Market Brief – Friday 5/31/19

Shortly before Asian markets opened Thursday night, President Trump announced that effective June 10th, a 5% tariff on all imported goods from Mexico that will increase on the first of each month by 5% until the cap of 25% is reached. The tariffs won’t be removed until Mexico puts a stop to the illegal immigrants entering through their country are stopped. Mexico stated that they “won’t act desperately.” Stock futures and Treasury yields fell following the announcement.

In overnight trading, China’s May Manufacturing PMI came in below estimates at 49.4, which shows that China’s manufacturing sector has slightly contracted. A print below 50 indicates the manufacturing sector is contracting. China’s $60 billion in tariffs on U.S. imports is set to take place on June 1st and China has indicated they are preparing a response to the Huawei ban. Rumors are also circulating that China is preparing a rare-earth materials ban.

The USDA reported that as much as 13 million acres may not get planted this season due to persistent rains. Some experts believe upwards of 10% of farmland in the U.S. will not be planted this year. According to the National Weather Service, there is an above average probability for more rain coming to the Midwest over the next two weeks.

While the USDA has reported an increase in plantings, although well below the 5-year average, farmers on the ground have a different opinion. Midwest farmers are ‘wet’ farming, which involves planting seeds in wet ground, knowing the seeds are unlikely to germinate. Wet farming is done to collect on crop insurance. Those farmers who are willing to talk aren’t seeing the number of plantings claimed by the USDA. Either way, do not expect a strong crop this year.

Personal Spending in March was revised higher to +1.1% MoM while April came in at +0.3% MoM. On an annualized basis, Personal Incomes rose +3.9%. Real Personal Spending was flat in April. The Fed’s preferred inflation gauge, Core Personal Consumption Expenditures, rose +0.2% MoM and +1.6% YoY for April. Rising consumer prices will make it difficult for the Fed to ease.

The final University of Michigan Sentiment survey reversed some of its prior flash results as the survey came in at 100.0, which is its highest level since August 2018. Buying sentiment for vehicles increased slightly but declined for homes and large durable goods. A mere 38% of respondents felt there will be an economic downturn in the next five years, which explains why so many investors are so bullish on stocks.

Investors remained undeterred by today’s early drop in stock prices as they eagerly bought stocks. The S&P 500 was attempting to reclaim its 200-day moving average, which prices broke below in overnight trading. Treasury yields fell across the curve, with everything except thirty-year yields being inverted against the Federal Funds Rate.

Stocks headed lower in late trading as investors couldn’t get stock to rally. Treasury yields continue to be the star of the show as interest rates tumble which are sending Treasury bond prices higher. Given that the stock market is unable to rally here while Treasuries are, it is an indication that stock prices are headed much lower to catch up with Treasury yields.

Adding to the narrative that stock prices are headed lower are lumber prices which broke below their December 2018 lows and are threatening to head lower and take stock and crude oil prices much lower. Except for the major stock indices, the commodity and bond markets are telling stock investors that stock prices are going down.

Physical gold and the mining stocks rallied today but it was more of a technical move after being unable to find more sellers. Sellers appear to be at a higher price level, which is what Bulls found out today when they bid the price of gold higher.

Agricultural commodities rallied up to a major resistance zone where they found sellers. Prices thus far are holding their 100-day moving average, which is the moving average agricultural commodities tend to follow. Holding their 100-DMA into next week should help fuel a rally in this sector.