May 18, 2016

Stocks gapped down at the open but quickly recovered. The Dow and SPX are currently up 40 pts & .36%, respectively. This session looks very much like yesterday’s session: cyclicals are leading and defensives are losing momentum. In fact, a quick glance at Bloomberg confirms the defensive sectors have been losing steam over the last 12 weeks. On the other hand, financials, consumer discretion and energy have steadily gained momentum. The dollar is a bit stronger today and commodities are resting. WTI crude oil is trading modestly higher toward $48.20/barrel. Bonds are sharply lower as yields rise. The 2-year and 5-year Treasury yields are up to .85% and 1.34%, respectively. Even the 10-year is moving up today, trading near 1.82%. It will probably move up and test 1.9% before too long.

Economist Nouriel Roubini believes the Federal Reserve will remain patient with interest rate hikes this year. He sees only one rate hike before the end of the year. Commenting at the Credit Suisse conference, Mr. Roubini noted the Fed is taking on some responsibility for the global financial system. He implied the Fed is 2-acting as a central bank “not just for the US economy but also for the global economy.” So that explains why it will “go more slowly” with rate normalization. Later today the Fed will release minutes from its April policy meeting, and of course traders could push the market around as they jump to conclusions. 

CNBC ran an article about China’s slowing economy. The big-picture debate focuses on whether the government will be able to manage the transition from a manufacturing/export economy to a consumer-driven economy without causing a “hard landing.” Can the slow-down continue to progress in a gradual, predictable fashion? The article notes recent data showing shrinkage in the money supply in China. In that past, lower money supply has correlated with falling commodity prices. So a Barclays analyst is predicting lower copper and iron ore prices in the second half of the year. Now, it should be said that money supply is still growing year-over-year, but at a sharply slower pace. You can think of money supply as credit growth. Are businesses and consumer borrowing more money to invest?  We know that large state-run businesses and municipalities are struggling under high debt loads already and the government is trying to dial back credit growth on one hand, but boost economic growth on the other. It’s a sort of central bank tightrope act. The bottom line is that although commodity prices have improved this year, don’t expect that trend to continue in a straight line. 


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