- The latest ISM report showed that US manufacturing is still in a deep contraction.
- Consumers are very cautious about getting back out.
- The markets are consolidating in several time frames.
The latest ISM report still shows a contraction in manufacturing activity. The index rose from 41.5 to 43.1. Only 6 of 18 industries were expanding. New orders, production, and employment indexes all rose but are still in the lower 30s. The anecdotal comments show a clear split. Let's start with the negative comments (emphasis added):
- “Current conditions in the automotive, construction, oil and gas, agriculture equipment, and tube/pipe markets are all adversely impacting our business results.” (Chemical Products)
- “We see an issue with suppliers that are affecting production. At the same time, social distancing measures in [the] manufacturing plant and customer demand are impacting the rate of production.” (Transportation Equipment)
- “Getting out from under several suppliers being closed worldwide. Also, looking at what really needs to be in China.” (Machinery)
There were, however, some "green shoots:"
- “We see a lot of positive signs, despite what's going on. People seem to continue to be building and looking to projects for fall of 2020 and beyond. There is good optimism out there.” (Nonmetallic Mineral Products)
- “Fuel sales demand are beginning to rebound in May as stay-at-home orders are lifted across the country.” (Petroleum & Coal Products)
- “Despite the COVID-19 issues, we are seeing an increase of quoting activity. This has not turned into orders yet, but it is a positive sign.” (Computer & Electronic Products)
At the current pace, expect this data to be negative for at least a few more months, maybe longer.
The RBA kept Australian rates at 25 basis points. Since Australia is more trade-dependent, the bank's observations about the international environment carry a bit more weight.
The global economy is experiencing a severe downturn as countries seek to contain the coronavirus. Many people have lost their jobs and there has been a sharp rise in unemployment. Over the past month, infection rates have declined in many countries and there has been some easing of restrictions on activity. If this continues, a recovery in the global economy will get under way, supported by both the large fiscal packages and the significant easing in monetary policies.
All central banks have commented that the recovery is entirely dependent on the virus's progress. So far, the news in that area is encouraging.
Construction spending during April 2020 was estimated at a seasonally adjusted annual rate of $1,346.2 billion, 2.9 percent (±0.8 percent) below the revised March estimate of $1,386.6 billion. The April figure is 3.0 percent (±1.5 percent) above the April 2019 estimate of $1,307.1 billion. During the first four months of this year, construction spending amounted to $412.5 billion, 7.1 percent (±1.2 percent) above the $385.2 billion for the same period in 2019
Here's a chart of the data, broken down into residential (in blue) and non-residential (in red) spending:Residential investment was up in the latest GDP report as well. Housing is a key component of an economic rebound, which makes this an encouraging development.
Let's take a look at today's performance tables:
Another day of modest equity market gains. Transports led the way higher. Larger-cap and small-cap indexes split the next five spots in the table. However, all the gains were under 1%, making this a modest day at best.All sectors were higher. There are two keys to the above table. First, defensive sectors are at the bottom. Second, only two sectors (energy and basic materials) had meaningful gains.
Before looking at the charts, let's take stock of the current market environment:
- The Treasury market remains elevated while commodities are depressed. This means a significant number of investors are bearish.
- As I noted yesterday, several key technical indicators show a tired rally.
- Conversely, there's a lot of stimulus sloshing around the economy.
- As a result, I still think the most likely scenario is a sideways consolidation.
Right now, there are two key market developments. First, prices are consolidating in the short term. A week ago Tuesday, the SPY gapped higher. Since then, it's been forming a rising wedge pattern. Right at today's close, prices printed a very strong bar, breaking through resistance. But it's only a single bar, so we'll need additional data from tomorrow's trading to draw a conclusion.However, the IWM did not break through support. It continues to consolidate in a downward sloping channel.
Finally, we're just beginning the summer doldrums. While the trend is more pronounced towards the end of the summer, trading desks start to take vacations during the next few months, which means trading could simply be lighter.
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