Economic reports continue to miss consensus expectations and the acceleration in data deterioration is developing as expected. On Friday, the Empire State manufacturing index for June was reported at 2.29, a decline of nearly 15 points from the May reading and well below consensus expectations for a reading of 13.8. The Empire State index and the Philadelphia Federal Reserve index are both rolling over, with the latter having already entered negative territory.
The potential bottoming formation in initial unemployment claims that we have been monitoring also continues to develop as expected. A move well above the 390,000 level for both initial claims and the four-week moving average would signal the likely start of a new uptrend and forecast additional weakness in the labor market.
The stock market (SPY) has rebounded 6 percent during the last two weeks as the data have continued to weaken, pricing in expectations for the announcement of additional stimulus at the Federal Reserve meeting next week. However, it is unlikely that the Federal Reserve will take action at this point, especially given its current forecast for moderate growth during the second half of 2012. With the monetary base holding near historic highs, it will almost certainly require a much more pronounced deterioration in economic data before another meaningful liquidity operation is considered.
Given the likelihood that the Federal Reserve will disappoint the stock market next week, the early formation of the next beta high (BH) is probable. A brief beta phase rally would likely be followed by an extended decline into the next short-term cycle low (STCL), which would in turn forecast a resumption of the violent downtrend from early April.
As always, there are no certainties in the realm of financial market forecasting. However, the odds continue to favor the imminent development of a recession in the US, along with the formation of a cyclical top in the stock market. Assuming the downtrend from April remains in control, the recent oversold bounce in stocks has reached the point where it should begin to falter before moving down toward previous lows. The early formation of the forthcoming BH would be the first step in the resumption of the downtrend, so it will be important to monitor market behavior closely next week. We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.