It's not as if it is some kind of stimulus in itself, but it was definitely what Chinese markets needed to hear.
The Communist Party's top decision-making body, the Politburo, got together for their July meeting on Tuesday morning (Monday evening here on the U.S. East Coast) and pledged to "actively expand domestic demand" and to help in doing so by "raising income levels." This July meeting is where the Politburo often tries to set the tone for Beijing's second half of the year economically.
Stock markets in Shanghai and Hong Kong rallied significantly on Tuesday morning as the group pledged to "adjust and optimize policies in a timely manner" where the troubled property sector is concerned. In a statement coming about a week after a number of disappointing macroeconomic data-points crossed the tape, and quoted by Chinese news agency Xinhua, the Politburo acknowledged "The economy is facing new difficulties and challenges, mainly due to insufficient domestic demand, difficulties in the operation of some enterprise, many risks and hidden dangers in key areas, and a grim and complex external environment."
The group now speaks of "prudent monetary policy" and "proactive fiscal policy," which is something that markets have been hoping for but not really expecting. How this potential inflection point actually plays out for the struggling mainland Chinese economy remains to be seen, but in Beijing, they are now, at least talking the talk.
Well, That's Inflationary
The news out of Beijing? Not just that. Commodity prices are reheating, even as the U.S. dollar index has retaken the 101 level and appears to be trying to make a stand there.
As Helene Meisler discusses today on Real Money, "... on Monday, it was as if investors discovered oil." Front-month futures for WTI Crude now trade close to $78.50 per barrel, while Brent has moved above $82. These are close to three-month highs. Gasoline futures in the U.S. settled at their highest level in nine months on Monday as grains and industrial metals all appear to have reheated.
In fact, the Bloomberg Commodity Index traded just below the 108 level late on Monday, which had proven to be stiff resistance in both March and April this past spring. You would have to go all the way back to January to find a month where this index traded above that level consistently.
This burst of what has to be seen as an inflationary force is not exactly what economists were looking for (in addition to looser fiscal policy in China) as the FOMC goes into their two-day policy meeting later today. These developments almost force the committee to not only go ahead with their expected 25 basis point rate hike on Wednesday, but probably also will unify the committee to make an effort to posture itself more hawkishly moving toward Jackson Hole in late August.
Monday
U.S. equities largely moved sideways to slightly higher on Monday in choppy trading. There were bright spots -- the KBW Bank Index gained an impressive 1.71% for the session. There were weak spots -- The Dow Transports and Philadelphia Semiconductor Index both closed in the red. At the headline level, however, stocks nudged higher.
The Dow Industrials rallied by 0.52% led by Goldman Sachs ( GS) and JPMorgan Chase ( JPM) , hence the move in the KBW. Monday was the eleventh consecutive "up" session for the Dow 30. The S&P 500 gained 0.4%, as the Nasdaq Composite and Nasdaq 100 gained 0.19% and 0.14%, respectively. In hindsight, I guess I have to admit that the "special rebalancing" that the Nasdaq put the 100 through really turned out to be closer to a "nothing burger" than to a major market event.
As for breadth, nine of the 11 S&P SPDR sector ETFs ended Monday in the green led by cyclicals such as Energy ( XLE) and the Financials ( XLF) as the more defensive sector funds that had taken the lead late last week, dropped back toward the bottom of the performance tables. Both Health Care ( XLV) and the Utilities closed the day at a loss. Winners beat losers by roughly 5 to 3 at the NYSE, while losers edged winners by about 10 to 9 at the Nasdaq.
Advancing volume took a 69% share of NYSE-listed trade as aggregate trading volume increased for that group from Friday's levels. However, trading volume across Nasdaq listings dropped from Friday's levels like a stone thrown in a lake, as advancing volume took just a 45.2% share of that trade.
What it means is that traders did trade coming off of Friday's increase in trading volume, but investors largely paused ahead of Tuesday's sudden increase in high-profile earnings releases and Wednesday's Fed decision on monetary policy.
Uncle!
It finally happened. The perma-bear capitulated. Sort of.
On Monday, Morgan Stanley's ( MS) Mike Wilson wrote to clients: "We were wrong. 2023 has been a story of higher valuations than we expected amid falling inflation and cost cutting."
Wilson is the Wall Street strategist with a long reputation for having a bearish equity market outlook. He did call 2022 pretty much spot on, but remained bearish for 2023, and repeatedly warned that this year's rally would reverse and that the regional banking mini-crisis this past March would climax with a spate of pressured market prices for equities before any rally could take root.
While Wilson may have swung and missed, at least in terms of equity valuation over the first half of 2023, he may not have gotten everything wrong. Wilson wrote: "We remain pessimistic on 2023 earnings. Inflation is now falling even faster than the consensus expects, especially the inflation received by companies. With price being the main factor that has held sales growth above zero for many companies this year, it would be a material headwind if that pricing power were to roll over."
That Said...
Anyone else read John Butters' column at FactSet on Monday? I mean, I know that only 18% of the S&P 500 has reported so far this season, but Butters points out the fact that corporate profit margins are being pressed.
Apparently, the blended (results & projections) S&P 500 net profit margin for the second quarter is running at 11.1%. First-quarter net profit margin hit the tape at 11.5% for the S&P 500. S&P net profit margin for Q2 2022 ran at 12.2%. The fact is that should the current season finish not just at a profit margin of 11.1%, but anywhere below that 12.2% that Q2 2023 would be the sixth consecutive quarter of contracting year-over-year profit margin.
No, Wilson was not wrong about corporate performance, he simply misjudged the marketplace, which is easy to do. Let's hope he is not now misjudging inflation as Beijing hints at fiscal stimulus, the U.S. dollar tries to make a stand, and commodity prices trade at multi-month highs almost across the board.
Is The Market Ready For Some Profit-Taking?
Taiwan Semiconductor ( TSM) told us last week that the overall demand environment for chips has been more cautious for longer than expected. That said, TSM also let us know that back-end packaging capacity for AI-related orders is "very tight."
Does that mean that Nvidia ( NVDA) , the runaway design leader for AI-capable GPUs, is OK? What about Advanced Micro Devices ( AMD) ? AMD appears to be a (very) distant second place right now in that horse race. AMD won't do well if overall IT spending budgets are significantly reduced, or even fail to grow.
What does that say about the rest of the GPU/CPU/memory/foundry space? NXP Semiconductors ( NXPI) beat Wall Street expectations last night, albeit on contracting year-over-year revenue. For NXPI, the Internet of Things and Mobile were weak-ish, but Automotive held its own.
The truth is that we should know a lot more about the health, or lack thereof, for these kinds of capital budgets across corporate America once Alphabet ( GOOGL) , Microsoft ( MSFT) , both being cloud service providers and generative AI spenders, and Texas Instruments ( TXN) , report tonight. Ahead of the numbers, though, it does sound like generative AI might be the only real strength in the space.
Am I Ready For Some Profit-Taking?
I think I am in spots.
One spot where I think I may need to take a little something off (not completely exit) is in Deere & Co ( DE) . The rally experienced by this stock over the past seven weeks or so, has taken this stock from a middling holding of mine, really just maintaining a place on my book so I would have some exposure to the industrial sector, to my third heaviest weighted holding without having added a share over that time.
Readers will see here that DE, which is an Action Alerts PLUS holding, has run almost 32% since the start of June after what had been a long selloff.
Zooming out just a little, readers will note that a December-through-May downward-sloping price channel appears to have morphed into some kind of asymmetrical inverse head-and-shoulders pattern.
Over the past seven weeks as these shares did the industrial version of going parabolic, the stock recaptured its 21-day exponential moving average, 50-day simple moving average, and 200-day SMA, and now stands with readings for Relative Strength and the daily Moving Average Convergence Divergence (MACD) that both appear to be technically overbought.
What's more is that the shares are now testing the highs of last November and January. With China potentially ready to start spending again, this may not be the right time to exit names like this and Caterpillar ( CAT) , but I do know that if Deere does fail at this level, I will feel the fool for simply sitting on my hands.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last -0.2% y/y.
09:00 - Case-Shiller HPI (May): Expecting -2.1% y/y, Last -1.7% y/y.
09:00 - FHFA HPI (May): Expecting 0.2% m/m, Last 0.7% m/m.
10:00 - CB Consumer Confidence (Jul: Expecting 111.8, Last 109.7.
10:00 - Richmond Fed Manufacturing Index (Jul): Expecting -8.5, Last -7.
16:30 - API Oil Inventories (Weekly): Last -797K.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: ( MMM) (1.76), ( BIIB) (3.76), ( DHR) (2.02), ( GE) (0.46), ( GM) (1.83), ( NUE) (5.57), ( RTX) (1.18), ( SPOT) (-0.63), ( VZ) (1.17)
After the Close: ( GOOGL) (1.34), ( CB) (4.42), ( MSFT) (2.55), ( SNAP) (-0.04), ( TXN) (1.76), ( V) (2.12)
(GOOGL, XLE, DE and MSFT are holdings of Action Alerts PLUS . Want to be alerted before the portfolio buys or sells these stocks? Learn more now. )
