- Stocks rise on Bank of England stimulus hopes. Despite surprising investors by keeping interest rates unchanged this month, the Bank of England’s (BOE) signal that rates may be cut in August has U.S. markets higher in early trading. Yesterday’s session saw the major indexes little changed, with utilities, telecom, and consumer staples regaining some momentum, while energy stocks were dragged down by a 4% drop in the price of WTI crude oil. In Japan, the Nikkei rose for the fourth straight day, while the Shanghai Composite closed slightly lower. European markets are modestly higher in late trading, and the pound has jumped to a two-week high against the dollar on the back of the BOE’s announcement. Meanwhile, the yield on the 10-year note is up sharply to 1.53%, COMEX gold is down more than a percent, and oil is recouping some of yesterday’s losses.
- Post-Brexit data point. At 254,000, new claims for unemployment insurance remained at 40-year lows in the week ending July 8, 2016. The latest report is another indicator that the labor market post-Brexit is little changed from pre-Brexit; but as usual, the weekly claims data are beset by distortions. At this time of the year, the end of the quarter, the end of the school year, and the annual auto plant shutdowns are the likely culprits. Claims are down 26,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate a recession, so clearly there is no recession signal from claims.
- Beige Book Barometer bounces in July. In another post-Brexit data point, the Federal Reserve Bank (Fed) released its Beige Book yesterday, a qualitative assessment of economic, consumer, business, and banking conditions in each of the 12 regional Fed districts. The data were collected through July 1, 2016, and therefore, included a week of post-Brexit data points. Our Beige Book Barometer (“strong” words in the Beige Book minus “weak words”) ticked up to +61, from +44 in June. All of the increase came in the oil-producing Fed districts. Inflation words remained elevated as well. We’ll have a blog post on the Beige Book later today.
- New leaders in the U.K. Just weeks after the surprising Brexit vote, the U.K. has a new political leadership, with Theresa May, who advocated for remaining in the EU, as Prime Minister. May placed Boris Johnson, a leading “leave” campaigner, as Foreign Secretary. She also created a new ministry, the so-called “Brexit Czar,” led by David Davis, an ardent Brexit supporter. The placement of such strong “leave” campaigners suggests a strong commitment to Brexit, largely squelching the rumors that somehow Brexit will be postponed.
- The Bank of England surprised the market by not lowering interest rates today. The market had been expecting a 25 basis point (0.25%) reduction. However, statements from various officials suggest a rate cut is still likely later this year, and that there was simply too much uncertainty around Brexit to engage in any policy changes. The British pound rallied on this news, while U.K. equities gave back some of their gains, though markets were still positive even after the announcement.
- More new highs. The S&P 500 made another new all-time high yesterday, its third straight new high in fact. Fun stat, the S&P 500 gained only 0.013% yesterday, for its smallest all-time new high since August 27, 2014, when it gained 0.005%. There have been 35 new highs during this time frame. The S&P 500 itself is up four straight days, and with futures higher, today could be the first five-day win streak since March.
- Just how overbought is the S&P 500? The recent surge higher in equity prices has prices extremely stretched in the near term. One way to measure this is by how far away the price is from its 50-day moving average. The S&P 500 has closed for four consecutive days more than two standard deviations above its 50-day moving average. This hasn’t happened since June of last year, and only 13 times during past 15 years. What happens next? The median return a month later is about average, but going out three and six months the median returns jump to 3.6% and 6.3%, respectively, but well above the average return over this time.
- Not all bad for the big banks. JPMorgan Chase kicked off bank earnings this morning. The results highlighted some positive trends in the industry that have been getting drowned out by low interest rates and Brexit talk. First, falling interest rates are driving mortgage refinance activity. Second, overall loan growth is quite strong. Third, credit quality outside of natural resources remains healthy. And fourth, trading likely got a late-quarter Brexit lift. We still think some caution is warranted due to interest rate and regulatory pressures; but given low valuations, substantial underperformance versus the S&P 500 over the past year, and potential upside to interest rates, financials (and the big banks in particular) are groups to watch as potential trading opportunities in the months ahead.
- Initial Claims (7/9)
- UK: Bank of England Meeting (Rate Cut Expected)
- China: GDP (Q2)
- Retail Sales (Jun)
- CPI (Jun)
- Empire State Mfg. Index (Jul)
- Consumer Sentiment and Inflation Expectations (Jul)
- China: Property Prices (Jun)