Job growth without inflation. Job growth in the right areas: manufacturing and construction, not just healthcare. Lots of workforce participation but still some slack.
Against it? Tariffs go into effect and the yield curve.
Which animal will prevail in that contest, the bulls or the bears?
I think it's a draw which is why you see such a rush toward FANG - the ultimate anti-Chinese tech trade and toward the defensives even if they aren't even doing that well - witness the shade downs in price targets and earnings per share we got this morning from analysts about Hershey (HSY) and PepsiCo (PEP) , the latter a stalwart Action Alerts PLUS name.
Now I don't want to sound too negative given the fact that the 211,000 jobs created on average these last three months without much inflation is astounding. It's not supposed to be happening. We are supposed to be having tremendous wage pressure and we aren't.
But I don't want to sound too positive because as my friend Phil LeBeau pointed out, the Chinese are putting tariffs on American made cars and that's something that can be significantly negative. Autos are the biggest battleground there is. If the U.S. gets embroiled with an intractable Europe because of the higher tariffs on American made cars than the ones we have here on foreign cars, that's a very big negative. Does it undo the positive of the labor report? No. But if you combine that with higher costs of some goods including imported products that have kept prices down in this country, you do get an unfortunate picture. I have said that this may be the cost of trying to get our trading partners to play more fair. But in the interim it can be as negative as the employment picture is positive. The flattening yield curve, historically the sign of a coming recession is all about the tariffs because there's sure as heck nothing bad about the economy from this job growth number.
What will decide things? I believe the earnings releases that start next week will be incredibly important given the push between Tariffs and tens and twos versus employment. Any comment from the Fed Chairman that updates the thinking from last month about the disruption in world trade tempering hikes would help the bullish cause, too, but judging from the minutes yesterday that won't happen, so bring on the earnings to break the tie between the bulls and the bears.
With that let's go to our game plan that's filled not just with earnings but with key data from both the U.S. and China that could impact the trade war that's got everyone on edge, justifiably so, if it escalates from here.
On Monday the Chinese government releases consumer and producer prices and I have to tell you that these numbers are increasingly going to matter. Here's why: China has been easing, sub rosa, and low inflation numbers will allow them to continue to do so. I think the Chinese aren't nearly as confident as they sound in their rhetoric because as I keep stressing they need our economy more than we need their economy as they export five times more than they import. Often we talk about how much debt we have as a country but the Chinese have too much debt at every level both public and private. They need to repatriate their trillion dollars in Treasurys but if they do so their currency will go higher and that will cause more trade problems. The punditocracy has convinced itself that the Chinese will never give it because they take a thousand year perspective or some claptrap like that. Believe me, their debt situation is so precarious I don't even think they can hold on for a thousand days.
Remember when Alcoa (AA) used to kick off earnings season before its break-up? Now it's PepsiCo that sets the trend. We got a very negative note this morning from Wells Fargo about how PepsiCo's quarter could be a weak one. That's certainly something that would go against the grain of the rush to the defensive stocks. I expect the stock to trade lower but PepsiCo has a lot of levers and even the negative note included the notion that PepsiCo might do something big to bring out value. If you own it, there could be some pain, though, before any gain. We are holding it for Action Alerts PLUS but are concerned that short-term a weak quarter could send the stock down pretty hard unless the company addresses the weaknesses because there are so many strengths that are being masked by carbonated beverage weakness and share loss.
Tuesday's also a huge day for Nordstrom (JWN) which holds its first big analyst meeting. The last quarter was a weak one and the company offered very little explanation other than it didn't execute well and the stock quickly fell from the $50s to $45. Here we are again back in the $50s. A good meeting sends this stock appreciably higher still. But a bad one? We sold some stock for the trust this week because I have lost some faith in this company but we still have a lot because it is hard to imagine them really screwing this meeting up as badly as they did the conference call after the last quarter.
Wednesday General Mills (GIS) holds an analyst meeting and this confab will be the next test of the strength we have seen in the consumer sector. Generous Mills as we used to call it hasn't been all that generous as business has slowed and many think they paid too much for Blue Buffalo pet food. They did have to do an equity offering at a price much lower than they had been buying stock, a distinctly suboptimal situation. Let's hear more about debt paydown and perhaps a further restructuring to bring out value.
We get our own producer price index on Wednesday and our consumer price index on Thursday. We need to see a continuation of numbers that show tame inflation like the wage number we got today. Remember, the bulls need to see a sign that the Fed will not just keep raising rates but instead will say that it needs to see if the trade war is hurting the economy going forward. But a hot PPI and a hot CPI could be a huge win for the bears as it will be damn the tariffs full speed ahead on the hikes.
Finally Friday's a monster: JP Morgan (JPM) , Citigroup (C) , Wells Fargo (WFC) and PNC Financial (PNC) all report. The stocks in this group have been horrendous. We have had almost three weeks of relentless downside pressure in this sector as the rush out of pure financials and into fintech continues.
This morning I discussed this group with Scott Wapner on CNBC's "Squawk on the Street" - by the way I will be on Scotty's "Halftime Report" Monday, and he asked me is there anything that could reverse the direction of these stocks given that they can't make nearly as much on lending as they would like as they are paying depositors more money - have you seen the 3% CD rates out three years? - while they haven't been able to raise lending rates.
I came back and said that these companies have all sorts of fees now to augment lending and they also have plenty of other ways to make money including M&A advising. But I have to admit it's all pretty lame versus how much they can make lending. In their favor though is a tremendous return of capital that should cushion any more downside and valuations that are astoundingly cheap. I know, not enough, but at this point I would rather be a buyer than a seller, especially with Citigroup because, as we have been telling club members, the company is buying back 7% of its shares this year and will be doing the same next year, and I simply don't see how its stock can continue to go down with that trampoline underneath.
The bottom line? It's a push between the bulls and the bears because of positive employment figures versus negative tariffs. Earnings could break the tie unless, of course, China blinks - highly unlikely but if you are ever going to take on the Chinese you would do it now with the best job growth creation in the right industries in years.