Equity markets rally this week, over 150 points on the S&P 500 E-mini futures, and over 4% on other equity markets such as the Dow Jones, ES and just under 4% from Nasdaq. Huge tech regulations come out which hindered NQ gains. Alternatively, trade news was bullish for once, weak economic news comes out and a rate cut is pretty much priced in this summer, helping US equities reach for the star yet again. S&P 500 futures nearing the 2900 level yet again, closing the week out at 2877.

Antitrust issues were addressed by US regulators concerning Google and Facebook which stifled Nasdaq gains early in the week. The FTC and DOJ and taking it upon themselves to investigate large tech companies, splitting the duties amongst themselves. The FTC taking on Facebook and Amazon while the DOJ tackles Apple and Google. While the House Judiciary Committee is also investigating the tech giants.

Disappointing global economic data, and US economic data read more below, was the main catalyst in forcing the Fed’s hand this week. Many Fed members, including Powell, expressed their concern with the current conditions and hinted at expansionary monetary policy, meaning a rate cut in the near future.

More trade talk news came out, now that Mexico is involved with the US, both Mexico and China made headlines on the day. Mexico was a little more lenient to Trump’s demands than China. The suggested 5% tariff will still be in effect this coming Monday, June 10th. While China made headlines again, with the US being much more accommodating announcing a delay in tariffs until mid-June, which helped equities rally despite weak economic data.

Australia and India cut rates this week, along with super doves from the ECB were accompanied by doves out of the US Fed. All this dovishness and expansionary language helped equities find new highs, pushing the USD down and gold higher. Now expecting 3 rate cuts in 2019.

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 up 4.13%
  • Technology up 5.97%
  • Financials up 4.21%
  • Retail up 2.82%
  • Utilities up 3.06%

Overview of key markets last week (bottom chart):

  • Crude oil down 4.44%
  • S&P500 down 3.04%
  • Silver was up 3.55%
  • Gold up 4.05%
  • US dollar down 1.62%

Rate cuts could be around the corner.

Over the past few months economic data has been slipping, markets slipped for the most part as well. GDP globally was revised lower and so was US growth forecast. The tariffs that are being handed out left right and center are supposed to decrease global GDP by nearly $500 billion in the coming year, not to mention the abysmal jobs report that came out on June 7th, 2019. The ADP numbers predicted the jobs numbers for the coming Friday. The US managed to add 75,000 jobs in May, from the 263,000 expected that was revised lower to 224,000.

The last time we had a number this low was in February, and also 100,000 jobs less than the 175,000 consensus number. With March being revised lower to 153,000 from 189,000 bringing the net jobs added to 0… That’s right 0! Which may be one of the leading indicators for this proposed rate cut, get this economy firing again. The US economic indicator, the stock market has not been struggling per se, but why? Why are they cutting rates? We’ll get to that in just a second. Non-farm changes drop in 2019 from 2018 by about 60,000 on an average month over month basis form 223,000 to 164,000 in 2019. After this report, the probability of a rate hike in the coming few months skyrocketed. Take a look at the probabilities below, in June we have a 37.1% chance of a cut and in July a sharp 71.1% chance! Now that the Fed meetings are once a month, Fed rate cuts could happen any month!

 

What happened to the markets on this news? An initial equity dump..naturally. However, a little jawboning from the Trump administration helped equities rebound, which could spell danger for this rate cut proposition.

On the news, pre-market on the NFP report drops from the 2853 level to 2846, with decent selling as more traders caught wind of the severity of the situation. So why did we close near the 2880 level? As volume began coming in on the drop, Trump conveniently announced the US will be more lenient with Chinese tariffs, in order to avoid a tariff hike and they will not go up until June 15th for some Chinese goods. Not to mention the bolstering analyst talk of 3 whole rate cuts for the remainder of the year, that puts us at once every two months. Does this smell like the PPT? Yep.

From what we’ve seen, Trump is super happy with the rate cut because it is going to propel equity markets higher. He’s finally getting what he wants, however, this comes at a risk. Weak economic data and decently high equity market is forcing the already low rates to be cut. Are we going to get 0.00% in the US? Why is it risky to cut?

If rates were to be cut this aggressively, the US and Fed could experience similar economic conditions and monetary policy impotence and two major central banks that have been attempting to recover their economies for decades. That’s right Japan’s BOJ and Europe’s ECB. Should the Fed continue to cut already low rates we could experience stagnation as these two areas. Another risk is tariff affect on one, the global and US economy and two, unemployment. Since the imposition of tariffs, unemployment has stagnated towards the bottom and is in danger of rising which will hurt Trump’s re-election chances. Not to mention a massive hit on the global GDP, potentially plunging the US into a recession.

Weekly Economic News

Slower economic news in the week ahead with little US news scheduled. Beware of the US tape bombs that have been the center of attention over the past few weeks as Trump has addressed trade talks yet again, the Fed is talking about a rate cut and Trump has decided to hit Mexico with tariffs.
Monday, news out of the UK, GDP and manufacturing production.
Tuesday, more news out of the UK, average earnings Index.
Wednesday, CPI data out of the US, employment numbers out of Australia which will move the Aussie dollar.
Thursday, the Swiss national Bank addresses monetary policy watch the Swiss franc.
Friday, retail data out of the US pre market.

 

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