The US stock market slumped mid-Wednesday on lack of any fresh China trade deal optimism, subdued US economic data, muted OECD forecast for the global growth and mixed Fed talks. On Wednesday, the former NY Fed President Dudley again argued that the Fed is not necessarily done raising rates. Dudley further pointed out that after weak Q1, the economy will pick up steam and the Fed tightening is back on the table in H2CY19. Fed’s Williams (NYSE:WMB) also sounded non-committal about Fed’s patience and flexible stance, especially with the QT issue (B/S tapering). Subsequently, Dow slumped almost -175 points mid-Wednesday.
But Dow got some support on another comment by Fed’s Williams, pointing out that at around +2.50% of US rate, it’s now right at the neutral”. Williams said: "my current estimate for r-star is 0.5%, so when you adjust for inflation that’s near 2%, the current federal funds rate of 2.4% puts us right at neutral”. As a pointer, the range of US neutral rate is +0.50% to +1.50% from the average US core CPI; (i.e. the US rate should be in the range of +2.50% to +3.50%), as per various economic conditions.
Dow also got some support late Wednesday after less hawkish Beige book, pointing towards slowing US economy amid intensifying China trade war.
In any way, although Dudley is now not associated with the Fed any more after his retirement, being an influential and experienced former FOMC member/US policymakers, his comments do have significant weight on the market sentiment. And his repeated stance that Fed may hike in H2-2019 is also in line with Fed’s own dot-plots of two more hikes in 2019 (H2/H4). The market got jittery as the Fed’s patience may not be perpetual and guaranteed in 2019, which is against the market perception of no more hike in 2019.
The market is also concerned about soft US economic data. The ADP (NASDAQ:ADP) Nonfarm Employment report (private payroll data) shows that in February, the US economy added 183K private sector jobs in February from prior 300K (revised positively from 213K), lower than the expectations of 189K and the lowest in last 3-months. The ADP job data was slightly disappointing on a headline basis, but the huge positive revision may be also an indication of exceptional factor like Polar Vortex.
In any way, commenting on the ADP data, ADP/Moody’s analytics said, the US job market may be topping out: “Job gains are still strong, but they have likely seen their high-water mark for this expansion. As the gross domestic product (GDP) running at a 0.3% annual rate in the first quarter (Q1-2019), much slower than the 2.6% rate reported for the final three months of last year (Q4-2018), this slowdown will start to show in payroll data”.
Although, the ADP data of 183K is close to the market estimate of 180K for the NFP to be released on Friday and is also in line with the Fed’s long term sustainable target, the market is concerned about signs of a potential slowdown in the US economy amid synchronized global contraction on Trump trade war and various geopolitical jitters.
Meanwhile, another data shows that the US trade deficit jumped to -$59.80B in December from prior -50.30B and higher than the expectations of -57.90B and at 10-years high. The US exports dropped to -$205.10B from prior 209.10B, while import surged to 264.90B from prior 259.40B. The goods trade deficit soared to an all-time high of around $891.3B in 2018.
Overall the total US deficit in 2018 surged to almost $621B, another milestone high and not a great figure in keeping Trump amused; he may harden his trade war stance further. It’s now almost clear that Trump’s “America first” policies are not working in this era of globalization. “Trump tariffs” or customs collections of around $5B per month is being paid by the US importers/consumers, not by any Chinese/other exporters.
“Trump trade war” stance and retaliatory tariffs are also affecting the US goods exports significantly. This coupled with slowing global (China/EU) growth, causing a reduction in demand for the US goods, while a stronger dollar is also working against the US export.
The trade deficit with China in December was $38.7B, by far the most of any nation, followed by the EU at $15.8B and Mexico at $8.8B. The surge in December trade deficit and a fall in net exports may affect the final GDP calculation for the Q4-2018; the 1st estimate was at +2.6%. The likely drag in the US GDP growth for Q4 is affecting the USD as-well-as the overall market sentiment.
As the US core inflation still hovering around 2.2% and the Q4-2018 GDP growth may come around +2.5% to +2.2% and the Q1-2019 GDP growth may also come around +0.03 to 0.05%, the market is now concerned about a high potential US stagflation not “Trumpflation”. In 2019, the US GDP growth may be slowed to around +1.5 to +1.8% as Trump’s fiscal stimulus fades.
Adding to the gloom & doom sentiment, the OECD on Wednesday have lowered the global growth forecast by -0.2% to 3.3% in 2019 on account of China and the EU slowdown. The OECD noted in its Interim Economic Outlook about the Chinese and European slowdown, and weakening global trade growth, which are the principal factors weighing on the world economy. Also, OECD warned that further trade restrictions and policy uncertainty could bring additional adverse effects. For China, while policy stimulus should offset weak trade development, risks remain of a sharper slowdown that would hit global growth and trade.
The OECD said: “The global economy is facing increasingly serious headwinds. A sharper slowdown in any of the major regions could derail activity worldwide, especially if it spills over to financial markets. Governments should intensify multilateral dialogue to limit risks and coordinate policy actions to avoid a further downturn”.
Thus, the overall “Trump trade war” and various geopolitical jitters (like Brexit and Trump’s own political issues) is responsible for the present “gloom & doom” scenario for the global economy. We have synchronized contraction from earlier rhetoric of Goldilocks expansion. This global slowdown, especially in China is affecting the US MNCs, which are heavily exposed to the Chinese economy and China is itself now a big consumption power. Thus, when China “sneezes”, the rest of the world got a “cold”, that could worsen to “Pneumonia”, if not properly treated at the earlier stage.
Trump, on his part, is now very eager for a face-saving China trade deal because he’s growing increasingly concerned the lack of a deal will drag down Dow ahead of the 2020 election. As a reminder, Trump is a slave of Dow (the US stock market) as he measured his Presidential success often to the rise in Dow since he got elected.
After his failure of the border wall narrative, NK truce rhetoric (failed summit with Kim) and defeat in the US Congress in the mid-term election, Trump has to show the success of China trade deal. And thus Trump will eventually sign for a tentative China trade deal, even with lots of uncertainties, This is already discounted by the market to a great extent considering the mammoth rally of over 20% for the SPX-500 from the December low of 2346.58 to the March high of 2817.76 (till now) on hopes & hypes of China trade truce.
Talking about China trade truce, a former Chinese finance minister Lou said Wednesday that China won’t make big concessions to reach an accord, and described some US demands as “just nitpicking”.
On Wednesday, the US stock market was dragged by GE (on guidance warning/ muted net cash flow forecast), Exxon (NYSE:XOM) (higher capex for 2020 coupled with a slump in oil), while helped by Dollar Tree (NASDAQ:DLTR) (on an upbeat guidance/revenue). Overall, out of 11-major SPX-500 sectors, 7-are in red including energies, healthcare and consumer discretionary stocks (led by Amazon (NASDAQ:AMZN)).
Technical Outlook: SPX-500, DJ-30, NQ-100
Technically, whatever may be the narrative, SPX-500 has to sustain over 2825 for a further rally to 2840/2865-2900*/2925 and 2950*/2985-3020/3050 in the near term (under bullish case scenario).
On the flip side, sustaining below 2815-2800, SPX-500 may fall to 2775/2745-2730*/2700 and 2675/2650-2635/2610 in the near term (under bear case scenario).
Technically, whatever may be the narrative, DJ-30 has to sustain over 26300 for a further rally to 26555*/26685-26850/26955* and 27050*/27380-27750/28100 in the near term (under bullish case scenario).
On the flip side, sustaining below 26250-26100, DJ-30 may fall to 25700*/25500-25300/25100* and 25000/24750-24550/24200 in the near term (under bear case scenario).
Technically, whatever may be the narrative, NQ-100 has to sustain above 7255 for a further rally to 7280/7375-7455*/7550 and 7685/7735*-7850/7925 in the near term (under bullish case scenario).
On the flip side, sustaining below 7235-7120, NQ-100 may fall to 7055*/7000-6950/6915 and 6870/6825*-6790/6720 in the near term (under bear case scenario).
US 500
Pivot: 2825 Support: 2775 2745 2730Resistance: 2840 2865 2900 Scenario 1: Strong above 2825 and sustaining above 2840/2865-2900*/2925, SPX-500 may further surge to 2950*/2985-3020/3050 in the near term Scenario 2: Weak below 2815-2800/2790* and sustaining below 2775/2745-2730*/2700, SPX-500 may further plunge to 2675/2650-2635/2610 Comment: Short term range: 2675-2825
US 30
Pivot: 26300 Support: 25700 25500 25300Resistance: 26555 26685 26850 Scenario 1: Strong above 26300 and sustaining above 26555*/26685-26850/26955*, DJ-30 may further surge to 27050*/27380-27750/28100 in the near term Scenario 2: Weak below 26250-26100/25800, DJ-30 may further plunge to 25700*/25500-25300/25100* and further to 25000/24750-24550/24200 in the near term Comment: Short term range: 24800-26300
US Tech 100
Pivot: 7255 Support: 7135 7035 7000 Resistance: 7280 7375 7455 Scenario 1: Strong above 7255 ans sustaining above 7280*/7375-7455*/7550,NQ-100 may further rally to 7685/7735*-7850/7925 in the near term Scenario 2: Weak below 7235-7135 and sustaining below 7035*/7000-6950/6915, NQ-100 may further plunge to 6870/6825*-6790/6720 in the near term Comment: Short term range: 6825-7235