Monthly Market & Economic Forecast-July to August 2019

The month of July is over and a lot has happened from the first week, news-driven market movers have riddled the markets. The S&P 500 futures market opened at 2979.25 and closed at 2973.50. Down 0.193%. While the cash market opened at 2971.50 and close at 2980.50 up 0.2995% on the month. While the all-time high and months high was 3028, slipping 1.572% from that high into the close. A lot of the downside came from the last day of the month and the Fed cut decision. Why did the market drop on a Fed cut? Check out our Market Forecast section for the details. Enjoy the Monthly August Forecast.

July Market Driving Events

The main events that drove market movement this past month were none other than the US Federal Reserve and the Trade Talks between China and the US. In the following section we are going over the main high impact economic events that moved markets in July. Keep in mind through July, bad news was good news for the markets, why is that? Response below. 

Wednesday, July 3rd:

• USD ADP Non Farm Employment Change 102K actual vs 140K expected 41K (+) previous 

Friday, July 5th: 

• Average Hourly Earnings m/m 0.2% actual versus 0.3% expected 0.3% (+) previous (USD)
• Non-Farm Employment Change 224K actual vs 162K expected 72K previous (USD)
• Unemployment Rate 3.7% actual vs 3.6% expected 3.6% previous (USD)

Tuesday, July 9th:

• Fed Chair Powell Speaks at a Conference (USD)

Wednesday, July 10th:

• Fed Chair Powell Testifies (USD)
• FOMC Meeting Minutes (USD)

Thursday, July 11th: 

• Fed Chair Powell Testifies (USD)

Wednesday, July 31st:

• ADP Non-Farm Employment Change (USD)
• FOMC Statement (USD)
• Federal Funds Rate (USD)
• FOMC Press Conference (USD)

Over the past month, the main economic events were centered around employment figures, one of the Fed’s main economic data points observed for monetary policy changes. The reason for that is the rate decision late in the month. Whatever bad news was correlated to an increased probability of rate cuts on July 31st. The misses in high impact events meant upside in equity markets, while the beats in economic data meant misses. Check out the chart below. 

August Market Driving Events

Friday, August 2nd:

• Average Hourly Earnings m/m (USD)
• Non-Farm Employment Change (USD)
• Unemployment Rate (USD)

Thursday, August 15th: 

• Retail Sales (USD)
• Core Retail Sales (USD)

Wednesday, August 21st:

• FOMC Meeting Minutes (USD)

In August, we’ve got the employment report from the US which will either put more pressure or take the pressure off the Fed for further September cuts, only time will tell. This is good news is bad news scenario. Meaning if the numbers come out good, the rate cut might seem useless and there will be further pressure to cut yet again.

The Fed Jackson Hole Symposium starts on August 21st as well. How will it all coincide with our Monthly August Forecast?

The Federal Reserve’s Monetary Policy stance in July and what to expect in August.

The Federal Reserve has been the center of attention this month as last month they announced that we would experience 3 rate cuts in 2019. That leaves 6 months, from June to cut 3 times in a low-interest-rate environment. That rate cut expectation was later cut down to two rate cuts in 2019. From a Feds fund rate of 2.25-2.50, there isn’t much to cut. There is even a probability of a double rate cut priced into the market. Two double cuts, is a whole percentage point cut in the Feds Fund rate, leaving us with a 1.25-1.50 funds rate by the end of the month with markets at all-time highs, unemployment at decade lows and moderately increasing inflation.

To begin the month of July, there was a 25% chance of a 50 basis point cut and a 75% chance of a 25 basis point cut. Overall 100% chance of a cut of any sort. By the July 31st meeting, there was a 25 basis point cut. This was the first cut in over 10 years, since the last financial crisis.

The next probabilities available are for the month of September where rate probabilities are 70.7% for 1.75-2.00%, 3.2% for 1.50-1.75% and a chance for 2.00-2.35% at 26.1%. Which would mean another potential for a cut in September?

Well, it really seems like it! now just over 70% of a chance of another cut in September after Powell’s announcement and press conference. This probability may chance in August, which will effect the outcome of the monthly forecast.

The Fed has expressed its concern over its independence and has time and time again mentioned that they are indeed data-dependent. However, Powell and the majority of members are adamant on raising rates. That’s what they’ve expressed for the most part. Many of which have said they’ll need more data to confirm. Otherwise, data has been for the most part this month come out on a positive note.

Which brings something weird to the markets, downside. Why is that? Because the more positive economic data comes out, the more the Fed would shy away from cutting rates. This is an artificially inflated environment which is unsustainable. The Fed is losing independence as they are clearly working for market strength and doing their all to push the S&P 500 higher. There has been recent political discourse between Powell and Trump, with the possibility of Powell losing his job. One more thing, imagine S&P 500 trading at 3100 and rates are at 1.50-1.75%. What would happen from there if there is doom and gloom? Cut to 0.00% and go the way of Japan and the ECB. 

Fed June Dot Plot 2019

After the June 19th, 2019 meeting, the Fed Dot plot was reconfigured and the results were interesting. The majority of FOMC members saw current rates as the expected rates. However, a large number of members see the 1.75% level as the 2019 target area. Then in 2020 rates are expected to be slightly lower, before longer-term hikes. 

Powell testified for two days straight in the second week of July and where he expressed his weak inflation worries and risk that it presented and that the recent jobs data in the non-Farm numbers did not sway his decision too much, opening the downside in the equity markets. He was very vocal on the independent front of the Fed. Powell is clearly getting pushed around by politicians, the main point he had this week was that inflation readings were weak, too far below the target, then the CPI print for June comes out HOT. CPI came out at 0.3% month over month, the highest level since 2018, after Powell prepared his dove speech. 

Into July 31st at the actual Fed Funds rate decision and monetary policy, Powell and the Fed cut as expected to sustain the expansion. However two of the Fed members dissent. Pretty obvious it was the two hawkish members George and Rosengren. Powell mentioned that the Fed is adamant on remaining data dependant, or market price dependent. 

Powell went onto say that the muted inflation and global developments are the reasons for the rate cut. They also want to end the balance sheet run-off two months before they originally planned. Through the press conference and questioning, Powell talked about the current “midcycle policy adjustment” trying to waiver fear away from late-cycle talks. After which he said he and the Fed did not open the flood gates for a long series of cuts but that doesn’t mean it is the only cut. We are patiently anticipating the Fed Dot plot after the July meeting to add to the Monthly August Forecast for the economic sentiment.

New Fed Policy

The Fed’s policy will now lower the borrowing costs and support the evident confidence.

The cuts 3 main goals were as follows:

1. Ensure against downside risks
2. Support demand
3. Support return to 2% inflation target.

Overall the Fed does not see the risk of recession in this near equity high decision and sees no reason for why this economic expansion cycle cannot continue. This is interesting considering we are just days away from the Non-Farm jobs numbers yet again where we will see if the cut was just. Remember the Fed said they wish to remain data-dependent. For that reason, this cut would only make sense on weak economic data, so if jobs numbers beat, there will be a lot of questions around the Fed. Now, this isn’t the be-all and end-all data figure, but its an important one to consider.

Political Influence and Trade Talks

Before we look at the stock market movement and expectations based on a lot of criteria, we will outline the recent trade talks between Xi and Trump and a look at economic data that came out over the past month. 

First things first, Xi and Trump, USA and China. The trade talks. The two have been away from each other for a while, leading into the G20 meeting at the end of June in Japan. Where the two had a good talk it seems because they’re back to the table and negotiating. It doesn’t seem to be going very far, as there are few new revelations. The first of which Trump has announced that he will ease up on Huawei restrictions allow US hardware and component producers to sell to the Chinese telecom giant.

There were also talks of China agreeing to purchase more agriculture from the US, nothing solidified yet. With the drawn-out trade talks, we just want a deal to go through. The same has been repeated over again and the main issue is agreement. Both sides want the best deal for themselves and their countries, and there will have to be compromised. Trump and Xi have not even been able to agree on the wording of the last agreement which may have just been scraped. 

Trump and Tariffs

The tariffs that were proposed will not be dismissed, however, Trump did not hit China with the remaining tariffs on $300 billion worth of goods as Trump and Xi met during the G20. A trade deal going through would undoubtedly rally the market and if rate cuts would go through with a trade deal we’ll hit new highs, which could spell disaster in the medium to long term for the economy and markets.

This whole Trump/Xi negotiation seems like a solid game of cat and mouse as the G20 meeting is very similar to the one in December 2018, Buenos Aires when the two met again. What’s the same? The nations are in great relations, and a deal is coming right up. There is still a 10% difference in the US and China trade that has to be settled. Not hitting the remaining $300 billion of Chinese imports to the US with tariffs is exactly what happened in 2018, that time it was not raising tariffs on $200 billion dollars of goods. What happened? A large market correction on the back on rate hikes. Is Trump just buying time before his election in 2020?

With markets at all-time highs, he has a strong case for the election, however, no one really thinking of the long term and economic health, what would happen then when everyone realizes how overbought everything is and how artificially hit it is and artificially low rates are? Is the US just waiting for China’s total capitulation of the tech issues that sparked this debate in an attempt to launch a full out economic war for their own gain?

China’s rebuttal

China has an ace up its sleeve, the natural devaluation of the Yuan-Renminbi currency as the global economy slows, the devaluation would offset tariffs. They have done this before but it was a forced devaluation if they allow natural devaluation they will have a strong hand to play. Simultaneously if they sell off or stop purchasing US Treasuries, of which they have $1.3 trillion in US assets could increase long term US rates and the value of the greenback which increases the slowing of global growth. China has already begun to hold back on purchasing further US assets this year and last. What does a rise in long term rates and the value of the greenback lead to? A huge stock sell-off and that would anger Trump drastically since he’s pinned the US economy to the market’s strength. 

Mid-July Trump threw some more fuel into the fire by saying that deal is a long way away and equities at all-time highs did not appreciate that. Falling that same week into the 2970 area.  At this point,all we have to do is wait for more news. Towards the end of July, we got a lot of political news from Trump and Xi’s deal, the Fed’s take on the rate cut and the debt ceiling. Markets slipped off a less aggressive Fed, however, the 50 basis point cut probability has been on the steady rise. The 25 basis point cut has remained the majority however into the cut decision. 

On the market dive off a less aggressive Fed, Trump was not far behind. Quickly announcing that trade talks were going well-adding optimism to the markets, moving them back near highs. 

The United States Economic Data & The Federal Reserve

The economic data that came out over the past month is to be noted as well as the Fed has expressed its data dependence rather than political influence. 

The main report that stuck out this past month was the non-farm employment numbers. This is because of how the market reacted, a strong number sent the market spiraling, due to the Fed influence. With strong data points, the Fed was priced in to be less likely to cut rates and markets/traders and investors all panicked. The numbers can be seen above. However, there are other economic data out of the US that should be analyzed to make a fair decision about the economy. Some data points include imports and exports with China. 

The White House and many on Wall Street have argued that the Fed should focus on price indicators rather than employment. CPI data has remained persistently below the 2% Fed target, despite a healthy jobs market and the central bank’s willingness to tolerate “symmetric” above-target inflation. This month’s inflation data is expected to remain tame, but an upside surprise could curtail hopes for Fed rate cuts this year. 

It’s no surprise that the trade war significantly impacted the US economy with a potential loss of upwards of $400 bn next year in GDP, there is a potential of global trade conflict emerging and a US recession which has to lead to monetary easing. In the package of rate cuts from the Fed. 

Economic Data

Economic expansion is on the US agenda, and this month hits a pivotal milestone in the longest uninterrupted economic expansion ever in the history of the United States. Growth is another thing, however. GDP growth, as seen in the chart below is expected to decline from 2.5% this year, nearly a whole percentage point down to 1.6% in 2020. 

On the back of the trade policy from the US that saw a significant decline in imports and exports with China due to high cost, which is expected to slow through 2020 is the worry of the decelerating inflation rate. Noted clearly by Fed Chair Powell and the Reserve, just before the surprise data number that led us to believe inflation growth is not that bad.

The two main figures to look at here are Core and total PCE inflation. Averaging about 1.6% and 1.4% respectively in 2019. PCE inflation is well below the Fed’s proposed 2.0% that is why they are making the case for rate cuts to stimulate the economy. Large blame is being set on the global financial crisis that muted inflation and is still recovering. The PCE inflation measure since 2007 is averaged at 1.55%, almost half a percent below the Fed target. The expected rise in inflation in 2020 is due to the expected easing out of the US, rate cuts will bolster the economy.

IMF Outlook

The IMF continues to cut global growth outlook which is the lowest it has been since the 08-09 financial crisis. Trade talks and Brexit at the forefront of the stifled growth outlook. This is the fourth time in a row that the IMF has downgraded the worlds expected economic growth due to global trade tensions.  

In 2018 they expected 2019 to grow at 3.6% initially, then downgraded to 3.3% and 3.2%. China’s economy is forecasted to grow at a rate of 6.2% which is the slowest in almost 30 years. There is a lot of pressure on economic growth baked in from the emerging market, resolving trade differences, mainly those between the US and China and the plethora of tariffs. Finally the worries of a no-deal Brexit. Finally, US growth outlook has been increased since April when it was 2.3% up to 2.6% now in 2019. However, it is still down from last year. 

The Debt Ceiling

On July 22nd, the White House and congressional negotiators reached a two-year budget deal to increase the US borrowing/spending by $320 billion over the current cap. This was in part done to keep the borrowing up and avoid a financial crisis, however, they are doing it by taking on more debt, and increasing the deficit.

This is not ideal in the long term for the government and the US economy. Adding to the potential debt crisis as we are expecting the US to shatter the $1T mark in 2020. The increased tariffs added on Chinese goods and the trade war as a whole will stifle the country’s GDP, contributing to the deficit. If the economy was in such good standing and there were no financial worries as Trump has repeated time and time again then why are they taking such measures to increase debt and decrease interest rates. One of the main risks is the possibility of default on its own government debt, ending Obama’s Budget Control act. 

Sector Analysis

Sector analysis can tell investors and traders a lot about the current economic cycle. There are certain sectors that tend to do better in certain economic environments and in the following section, we will go through the main sectors of interest and what they may mean. 

Below is a chart representing the sectors in comparison to the S&P 500 Futures market (ES1!)

There is a legend on the graph on the top left-hand side of the chart. 

The following sectors we will be looking at are:

• Technology up 3.55% (Purple)
• Consumer Staples up 2.74% (Burgundy)
• Financials up 1.90% (Green) 
• Consumer Discretionary up 1.30% (Salmon)
• Industrials up 1.57% (Grey)
• Retail up 1.11% (Pink)
• Utilities up 0.86% (Yellow)
• Health down 1.03% (orange) 
• Energy down 0.88% (Red)

Watching the flow of capital into each sector, or out of each sector can be a good indicator of how the economy is holding up. This is because there are an array of sectors, some consider “safe havens” which tend to increase capital inflows during times of fear. This is because they are the last things to be cut by the general population. For example, utilities and consumer staples.

Over the past month, the sector movement has been interesting. It is always difficult to identify the exact moment of shift in the business cycle based on the sector capital flows. However, there are more evident signs. 

For the most part in July, equities have outperformed and even those that are considered safe havens like Consumer Staples and Utilities. 

So it’s very difficult to say that we are in a late business cycle because there is still a lot of strength in Financials, Tech, and Industrial who generally lose ground during a late-cycle and Recession. It’s also not safe to say that we are in an early cycle in which most sectors increase in value and Health Care, and Utilities drop substantially along with Energy (which has been dropping). 

The substantial increase in Consumer Staples and slight move higher this month in Utilities does hint at signs of late-cycle, but there is a more of a hint to the latter end of the mid business cycle based on sector movement. 

To confirm a late-cycle movement, energy, health, and utilities would have shown signs of strength, while technology would have shown signs of weakness along with consumer discretionary. 

It’s a mixed bag of sectors right now that does not show definite signs of slowing into a late-cycle or recession. Which can easily change after the rate cut decision’s effects come into play which may take longer than we might anticipate? 

It will be interesting to see how the sectors shape up in the month of August. Which will give us a clearer picture as to what is to come in terms of business cycles? 

Earnings Season

The earnings season kicked off midway through July for the second quarter of 2019. The banks were the first to have a go at earnings and then blue-chip as we anticipate tech names reports. Really to see what this stock market is made of on the bull side. The expectation is for a weak Q2 in terms of earnings, banks are expected to weigh on the downside amid the low-interest-rate environment and the rate cuts up ahead. Watch out financials. The trade issues are weighing on company earnings as corporations are slowing down their investment side and capital commitment around the geopolitical uncertainty. Meaning corporate earnings are expected to slow as well. Below is an earnings expectation graph from Factset, this quarter’s earnings are expected to drop 2.6% based on the S&P 500 companies. 

Among bank stocks that may be in trouble, we could see trouble in the tech and materials sectors. 

We’ll focus on a few earnings that came out this month and their effect. Mainly large companies that sway the markets. Here is the following list:

• Wells Fargo (WFC)
• Goldman Sachs (GS)
• Netflix (NFLX)
• Facebook (FB) 
• Amazon (AMZN)
• Alphabet (GOOGL)
• Apple (AAPL)
• Boeing (BA)

Wells Fargo (WFC)

The bank beat earnings expectations $1.30/share vs $1.15 expected and beat revenue $21.58Bn vs $20.93Bn for Q2. However, the stock slipped slightly on the news off anticipations of lower Fed Funds rates. Which may impact future bank earnings and operations. Since their profit margins get affected by a smaller lend to borrowing margin. The stock recovered afterward as US equities continued higher off other baked in political optimism. The stock has not made all-time high gains such as many others. 

Goldman Sachs (GS)

Goldman also beat earnings, $5.81/share vs $4.89/share expected. Beating revenue as well, $9.46Bn vs $8.8Bn expected. Goldman Sachs beat across the board, beating equities sales & trading revenue $2.01Bn, vs $1.79Bn. GS did not seem to feel the same initial burn WFC felt and earnings beat helped the stock rise. It will be interesting to watch this stock after the rate cut and during their next few earnings reports. 

Netflix (NFLX)

Netflix earnings came out as a slight beat of expectations $0.6/share vs $0.56 expected. Revenue missed slightly, $4.92Bn vs $4.93Bn expected. However, the stock fell drastically off the report losing just over 11% off the report itself. There was more downside to the stock. Why did this happen? The drastic drop in subscribers added from the increased monthly fee, just half a year ago. The company was expecting a loss in subscribers added from 8.9M in Q1 to 5.0M in Q2. Instead, they got a huge miss of 2.7M subscribers added Q2. The downside has opened up and we could see NFLX under $300 soon. 

Facebook (FB) 

Facebook earnings beat revenue expectations ($16.9Bn vs $16.5Bn) but missed on earnings per share. Which came out as $0.91 vs analyst expectations of $1.86. The stock did not take well to this news as a slight spike leading into the even got taken out. The FTC took a chunk out of FB’s wind with a substantial fine, near $3Bn for their recent privacy issues. The FTC investigations is still under review by the DOJ in a massive antitrust issue. Which added to the downside of the marginally missed earnings. Falling just shy of the $209 level upside down under $200/share yet again.

Amazon (AMZN)

Amazon may be the loser of this earnings season. The tech giant beat on revenue $63.4Bn vs $62.4Bn expected but lost on earnings per share based on the analyst expectations of $5.57 ($5.22/share). The beat in revenue was in part due to the upgrade in Amazon Primes 1-day delivery from 2 days. The North American revenue and International revenue grew dramatically, over 20% and 12% YoY respectively. While in Q3 Amazon expect further slowing which is a sign of a mature company. They expect operating income to drop to 16% from 43% as they continue to spend on upgrading Prime’s free delivery to 1-day. Off the news, AMZN dropped below $2000 and back into the $1900/share mark. 

Alphabet (GOOGL)

Google or Alphabet came out as the earnings season winner gapping over $100 higher per share. On the news release beating the analyst expectations of $11.32 with an earnings per share of $14.21. Falling about $30 shy of the all-time high and now resting around the gap high close. Revenue slightly missed ($38.9Bnvs $39.7Bn expected) but the YoY revenue grew 19%. Most importantly ad revenue was up 16%. Which is a main driver in the stock as we head to the $1300 level. The stock is struggling, however, to maintain this huge gap upside due to subdued equities into the FOMC announcement. 

Apple (AAPL)

Apple beats well on earnings, $2.18/share vs $2.09/share expected and a beat on revenue from the expected $53.3Bn. The revenue number came out as $53.8Bn. The stock rose over 4% right off that news breaking through the $1Trillion market cap. The price has to stay above the $215 level should the upside continue.

Boeing (BA) 

Boeing is a company of controversy over the past few months. After the 737 MAX mishaps, leading to the grounding of the Jet. Earnings we’re going to be a large area of interest for the company. As a loss naturally was expected of $6.30/share. While the actual loss of earnings was $5.21/share a slight beat of expectations. There was a substantial sales loss of $2.9Bn falling to $15.8Bn this quarter. Boeing took a $4.9Bn charge for the MAX mishaps as well. Expectations for continued decreases in revenue are to come in the next quarters as the 737 is still grounded. BA dropped off the earnings report from the $380 resistance. Down from $450 in March 2019 when the fall happened. 

August 2019 Market Forecast

Into the end of July, we got our much-anticipated rate cut decision, however, markets feel off into the close of the month. If rate cuts are in the direction of monetary easing then why did markets drop off the news?

The US equity benchmark, the S&P 500 fell on investor fear. That the Fed was taking precautionary measures to hedge against a potential large downside sweep in markets.

Keep in mind, in late July, the S&P 500 printed all-time highs, while the Fed was cutting. If everything was as good as Powell made it out to be on the economic data front, then why would there be a need to cut rates near highs?

What will happen when the market does actually retrace. Does the Fed continue to cut near highs just to propel the current confidence?

For the August forecast, we have to take a lot of data points into account, along with technical analysis.

Its hard to predict where the market will land in a months time. Its not that hard to create “if this then that” scenarios.

Market Analysis

We got an extended move below the 3000-3005 support structure that had to hold for the move higher. Thanks to the Fed and Powell, where price managed to drop into the second support level below at 2970-77 support. This is where price stalled out on the S&P 500 futures market to close out the month.

There can be more downside at the start of August. We see the current 2770-75 area as a strong area of fight if we break below we can get into the low of the month at 2955 where price ultimately stalled on the Fed cut news. The volume was really strong on the downside through all the support. Which leads us to believe some more downside before the confidence and euphoria of traders buy the dip, deeming equities “on sale”.

The ultimate downside we see in August is 2885-88, watch the volume on this downside swing if the sellers really come in this could be the start of a large spill.

However we have 2955 as really strong support where we can see the ES futures back into the 3000 levels, and even all-time highs yet again. That is however really strong resistance.

If we break into the 2955 support the bear structure of lower lows lower highs is strongly confirmed and we can see the move into 2915.

Political Influence

The fundamental portion of this forecast comes from US economic data and also Trump and the Trade news. We could see Trump come out with “an almost deal” and jawbone the equity markets back above 3000.

If US economic data comes out as misses throughout the month we could get mixed signals. Meaning some investors may think that this is an opportunity for another cut. While others may have wised up and come to the conclusion that this cut didn’t do anything for bad data, why would another near highs?

All in all, the next few days in August will be pivotal. Manage risk, trade like a TRADEPRO. Hope you all enjoyed our Monthly August Forecast.

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