The market has broken out from the consolidation range of the last few months and above the double top point of 3020 on the back of solid earnings, another Fed rate cut, and a waning of trade tensions.  We have entered a typically strong seasonal period and the bias is to the upside.  However, the GDP numbers are coming in lower than expected with the GDP now estimate only at 1.1%, providing some data to the contrary.

Market Technicals

This Month Comments

We have broken above the double top and resolved the ascending triangle to the upside, with the previous highs around 302 now offering support.  We would expect that this would be tested in the coming weeks.

Prior Month Comments

We tested the August lows yet again and still managed to make a marginally higher low around the 285 area.  However, the failure to make ATH’s on the rally in September puts the index in a precarious technical position.  As of now, the bias is still slightly to the upside, but watch for a break of 2850.

Chart source Finviz.com

Economics

Source: Federal Reserve Bank of Atlanta

The ISM Manufacturing Index rose to 48.3 in October, lagging the consensus expected 48.9.  Manufacturing activity continued to slow in October, according to the Institute for Supply Management (ISM) survey, though the outlook improved modestly from September. We believe that, because the ISM index is calculated through a survey of purchasing managers who may or may not be swayed by sentiment, and who may or may not have access to actual numbers on every individual portion of the index…it should be considered soft data. The index has dipped below 50 earlier in this recovery, without signaling recession – on three occasions in 2012, once again in 2013, and for five consecutive months in 2015/16. Each time, the economy kept growing.    (Levels higher than 50 signal expansion, below 50 signal contraction)

Nonfarm payrolls rose 128,000 in October, beating the consensus expected 85,000.  Including revisions to August/September, nonfarm payrolls were up 223,000. Private sector payrolls rose 131,000 in October, while revisions to the two prior months added 94,000. The largest increases in October were for restaurants & bars (+48,000), health care & social assistance (+34,000), and professional & business services (+22,000, including temps). Manufacturing declined 36,000 while government slipped 3,000.  The unemployment rate increased to 3.6% in October from 3.5% in September.   Average hourly earnings – cash earnings, excluding irregular bonuses/commissions and fringe benefits – rose 0.2% in October and are up 3.0% versus a year ago.

Existing home sales declined 2.2% in September to a 5.380 million annual rate, lagging the consensus expected 5.450 million.  Sales are up 3.9% versus a year ago.  The median price of an existing home fell to $272,100 in August (not seasonally adjusted) but is up 5.9% versus a year ago.  Average prices are up 4.2% versus last year.

Housing starts declined in September to a 1.256 million annual rate, below the consensus expected 1.320 million.  Starts are up 1.6% versus a year ago.  After hitting a twelve-year high in August, housing starts took a breather in September, falling 9.4% to a 1.256 million annual rate. That said, all of September’s decline was due to the volatile multi-family sector where starts fell 28.2%, the biggest monthly drop since 2016. Meanwhile, single-family starts eked out a gain of 0.3% in September, posting a fourth consecutive monthly increase. It’s important to note that single-family starts have been on a general upward trend since bottoming in February and are in spitting distance of new highs. Meanwhile, multi-family starts have been range bound since 2015 when an upward trend ended.

Retail sales declined 0.3% in September (-0.1% including revisions to prior months) versus the consensus expected gain of 0.3%.  Retail sales fell in September for the first time in seven months. This should pretty much solidify a rate cut by the Fed in two weeks, as the financial markets fully anticipate. But should it? No! Yes, overall retail sales declined 0.3% in September, but including revisions to prior months, sales were only down 0.1%, and remain up a solid 4.1% from a year ago. Sales declined in seven of thirteen major categories with autos, which are very volatile from month to month, leading the way lower, declining 0.9% in September. Still auto sales are up 5.6% from a year ago. Non-store sales which have been a real bright spot, fell for the first time in nine months but are still up 12.9% from a year ago. The largest gain in sales in September was for clothing & accessory stores which grew 1.3%.

Source: First Trust Economic Briefings

Yield Curve Watch

The Fed cut rates again in September, which pushed down the short end of the curve.  We also saw the long end gain, bringing the spreads between short and long maturities well out of inversion risk territory for the time being.

(11/4/19)

(10/7/19)

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Top Tweets & Charts

The “strong consumer” story does have some cracks in it, as evidenced by auto delinquency rates on the rise.

Is the trade war with China just a new normal state of affairs?  According to BofA Merrill Lynch, about 40% of fund managers think so.