The Markets Are Starting To Struggle (Technically Speaking For 5/4)
Summary
- US manufacturing is growing at a peak rate.
- The treasury market has stabilized.
- The markets are starting to struggle.
US manufacturing is expanding at a solid rate (emphasis added):
The seasonally adjusted IHS Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 60.5 in April, up from 59.1 in March and broadly in line with the earlier 'flash' estimate of 60.6. The PMI figure was the highest since data collection for the series began in May 2007 and signalled a marked expansion.
Contributing to the greater headline figure was a sharp and faster upturn in production across the manufacturing sector. Output growth was commonly linked to a stronger rise in new orders, although some companies continued to highlight pressure on capacity following raw material shortages.
New orders increased markedly in April, with the rate of expansion accelerating to the fastest for 11 years. Firms noted that the upturn was due to stronger client demand, with some companies mentioning that customers were placing larger orders amid substantial supplier delivery delays. At the same time, new export orders expanded at the second-quickest rate on record as lockdown restrictions eased in key export markets
It appears there is pent-up demand spiking orders. Expect this to continue for at least a few months. The latest ISM data confirms the above data.
The Reserve Bank of Australia maintained its current rate and bond-buying program. The bank's release contained the following assessment of inflation (emphasis added):
Despite the strong recovery in economic activity, the recent CPI data confirmed that inflation pressures remain subdued in most parts of the Australian economy. A pick-up in inflation and wages growth is expected, but it is likely to be only gradual and modest. In the central scenario, inflation in underlying terms is expected to be 1½ per cent in 2021 and 2 per cent in mid 2023. In the short term, CPI inflation is expected to rise temporarily to be above 3 per cent in the June quarter because of the reversal of some COVID-19-related price reductions.
Assuming that inflation is at least a partially global phenomenon and that Australia is a key raw material exporter, the above observation is good news for inflation's long-term prospects.
The treasury market sell-off has stabilized:
From Stockcharts.com
Above are five, 6-month charts of ETFs that track the entire US government bond market. With the exception of the SHY -- which tracks short rates -- all have stabilized in the last few months. Here's another way to think about the data:
The 30-year-3-month spread peaked in mid-March and has since trended modestly lower.
Let's take a look at today's performance tables from Stockcharts:
According to the Washington Post, news that Yellen suggested the Fed might have to hike rates to cool the economy was a selling catalyst. All the major indexes were lower with smaller-caps taking the brunt of the effort. The long end of the bond market rallied.
Communication services, consumer discretionary, and tech were the three biggest losers. This had a disproportionate impact on larger caps. Defensive sectors were also off. Only reflation names -- basic materials, financials, and industrials -- were higher.
Let's take a look at today's charts from my Quotetracker:
The larger-caps (SPY and DIA) started a comeback rally in the late AM. The QQQ also staged a rally but it was less effective. The IWM moved modestly higher, but, in reality, it consolidated losses.
The 30-day charts are showing growing problems:
IWM 30-day
The IWM first hit resistance in the 226-226 area. It broke through in late April but has since curved lower.
DIA 30-day
The DIA is still consolidating but keeps hitting resistance in the 342 area.
SPY 30-Day
The SPY first hit resistance around 417-418. It broke through that level three times in late April and early May, only to fall back today.
QQQ 30-day
The QQQ has the worst chart. Today, it fell back to the near 30-day lows.
The inability to make new highs is concerning. And the magnitude of the QQQ sell-off is another warning sign. Let's see if the bulls can make a move tomorrow.
This article was written by
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