The Grand Armee
It was in June of 1812, with troops numbered at roughly a half million men and probably more under his command, that Napoleon Bonaparte entered Russian territory. The victories came quickly at times, other times not so easily as a Russian force of likely less than 200,000 retreated further into Russia, burning the country around them. The Russian army made unsuccessful stands at Smolensk and Borodino. Finally, in September, Napoleon occupied Moscow, at this point, a burned out skeleton of a city.
It was then -- with the real enemy, the Russian Winter, fast approaching and with no way to supply or properly clothe his massive army -- that Napoleon was forced to attempt a retreat back to Western Europe. But the emperor had waited too long. Typhus, dysentery, hunger and now the cold all took their toll on French and allied forces. Maybe 100,000 left Moscow.
After being forced to fight the harassment of Russian and Cossack forces all the way home, perhaps 20,000 to 25,000 troops re-entered Paris. The rest? Frozen in place along the miserable trail behind. Napoleon would rebuild his army, but never again win a significant battle. Austria, Sweden, Prussia and Great Britain would align -- and you know the rest.
I appeared somewhere in the media three times on Tuesday. At the opening bell... ho hum, markets seemed unchanged, but you could tell the ice was thin. Around midday, it had become obvious that a risk-off day was under way. Just how bad? Still not terrible. Leading into the close. Okay, the market had fought a day-long retreat against persistent harassment, and the market, or at least the net-long crowd, had lost the day.
There was enough blood to go around. The most significant beat-downs were handed out to industry groups where traders had the most profit to protect. Information technology, but not just tech, software, the cloud. Internet type names... FANG. The materials sector closed flat on the day, the other 10 sectors all in the red, for a number of reasons.
I find it troubling that markets blame an already seemingly dovish Fed for a move away from the top of the charts, but many did -- for not being quite dovish enough.
First, Fed Chair Jerome Powell tried to assert the central bank's political independence. Big deal. What did you think he would say? Then, St. Louis Fed district President James Bullard, who has been the equity market's best pal, opines on Bloomberg TV that cutting the Fed Funds Rate 50 basis points at the next policy meeting (July 31) "would be overdone."
Oh my. So hawkish. He's right, but how can we possibly stand the heat? These comments knocked futures markets trading in Chicago for a loop. A third cut of 25 basis points to the Fed's benchmark overnight rate is now not priced in until December. That's with the Atlanta Fed still tracking Q2 GDP at 2% (Atlanta will update this today after May numbers for Durable Goods Orders hit the tape). Methinks we protest too much, if this really was about a Fed that might be just plain dovish, instead of absurdly dovish. Perhaps there's more to Tuesday's weakness than meets the eye. Perhaps.
More Than Likely...
In my opinion, markets were reacting to uncertainty ahead of the meeting between Presidents Trump and Xi at the G-20 summit later this week -- and algorithms have been reacting to headlines, as well. Reuters ran a story on Tuesday that keyword seekers latched onto. There's your culprit right there. According to the story, the U.S. is leaning toward taking something of a hard line at this meeting. While willing to discuss the U.S. ban on Huawei, the Trump administration will not accept conditions on tariffs, nor concessions on trade.
What do we know? We know that the Chinese side has walked away from a deal once before, the cause believed to be that the conditions of the deal, and the framework for policing the deal moving forward, were considered to be somewhat humiliating, as the implication was that the U.S. would be seen in the position of authority for policy enforcement.
What has changed? For one, the Chinese economy is notably weaker. That said, should trade conditions worsen, the U.S. economy skates on some thin ice of its own. It is okay for now, but with an implication of either a corporate margin squeeze that could soften employment or increased consumer pricing (which has been weak), likely in my opinion to end up with some combination of the two. The story does not end there -- a champion has risen for now.
Now Hear This
Breaking news. U.S. Treasury Secretary Steven Mnuchin has been quoted from Bahrain early on Wednesday morning (some of you may have been sleeping) as saying "We were about 90% of the way there (regarding a trade deal with China), and I think there's a path to complete this." Mnuchin is apparently optimistic that a deal could be done this year, as he put it, "there needs to be the right efforts in place." U.S. equity index futures markets (as well as European equity markets) immediately responded to the upside as this headline passed by.
The meeting between President Trump and President Xi is scheduled for Saturday in Osaka, by the way. Key to this meeting will be that both sides come away with the feeling that progress has been made, and that the schedule of tariffs has not been expanded. Poetry will remain optional.
For May, U.S. housing data has been rather mixed despite already softer expectations for interest rates. June information will be more telling, in my opinion, but we do know that at least for May, New Home Sales disappointed badly, while Housing Starts declined even if meeting expectations. This occurred while Existing Home Sales beat the street and home prices in year-over-year terms experienced the slowest growth across that space since 2012.
We know that, according to the Conference Board, consumer confidence is waning quite rapidly. The June headline print of 121.5 seems pretty lofty to most of us, having gone through a decade of economic malaise, but that number is actually the softest seen since September of 2017 on a decrease in the perception of current conditions around the job market.
It makes one stop and think more succinctly about labor markets -- and where capacity might be. We are already seeing marked weakness across the Fed's regional manufacturing reports. We'll know more about that corner of the economy later this morning. We'll know more about the consumer and inflation as well by Friday. By the way, if nothing were to change at the G-20, the deadline to implement the next tranche of tariffs (on $300 billion worth of Chinese exports to the U.S.) is July 2. That's next Tuesday. Are we 90% of the way there? Let's hope. I think.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (May): Expecting 0.0% m/m, Last -2.1% m/m.
08:30 - ex-Transportation (May): Expecting 0.2% m/m , Last -2.5% m/m.
08:30 - ex-Defense (May): Expecting 0.1% m/m, Last 0.0% m/m.
08:30 - Core Capital Goods (May): Expecting 0.2% m/m , Last -0.9% m/m.
08:30 - Goods Trade Balance (May): Expecting $-71.8B, Last $-72.12.
08:30 - Wholesale Inventories (May): Expecting 0.5% m/m, Last 0.8% m/m.
10:30 - Oil Inventories (Weekly): Last -3.106M.
10:30 - Gasoline Stocks (Weekly): Last -1.692M.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (KBH) (0.38)