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Mini Market Rally, Inflationary Woes, Employment Situation Expectations, And More In My Weekly Market Outlook

Last Sunday I did not post a weekly follow up/market prediction because there hasn't been any economic data or investor behavioral patterns that are different than what I've mentioned before. In my last post (03/19) I said that I think a market sell-off is a probability because of the behavioral patterns I saw in intra-day trading activity and the way that the ^VIX was moving in connection to the markets (S&P). I accurately predicted that the beginning of the week would be declining and that gold would outperform (03/20- 03/24). I thought that the markets would decline because of the way they rallied post FOMC (03/15), but then lost steam and fell below a couple of technical support points showing, reflecting the lack of buying. This makes sense because, after the Fed revelation, investors had no major economic data to look forward to. As I've written that week "I just see a slight sell off as a probability if stock prices remain stagnant and there is a lack of insightful economic data." This is percisely what happened; the markets sold off Tuesday. I wrongly predicted that the sell-off would be bought & markets would be overall neutral by the end of that week.

The economic data that came out in these two weeks provides valuable insight into business expectations, consumer behavior, and economic conditions. Several manufacturing reports (Kansas City Fed Manufacturing Index - 03/23, Durable Goods Orders - 03/24, Dallas Fed Mfg Survey - 03/27, Richmond Fed Manufacturing Index - 03/28) solidified general strength in manufacturing, suggesting to me that businesses are more than happy to use some of their corporate profits, which rose 22.3% (Corporate Profits - 03/30) to satisfy consumers, whose confidence rose its former, December 2000 highs. With low unemployment rates, favorable income data and a 0.5% increase in salaries and wages (Personal Income & Outlays - 03/31) it makes sense to see businesses placing more orders in anticipation of higher spending by consumers, which already rose at a 3.5% pace in the first quarter and gave a boost to Thursdays GDP report.

But as I've said in the past, I think inflationary pressures will soon cast a shadow of doubt on the optimistic outlook. The Personal Income & Outlays report shows mixed signs of inflation for the moment, but I expect to see pressures takes off. Farm Prices surged 6.1% (Farm Prices - 03/30), Producer Price Index has been steadily increasing. Businesses will likely lessen this inflationary burden by increasing their prices. Consumer prices (NYSEARCA:CPI) will go up as their confidence goes down, and the labor force will demand higher wages. Businesses will have accumulated inventories from ramping up manufacturing and will have to lay workers off to offset the costs of those orders while satisfying labor force demands.

Next Week's Pivotal Economic Events:

Monday 3rd: Manufacturing (PMI, ISM), Gallup Consumer Spending, EuroZone Unemployment Rate, & People's Bank of China report.

Tuesday 4th: Motor Vehicle Sales, International Trade, & Factory Orders

Wednesday 5th: FOMC Minutes, ADP Employment, & Gallup Job Creation Index

Thursday 6th: Chain Store Sales, ECB Minutes, & Challenger Job-Cut Report

Friday 7th: Employment Situation, Wholesale Trade, & Consumer Credit

Market Outlook:

I think that the markets will climb higher in anticipation of another strong Employment report on Friday. It's hard to predict the exact daily movements but judging by the way S&P ($SPX) pessimistically closed on Friday 31st I would say investors are more cautious of Trumps agenda setbacks and therefore, not as quick to buy the dip (as was seen Tuesday 21st when markets sold off & continued to decline for a week). This week's positive economic data will push markets higher, but it won't be with the same "spirit animal" zeal. This is a good opportunity because even given exceptional economic data; some optimism won't be priced in. That is why I think markets open up lower on Monday but then steadily rise leading up to Friday when the Employment Situation will dictate the market behavior. I think that Monday's manufacturing data will be positive, as well as Tuesday's factory orders, but Motor Vehicle sales won't show the same strength as before. I think that Friday's employment situation will be in line with expectations, probably a little stronger, with about 190,000 Nonfarm Payrolls added. I also believe wage pressures will start accelerating. I expect gold to decline this week as confidence in the markets is regained, but continue in an upward trend in the following weeks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.