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STRATEGISTS WORRY THE STOCK MARKET'S JUMPING THE GUN (1145 EDT/1545 GMT)
A risk-on backdrop is in play in equity markets as global government bond yields have taken a material step back since the spring, and as the expected deceleration in inflation has become more evident.
As Bob Doll, chief investment officer at Crossmark Global Investments, sees it in his latest "Deliberations," global inflation expectations have eased amid lower crude oil and commodity prices.
In fact, he says that last week's U.S. CPI report confirmed that "the high-water mark for the past year's surge in inflation" has likely been seen, which should underpin sentiment for a period of time.
However, Doll believes that those expecting a return to the low-inflation environment of the last decade will be sorely disappointed. He thinks inflation will only pullback to the 4%-5% area, well short of the central bank's 2% target.
"A choppy investment environment is probable as investors anticipate an eventual slowing of the pace of rate hikes and less hawkish central bank rhetoric. Once recession fears recede significantly and it becomes apparent that underlying inflation is not headed to the 2% area, then the investing environment may become more difficult again."
Philip Palumbo, founder, CEO, and chief investment officer, at Palumbo Wealth Management, has his own thoughts on inflation.
He says the lesson is that when inflation gets as high as it is, it takes some time to retreat and "that implies that the Fed potentially needs to keep tapping the economic brakes for quite some time."
Palumbo adds that over the last 25 years, the Fed has come to the rescue with increasing speed and urgency.
However, inflation will impede them from repeating that process and the response to economic malaise could come more slowly than the market has come to expect.
"Several Fed commentaries since the CPI data appear to confirm that message but markets continue to rally and the disconnect becomes that much greater. We suspect markets are jumping the gun."
(Terence Gabriel)
A CASE OF THE MONDAYS: HOMEBUILDER SENTIMENT, EMPIRE STATE (1050 ET/1450 GMT)
A one-two punch of dour indicators released on Monday served as a bitter wake-up call to market participants who have been blithely coasting along over the past week or so under the power of upbeat economic data.
First, the mood of U.S. homebuilders has turned unexpectedly cloudy this month.
The National Association of Home Builders' (NAHB) Housing Market index surprised consensus to the downside by sliding 6 points to a reading of 49, the series' first dip into negative territory since the brief pandemic shock.
Excluding that shock, the index's last negative reading was in May 2014.
An NAHB figure below 50 indicates general pessimism in the sector. Analysts expected it to hold steady at July's 55.
"Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders," writes Jerry Konter, chairman of NAHB.
"In a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, the August buyer traffic number in our builder survey was 32, the lowest level since April 2014 with the exception of the spring of 2020 when the pandemic first hit," he said.
"Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession," Konter adds.
The report is just the latest among recent indicators that show the U.S. housing market groaning under the weight of the COVID boom, which saw soaring demand sending supply to record lows and home prices through the ceiling. This, along with rising mortgage rates have eroded affordability tossed a bucket of cold water on demand.
Later this week, more housing data is expected in the form of housing starts, building permits and mortgage rates/demand.
Separately, a dire report from the New York Federal Reserve showed East Coast manufacturing activity slamming into reverse.
The NY Fed's Empire State index unexpectedly plunged to a stark reading of -31.0 in August, the lowest reading since May 2020.
An Empire State number below zero signifies monthly contraction.
Among the survey's components, new orders and current business conditions also sank into contraction.
Bright spots could be found, however, in the prices paid element shedding 8.8 points to 55.5 and the six-month outlook index flipping back into expansion.
"Momentum in the manufacturing sector certainly has slowed, but this is a collapse" said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "We're now very curious about the other regional reports for August, due over the next few weeks. Our bet is that none of them will be as startlingly terrible as this one."
The Philadelphia Federal Reserve is due to release its Philly Fed data on Thursday to flesh out the Atlantic coast manufacturing picture. It's expected to show contraction as well with a slightly less dire reading of -5.
Wall Street was in a mild funk in morning trading, with all three major U.S. stock indexes modestly red.
Energy was suffering the worst of it, dragged down by sliding crude prices.
(Stephen Culp)
WALL STREET MEETS SOME INDIGESTION AFTER RECENT RALLY (1000 ET/1400 GMT)
After posting weekly gains for four straight weeks in a surge that drove the S&P 500 past the 50% retracement of its peak to its June lows, the benchmark index may be set to back off recent momentum if history repeats, with China data providing a ready excuse.
The S&P 500 and Dow industrials are slightly red, while the Nasdaq is edging green. Small caps , semiconductors and Dow transports are down. Five of the 11 S&P 500 sectors are lower, led by an almost 4% drop in energy. Consumer staples is leading the gainers.
Weak economic data from China rekindled fears of an economic slowdown in the world's second-largest economy that could snarl supply chains and curb global growth.
Chinese industrial output grew 3.8% in July from a year earlier, according to the National Bureau of Statistics (NBS), below the 3.9% expansion in June and a 4.6% increase expected by analysts in a Reuters poll.
On average the S&P 500 has stalled a bit once reaching the 50% threshold as the average frequency of advance (FoA) was only slightly better than that of a coin toss at 54%, according to Sam Stovall, chief investment strategist at CFRA.
But two and three month later, the benchmark index has posted a frequency of advance (FoA) of 77% and 69%, respectively, Stovall says.
Another reason the market may be due to dip is that as of Aug. 12, 93% of the sub-industries in the S&P 1500 were trading above their 40-week, or 200-day, moving average, he said.
That's well above the 85% level representing one standard deviation above the mean since 1995. As a result, the S&P 500 may be primed for a digestion of its recent four-week climb.
Here's a snapshot of early market prices:
(Herbert Lash)
CLEAN ENERGY STOCKS: SUDDENLY NOT SO MESSY (0900 EDT/1300 GMT)
Green energy stocks have certainly been humming of late. In the wake of sweeping legislation to fight climate change, among other initiatives, the WilderHill Clean Energy Index has now risen more than 41% this quarter.
With its recent strength, the renewable energy index is nearing where it ended the day Joe Biden was elected president:
In what was perhaps a classic case of "buy the rumor, sell the news," the ECO topped on a closing basis on Feb. 9, 2021, just shortly after Joe Biden took office. It then lost about 70% of its value into its May 11, 2022 closing low.
Since then, the ECO has strengthened, while outperforming the S&P 500 index and traditional energy stocks. The ECO has rallied 53% since May 11 vs a 9% gain for the benchmark index, and a 1% rise for the S&P energy sector.
The ECO ended Friday at 134.53, which put it back above its 200-day moving average for the first time since Nov. 29, 2021.
However, the index now faces a number of additional hurdles that reside from around 138.75 to 144.27, or only around 3%-7% above Friday's close.
These levels include a log-scale resistance line from the February 2021 high, the level the ECO closed on the day Biden was elected, at 140.71, and the April 5, 2022 high at 144.27.
Since closing below 140.71 on Jan. 6, 2022, the ECO has only managed one daily close above that level, which occurred on April 4. The index then kicked off a sharp slide into its May low.
Traders now will be watching ECO action closely as it attempts to contend with these levels.
(Terence Gabriel)
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)