May 25, 2016

Stocks surged again this morning (Dow +157 pts; SPX +.67%). And again, the cyclical sectors are leading the charge (energy +1.1%; financials +1%; materials +1.2%). At this point, the financials sector has nearly erased its losses for the year. In order for the stock market rally to reaccelerate, we really need the financials to wake up. Utilities is the only sector in the red this morning. The dollar is slightly lower and commodities continue to rally. Copper is up 1.5% in early trading. WTI crude is trading back up around $49/barrel. Jeff Currie of Goldman Sachs says the physical rebalancing of supply/demand in the oil market has begun. But there’s still a lot of oil in storage around the world. So the rebalancing process will be volatile as inventories are worked down. Bonds are roughly unchanged. The 5-year Treasury yield is flat at 1.40%; the 10-year Treasury is hovering around 1.85%. Only the really short-term Treasury bills are falling in price (rising in yield). 

Bloomberg reports Chinese government officials are planning to ask the US Federal Reserve about their plans to raise short-term interest rates in June. They apparently want some clarity as to the timing of interest rate normalization. The article says China would prefer a rate hike in July rather than June. I swear I didn’t make this up. Obviously, interest rate moves in the US affect currencies around the world and a stronger dollar means a weaker Yuan. That’s probably OK as long as the Fed doesn’t get too aggressive. 

Ed Yardeni of Yardeni Research was interviewed on CNBC yesterday:  “Is there a recession around the corner? I don’t see it.” He addressed the earnings recession and asserted, “Believe it or not, the earnings picture is actually starting to improve.” Wall Street analysts are beginning to revise up their earnings estimates because they were “way too pessimistic.” Mr. Yardeni, an oft-quoted economist, believes the S&P 500 could move up to 2,200 in the next 123 months.  

Markit Economics’ US Services PMI, a survey that measures business activity in the services sector, plunged to 51.2 this month from 52.8 last month. Remember, 50.0 divides business expansion and contraction. So this report suggests the largest part of the US economy is slowing again. Why is the market not lower today on this news? I’m not sure. Bloomberg and CNBC are largely ignoring the report. A Barron’s headline wonders whether this is an “Outlier or Warning?” 

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