Dollar Tentative Rebound and S&P 500 Recovery Stall Faces CPI, Consumer Earnings and Sentiment

Dollar Tentative Rebound and S&P 500 Recovery Stall Faces CPI, Consumer Earnings and Sentiment

Talking Points:

• The ‘recovery’ in risk appetite continued this past week, but progress notably flagged via benchmarks like the S&P 500
• Historically, the SPX puts in for its second worst performance of the year in the 20th calendar week, but those expectations should be set against current conditions
• US CPI will be a standard bearer for capable macro event risk, but US and Chinese ecommerce earnings as well as the UoM report deserve close observation as well

Risk Rebound Continues and Volatility Settles into Seasonal Expectations

While the market backdrop levels out between the sentiment extremes (greed and fear) and fundamental focal points (trade wars, monetary policy decisions, etc), the tendency for ‘normalization’ will increase. What are the norms when headlines around escalating trade war aren’t fueling extreme volatility? On the one hand, the 20th week of the calendar year has seen the VIX produce in a countertrend jump to a larger decline into the summer doldrums, and the S&P 500 averages its second worst week’s loss (-0.6 percent) stretching back over the last hundred years of historical price action. That ominous historical pattern doesn’t seem to align to the current trend in conditions, however, with risk assets still recovering and a range of benchmarks showing a retreat in their respective volatility measures.

Table of Relative Market Performance and Volatility Levels Over Different Time Frames

Source: John Kicklighter

When it comes to unexpected pivots in the capital markets, a shift towards risk aversion tends to be far more abrupt and severe (thought shorter lived) than a risk appetite charge. With the major themes of the past weeks and months shifted to idle, event risk-based catalyst seems a necessary spark. Headlines around US-China trade relations should be a top concern – as anticipation can render a hold by both countries as market moving as an actual de-escalation. Short of that systemic theme, we will need to rely on this week’s top scheduled event risk for motivation.

Calendar of Top Global Macro Event Risk

Source: John Kicklighter

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US Inflation Will Be Another Prod to the Fed’s Wait-And-See

Overall, there is a notable reduction in top-tier global macro data over the coming week. While there is a range of data like economic and business sentiment surveys, UK and Japan GDP readings and US retail sales; it is too far away from stirring the systemic themes back to life. That said, there are a few highlights that could generate significant heat in more concentrated areas of the financial system or hold a reasonable probability of overcoming the fundamental inertia. The first, top scheduled listing over the coming week is arguable the US CPI consumer inflation report for April.

This past week, the Federal Reserve held its benchmark lending rate unchanged and Chairman Powell remarked that the outlook for economic health and inflation were more uncertain. The central bank has a dual mandate to pursue a natural low in unemployment along with a target of 2 percent inflation over an annual basis. The April jobs report beat expectations the Friday before last with the jobless rate hovering very close to its multi-year low, that keeps the onus more squarely on the demonstrably volatile price services. With trade war escalation easing out this past month, what will the data say towards the ‘stagflation’ fears that are being murmured by policy officials and market conditions? If inflation is higher than expected, the fight between Fed stability in ‘wait-and-see’ and President Trump’s preference for lower yields to unlock capital will likely increase.

Chart of DXY Dollar Index, US 2-Year Treasury Yield, UofM Inflation Outlook (Monthly)

Source: John Kicklighter, TradingView, Federal Reserve Economic Database, University of Michigan

 

How are World’s Largest Economies’ Retailers Holding Up?

As a second macro theme worth monitoring, I would flag key earnings. We have seen most of the major tech earnings cross the wires (NVDA posts towards the end of the month) as well as the major financial institutions that often kicks off the season. So, what kind of companies’ figures will capture the attention of this macro-oriented financial system? Reports that highlight the major US and Chinese ecommerce retail businesses are among the best places to unsettle the fragile financial health of the system.

China’s JD.com is due to report before the US bell Tuesday morning, but it’s relatively modest market cap (less than $50 bln) will do little beyond generating greater attention towards more systemic concerns. Far more consequential will be the adjacent release of Alibaba (the third largest Chinese company by market cap) and Walmart (the United States’ 10th largest company). Trade wars were definitely a factor for these important ecommerce companies, but how much could domestic demand from these two countries help offset the impacts of trade losses? We will soon see, and find our expectations for trade war impact updated with hard corporate data.

Chart of Walmart, Alibaba and JD.Com Stock Prices (Daily)

Source: John Kicklighter, TradingView

 

How Many Excuses Would the Market Make for a Bad Confidence Showing?

At the end of the coming week, one event in particular deserves a closer look from global macro observers: the University of Michigan consumer sentiment survey for April. The US consumer is the largest driver of the world’s largest economy, so the data here matters. Given how recent the news around possible improved negotiations between the US and China, the survey may not reflect the latest positive developments in headlines through the data. Forecasts are calling for a modest uptick in the headline figure, but the expectations figure is seen slipping to fresh multi-decade lows while the inflation component is expected to tick further up to a higher 44-year high. Will the market discount disappointing readings that line up to these expectations considering warmed developments in headlines? By equal proportion, better-than-expected readings could find their impact on the relevant markets discounted given such expectations.

Chart of S&P 500, UofM Consumer Confidence and US GDP YoY (Weekly)

Source: John Kicklighter, TradingView, University of Michigan

 

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----Written by: John Kicklighter, Global Head of Content