Market Brief – Wednesday 6/4/19

In overnight trading, UK retail sales crashed by -2.7% on an annualized basis, which is the largest drop since 1995. A continued collapse in retail sales will likely lead to further job losses and store closures.

U.S. Factory Orders slid -0.8% MoM for April against expectations of a -1.0% drop. Factory orders for March were revised lower from +1.9% to +1.3%. MoM. Durable Goods Orders fell -2.1% for April after falling -2.1% in March.

The global manufacturing PMI has contracted to its 7-year low as the global factory sector is officially contracting. This is another sign that global stock prices are too high.

In an early morning tweet, President Trump reiterated the likeliness of tariffs on Mexico which are slated to start on June 10th.

As expected, the S&P 500 ignored the economic data and found buyers which sent the index over its 200-day moving average in early trading. Treasury yields also moved higher, even though it is clear the global economy is slowing.

Fed Chair Powell spoke today, as a total of 13 Fed speakers are slated to make various speeches this week, and he reiterated that the Fed would “act as appropriate” to sustain the economic expansion. In the past, Powell has used the term “patient” to describe the Fed’s outlook on monetary policy. Powell went on to say, “the next time policy rates hit the lower bound – and there will be a next time – it will not be a surprise.”

What Powell said is that the Federal Funds rate will at some point in the future return to zero percent and when it does, the world will know in advance. He also mentioned that the so-called unconventional tools of monetary policy, think Quantitative Easing, are not conventional policies that will be used the next time the Federal Funds rate goes to zero.

Investors bought stocks following Fed Chair Powell’s speech when they should be buying bonds instead. Both stocks and Treasury yields rose following his speech.

Adding to China’s food problems, China confirmed an outbreak of H5N6 bird flu in the Xinjiang region. Nearly half the birds in the region have been killed and nearly 12,000 other birds have been culled to stop the outbreak. Agricultural commodities traded higher in early trading after finding support at their 100-day moving average.

The USDA reported that as of the week ending June 2nd, 67% of the corn crop has been planted against its five-year average of 96% and 39% of the soybean crop has been planted against its five-year average of 79%. Corn emerged is at a mere 46%, when it should be closer to 84% and soybeans emerged is at a low 19% compared to its average of 56%. With more rain on the way, it is unlikely much of this crop will germinate or survive as hybrid seeds need ideal planting and weather conditions.

Buyers rejoiced a dovish Fed and dumped money into stocks as traders are hoping to see the S&P 500 get to 3,000 to 3,200, despite the continued weakness in the global economic data. Treasury yields shrugged off today’s move as yields fell following Powell’s comments.

It’s interesting that investors claim they never see a bear market coming, yet a simple look at the global economic data in conjunction with the Fed tightening and the tariffs would tell an investor that now is not the best time to chase risk assets. Rather than look at the data, investors become fixated on stock prices, which are a terrible proxy for the health of our economy.

The American Petroleum Institute reported crude oil inventories as Crude: +3.55mm (-1.8mm expected), Cushing +1.408mm (-800k expected), Gasoline +2.696mm (+500k expected), and Distillates +6.314mm (+600k expected). Crude oil erased today’s gain following the report.