Macro Update

• Stocks rise on Bank of England stimulus hopes. Despite surprising investors by keeping interest rates unchanged this month, the Bank of England’s (BOE) signal that rates may be cut in August has U.S. markets higher in early trading. Yesterday’s session saw the major indexes little changed, with utilities, telecom, and consumer staples regaining some momentum, while energy stocks were dragged down by a 4% drop in the price of WTI crude oil. In Japan, the Nikkei rose for the fourth straight day, while the Shanghai Composite closed slightly lower. European markets are modestly higher in late trading, and the pound has jumped to a two-week high against the dollar on the back of the BOE’s announcement. Meanwhile, theyield on the 10-year note is up sharply to 1.53%, COMEX gold is down more than a percent, and oil is recouping some of yesterday’s losses.

Macro View

• Post-Brexit data point. At 254,000, new claims for unemployment insurance remained at 40-year lows in the week ending July 8, 2016. The latest report is another indicator that the labor market post-Brexit is little changed from pre-Brexit; but as usual, the weekly claims data are beset by distortions. At this time of the year, the end of the quarter, the end of the school year, and the annual auto plant shutdowns are the likely culprits. Claims are down 26,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate a recession, so clearly there is no recession signal from claims.

• Beige Book Barometer bounces in July. In another post-Brexit data point, the Federal Reserve Bank (Fed) released its Beige Book yesterday, a qualitative assessment of economic, consumer, business, and banking conditions in each of the 12 regional Fed districts. The data were collected through July 1, 2016, and therefore, included a week of post-Brexit data points. Our Beige Book Barometer (“strong” words in the Beige Book minus “weak words”) ticked up to +61, from +44 in June. All of the increase came in the oil-producing Fed districts. Inflation words remained elevated as well. We’ll have a blog poston the Beige Book later today.

• New leaders in the U.K. Just weeks after the surprising Brexit vote, the U.K. has a new political leadership, with Theresa May, who advocated for remaining in the EU, as Prime Minister. May placed Boris Johnson, a leading “leave” campaigner, as Foreign Secretary. She also created a new ministry, the so-called “Brexit Czar,” led by David Davis, an ardent Brexit supporter. The placement of such strong “leave” campaigners suggests a strong commitment to Brexit, largely squelching the rumors that somehow Brexit will be postponed.

• The Bank of England surprised the market by not lowering interest rates today. The market had been expecting a 25 basis point (0.25%) reduction. However, statements from various officials suggest a rate cut is still likely later this year, and that there was simply too much uncertainty around Brexit to engage in any policy changes. The British pound rallied on this news, while U.K. equities gave back some of their gains, though markets were still positive even after the announcement.

• More new highs. The S&P 500 made another new all-time high yesterday, its third straight new high in fact. Fun stat, the S&P 500 gained only 0.013% yesterday, for its smallest all-time new high since August 27, 2014, when it gained 0.005%. There have been 35 new highs during this time frame. The S&P 500 itself is up four straight days, and with futures higher, today could be the first five-day win streak since March.

• Just how overbought is the S&P 500? The recent surge higher in equity prices has prices extremely stretched in the near term. One way to measure this is by how far away the price is from its 50-day moving average. The S&P 500 has closed for four consecutive days more than two standard deviations above its 50-day moving average. This hasn’t happened since June of last year, and only 13 times during past 15 years. What happens next? The median return a month later is about average, but going out three and six months the median returns jump to 3.6% and 6.3%, respectively, but well above the average return over this time.

• Not all bad for the big banks. JPMorgan Chase kicked off bank earnings this morning. The results highlighted some positive trends in the industry that have been getting drowned out by low interest rates and Brexit talk. First, falling interest rates are driving mortgage refinance activity. Second, overall loan growth is quite strong. Third, credit quality outside of natural resources remains healthy. And fourth, trading likely got a late-quarter Brexit lift. We still think some caution is warranted due to interest rate and regulatory pressures; but given low valuations, substantial underperformance versus the S&P 500 over the past year, and potential upside to interest rates, financials (and the big banks in particular) are groups to watch as potential trading opportunities in the months ahead.

Monitoring the Week Ahead

Thursday

• Initial Claims (7/9)
• UK: Bank of England Meeting (Rate Cut Expected)
• China: GDP (Q2)

Friday

• Retail Sales (Jun)
• CPI (Jun)
• Empire State Mfg. Index (Jul)
• Consumer Sentiment and Inflation Expectations (Jul)

Sunday

• China: Property Prices (Jun)

Click Here for our detailed Weekly Economic Calendar

 

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

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