A turbulent week in US equities as earnings season kept up, we had the turn of the new month, all-time highs in equities, FOMC statement came out and more. Nasdaq made highs time and time again over the past week but so did the S&P 500 cash and futures market. In the Futures market, we managed to break above the 2947 intraday all-time high and move into the 2961.25 new intraday and all-time high overnight on April 30th. From that peak, we got a slide from the FOMC. Strong earnings and flat inflation data pressed markets to all-time highs early in the week.

The dovishness of Powell dissipated slightly on Wednesday from expectations and the 2/10-year spread widened. Powell talked about overbought equity markets and low inflation due to “transient” factors. Which put downside pressure on equities and increased overall fear sentiment. Powell stood firmly by his decision to not move rates in the foreseeable future as there were slight talks about potential rate cuts even more so than rate hikes. If there were a cut in the mix, wouldn’t that mean more accommodative monetary policy due to a slip in the US economy? However, the US economy has been doing well so there is no need for that, or so we’ve been told.

The jobs data on Friday came out very strong with a slight hiccup in average hourly earnings. That could not spoil the party as buyers took this as a chance to break back into positive territory for the week in equity markets. This pushed Fed doves to continue to press for a potential cut in rates to adjust inflation. In other market news, crude oil plummeted throughout the week due to an increase in crude inventories midweek and an increase in production.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 3.17%
  • Technology up 0.32%
  • Financials up 1.28%
  • Retail up 0.14%
  • Utilities up 0.34%

Overview of key markets last week (bottom chart):

  • Crude oil down 5.04%
  • S&P500 up 0.83%
  • Silver was up 0.23%
  • Gold up 0.02%
  • US dollar down 0.68%

Hawkish Powell can’t kill this bull.

This past Wednesday, Jerome Powell, Fed Chair hit the wire for the FOMC statement after announcing no rate cut or hike decision. He talked about the economy as a whole, mainly inflation and markets and with a few comments managed to send markets plummeting. Powell mentioned that low inflation is expected to be transitory, and continued to boast a surprisingly hawkish tone throughout the statement after announcing his pride for the US economic condition. Not to mention the fact that Powell flat out said there could be a trade deal as soon as next Friday, May 10th…jawboning?

Another thing to consider is the jobs numbers, along with what Fed Clarida had to say about the FOMC statement. The fact that Powell used the word transitory to describe factors affecting low inflation is a sign that nothing is certain in terms of accommodative monetary policy. This brought aniticpated December 2019 rate cut odds down to about 50% from the near 80% peak in late March. The only thing that was cut was the Fed Funds IOER, putting some kind of pressure on reserve levels, and over the past month or so, the effective Fed Funds rate has been trading over the IOER. It seems like the Fed is losing control of the Fed’s rate and dollar liquidity is becoming an issue that the Fed may not have a solution to.

The significant drop in the equity market over Powell’s statement was short-lived, Thursday more weakness came out in the equity markets. However on Friday, partially due to a significant beat of the NFP jobs numbers, equities were back to near highs. Is that all it took? Overexaggerated a little it seems. Well not to worry, a drastic 73K beat of the expected jobs added in April (263K actual vs 190K e) and a drop in unemployment to 3.6% from the 3.8%, was more than enough to send equities higher. Right off the lows, its like Powell’s stance on the US economy in Wednesday’s statement was brushed off.

Clarida added to the upside as he continued to jawbone markets reinstating that there is limited evidence that we are near a recession. Adding to this he boosted the US economic condition and the current state of inflation, stable. He supported Powell’s stance of further adjustments only when needed, and so far they are not needed. It will be interesting to see what equities do should they move back into the all-time high territory yet again. Last time around or this week, they did not do well, it took a rate statement to pull equities lower for two days straight, the downside could have continued had the jobs numbers not come out.

Oil slips up, Trump gets his wish.

Production ramps up, inventories build, Trump tweets, its the perfect oil bear-storm. Its brewing and Trump is chuckling. Russian production is up, it isn’t Saudi Arabia this time around, and US crude inventories build this week. The two main catalysts for the recent downside swing in crude. It wasn’t too long ago that the US barred waivers to Iranian oil, bringing out the upside in the crude market, now this. But Iran’s not done as their oil Minister predicts OPEC demise. Salty, or accurate?

As for this weeks supply increase, US crude stockpiles have risen to two-year highs, the upside in crude oil pricing may not be as bullish as it was last week, Russia also missed their due production cuts in April, whoops. The Eastern friends would rather make more money than cooperate with OPEC. To add to the potential downside in crude, retail traders are LONG! The retail bus has left and it’s going up the mountain.

After the strictness of sanctions against Iran increased, no longer offering waivers to accept Iranian oil, the oil minister had a few choice words to say about OPEC. He may be onto something. OPEC as a collective makes sense, they decide on the supply of oil to the world and collaborate with other nations. Dealing with supply they should abide by their rules. However, nations would rather make more money right? So production goes up, its seen time and time again. Does Saudi Arabia want to offload a few million barrels? No problem, supply them, price then goes down and not to OPEC’s plan. Recently seen with Russia, non-OPEC member but still collaborates with the collective. He also mentioned that “it is impossible to eliminate Iranian oil from the market”. Throughout the decades of OPEC, Iran has had issues in the unity but has managed to resolve them, this may just be one of those hiccups.

Below is a chart of the recent events in crude oil futures. The ups, driven by US Iranian sanctions, the downs driven by increased production and Trump tweets.

Weekly Economic Calendar

Heavier news week coming up, a lot of news out of Canada, Austalia and New Zealand with Fed Chair Powell going live yet again this week which should bring some volatility to the markets.

Sunday- Caixin Services PMI out of China to start the week bright and early.

Monday-BOC Poloz speaks which will affect the CAD. Retail sales out of Australia and Inflation numbers out of New Zealand.

Tuesday-Cash rate and RBA rate statement out of Australia. Official Cash rate, monetary policy statement, rate statement and press conference out of New Zealand. If there are any late night traders, the New Zealand dollar and the Australian dollar will be on the move during these reports.

Wednesday- No high impact news.

Thursday-Trade balance out of Canada which should stir up the CAD. Fed Chair Powell out of the US will move equity markets, he goes on pre market. PPI out of the U Spre market as well. The RBA monetary statement out of Australia overnight will move the Aussie Dollar.

Friday-Overnight, GDP, manufacturing production and prelim GDP out of the UK, which will move the pound. Pre-market employment numbers out of Canada and CPI data out of the US.

 

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