only strength was in pricing.  Inflation with out growth in the underlying businesses. That’s just terrific, and unintentionally deceptive.

Market Recon Thursday

Good Morning,
 
Bank of England.
                     Today’s early headline will come out of the Bank of England, where there will be a policy decision announcement at 7am ET. At the August meeting, the BOE cut the Official Bank Rate from .5% to .25%, kick started their quantitative easing program that included corporate bonds as well as government, and offered cheap loans to British banks. The BOE also promised further policy aggression if need be. Since then, the British economy has been stable, even pretty decent in spots. Retail Sales, Industrial Production, and UK PMI data have all been better than previously thought. The Bank of England certainly does not need to, and likely will not act today. Economists in the UK will more likely be discussing whether or not Mark Carney saved the economy, or if the MPC went too far last month. As with all central bankers, I am sure that the BOE will monitor the data, and stand ready to do what’s necessary going forward.
 
Very Heavy Domestic Macro Day.
 
                    Here, in the States, we have an extremely heavy macro day ahead of us, after not seeing so much in the way of data for quite some time. In my opinion, it is far more interesting to peruse a somewhat important batch of items like this, than it is to figure it’s interpretation though the prism of “Fed Speak”. Unfortunately, that is how all data is looked at in these times. Their ability to swing, or not swing policy decisions outweighs their use a barometer of economic health. We still have a few of those “high profile” economic events to get through prior to the FOMC’s meeting next week, and perhaps the most impactful of those will be today’s August Retail Sales numbers. This could be a case of good being bad for the market, or vice versa. Today’s Industrial Production print, and tomorrow’s CPI (though the FOMC does not admit it) should also matter to someone mulling a move in interest rate policy.
 
Trader Focus.
 
                     There are some levels that traders are watching very closely, and working off of. First and foremost, it’s difficult to not notice the brick wall that 2120 has been for the S&P 500. Now tested five times over three sessions, and providing immediate support each time, it’s not very hard to see where some traders, and some algos have decided to make a stand. If, and when this spot breaks, there will be visible violence on the chart. BTW, yesterday’s high of 2141 is also a trading level that has passed two tests of it’s own this week. Another is the 43.50 spot for WTI Crude. This level is more like an area target, and might be compared to the SPX 2120 level as a hand grenade would be compared to a sniper rifle. Though, far less precise, once this spot is not only pierced, but becomes resistance, the door opens to another fight just above $40 for oil.
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Macro
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08:30 – Retail Sales (August): Expecting -0.1%, July 0.0% m/m.
08:30 – Core Retail Sales (August): Expecting 0.2%, -0.3% m/m. At the headline, Retail Sales have run hot in two of the last four months. That’s kind of like a winning streak in this modern economy. Auto Sales were not strong in August, so I wouldn’t expect to see three out of five. We are however, looking for a fairly strong Core number. The Fed is looking for this too, especially after an impressive second quarter in this space ended with the disaster in July. Industrial Production, and tomorrow’s CPI both matter, but this is the most important item left prior to next Wednesday’s monetary policy announcement.
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08:30 – PPI (August): Expecting 0.1%, July -0.4% m/m.
08:30 – Core PPI (August): Expecting 0.1%, July -0.3% m/m. Producer prices rolled off of the table in July. projections aren’t exactly for a robust bounce back in the August data. FYI, projections were all positive last month when these two both surprised. The markets do not react much to inflation, or the lack thereof at this level, basically because the Fed does not react to inflation at this level.
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08:30 – Initial Jobless Claims (Weekly): Expecting 264k, Last Week 259k. I really can’t get over how consistent this item has become. It really is a shame that real economists don’t see that having a high number of part-timers in the labor force correlates to a drop in layoffs, and a lower Unemployment Rate, but does not mean that you’re approaching full employment. the four week moving average for this item is 261,250, and the entire range of opinions for today’s number spans just 4k, from 261k to 265k. Markets will not likely react to this release.
08:30 – Philadelphia Fed Manufacturing Index (September): Expecting 1.4, August 2.0. Though the number was quite paltry, Philadelphia’s headline print landed above zero in August, which ended up being quite a feat in comparison to most of the other manufacturing data that we saw for the month, and somewhat deceptive at that. All you’ve got to know is that New Orders, the single most important sub-component in the space were decisively negative for Philly last month. Not much in the way of growth is expected here today. Should you see a surprise here today, the markets will react. Philly is the most influential regional manufacturing number in our macro world.
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08:30 – Empire State Manufacturing Index (September): Expecting -1.0, August -4.2. Even thought he headline print showed contraction in August, New Orders at least held their ground. The forward looking employment number for the New York region was poor last month. That will be watched today, but with so much other high profile data available at this time, this report will not be what moves the marketplace.
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09:15 – Industrial Production (August): Expecting -0.2%, July 0.7% m/m.
09:15 – Capacity Utilization (August): Expecting 75.7%, July 75.9%. I bet you did not know that the last three times that Industrial Production printed in a state of growth, the number was revised lower the next month. That said, we saw nice month over month growth in July. Actually, it was more like a two month winning streak. If you can recall the August ISM print, and all of the regional data that we saw, then you probably aren’t looking for positive numbers here today.
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10:00 – Business Inventories (July): Expecting 0.1%, June 0.2% m/m.  This item is dated, and traders don’t really react to it, but it does factor into GDP, so eventually it will matter. Wholesale inventories for July were reported last Friday, and they are a major sub-component of this data-point. Now we add in inventories for manufacturers, and retailers in order to see a more complete picture.
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10:30 – Natural Gas Inventories (Weekly): Expecting 45B, Last Week 36B cf. The build just keeps going in this space. This week, we expect to see our 21st increase in Natural Gas supplies in the last 22 reports. This will likely be a low profile event.
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Thursday’s Earnings Highlight
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After the Close: ORCL (.58)

Market Recon Wednesday

Good Morning,
                    The good news for market participants is that all of the Fed speakers have been put back in their cages for a week or so. The obvious take-away is that the FOMC felt the need to change market expectations toward the possibility of an increase in the Fed Funds Rate, which they have done for now. Have the markets priced in an imminent increase? No, but they have priced in a degree of uncertainty, along with a simultaneous degree of uncertainty regarding global central banking expectations. It was only a couple of months back when the Bank of England, and the European Central Banks were pledging to pour as much kerosene on the fire as necessary in the wake of Brexit. There were, at the same time rumors of a merging of monetary & fiscal policies in Japan that would result in “helicopter” money. All of that, had Janet Yellen thinking that maybe spitting into the wind wasn’t such a hot idea. Normalization could wait.
                   What happened next was, that the sky didn’t fall. Suddenly, the BOE didn’t need to be as aggressive as Mark Carney had previously thought. If Mark Carney didn’t need to be aggressive, well then certainly Mario Draghi wasn’t going to react alone. Although, after he saw the ZEW numbers out of Germany yesterday, and European Industrial Production print this morning, he may be wondering if he should have. The Bank of Japan held their fire, and announced a two month study of their monetary easing policies. Now, the Fed could think about going about their business. In plain English, global central banks are simply looking less dovish than they were three months ago.
                  This is all simply posture until it is action, and never count on action until it is fact. What’s been working? Nothing over the last few days, but over three months’ time, the Tech space has been your best. Even over the last few days, that space has been damaged the least. The Financials are flat over a month’s time as a group largely because of interest rate hopes. I think that you do want some exposure there, but in a limited way.  Changing one’s allocation toward Treasuries might be wise before the yield on the ten year hits it’s 200 day SMA (1.81%), but I wouldn’t go too low in that space. In the past, every time I have thought about lowering my allocation (currently 17.5%) in that space, I have been rewarded for dragging my feet. Personally, I would not go below 14.5% there at this time. Gold acts well, considering that it’s fighting a stronger dollar. As long as the yellow metal stays above $1305, an allocation of between 5% to 10% seems appropriate to me. Should that level crack, momentum would shift away from precious metals at least temporarily, and I think that the lower bound of that range would serve better than the upper, until the spot was eventually retaken. Gold is not like a stock. Momentum is more of a factor there.
                   This is all short-term, gang. The whole “not getting creamed” thing may be high-maintenance for a while. Carry on.
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Macro
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08:30 – Import Prices (August): Expecting -0.1%, July +0.1% m/m.
08:30 – Export Prices (August): Expecting 0.0%, July +0.2% m/m. thanks to the volatility seen for quite some time now in Energy prices, and Food prices, these two items are not as reflective of cross-border demand as they once were. In July, the headline print for Import prices may have been 0.1% m/m, but prices for fuel imports were -2.5% m/m. Exclude fuel, and the print become 0.3%. For exports, the story is similar, but substitute agriculture for fuel, and the headline print of 0.2% m/m also become 0.3%. We expect further erosion in these subcomponents to continue to impact headline prices for August. Futures markets will not react with any kind of urgency to this data upon it’s release.
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10:30 – Oil Inventories (Weekly): Expecting +3.3M, Last Week -14.5M barrels.
10:30 – Gasoline Stocks (Weekly): Expecting +250K barrels, Last Week -4.2M barrels. Last week, you’ll recall that these numbers showed some of the most dramatic one week contractions in inventory in decades. These numbers matter every week, but after the beating that Crude, the Energy space, and the Transports took yesterday, they matter even more so today. Expectations for today are for a resumption of the methodical build in Crude supplies now that the inclement weather that contributed to last week’s surprise is out of the way.  Last week, the Tuesday night API number ended up being a fairly accurate forecast of what was to come. Last night, the API release showed a lower than expected build for Crude of 1.4M barrels, and a draw of over 2M barrels for Gasoline. This has allowed a bid to form around the 44.75 level for WTI.
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Wednesday’s Earnings Highlight
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Before the Open: CBRL (2.13)