In Which Do You Believe: Stronger Dollar or Inflation Monster?
The most recent US monthly employment report for non-farm payrolls was so strong that it looked like it was on steroids. Will the inflation monster inside of Yellen’s head or living under her bed be treated with an incremental interest rate hike in December?
However, let me tell you a secret that some of us already know. There is no inflation at this point. Overall, the U.S. economy is expanding but wage inflation has yet to become a serious issue in a tightening labor market and the slump in crude oil is tempering prices as well as the trade balance. Connect these dots to divergently dovish central bank policies elsewhere and relatively weak productivity and manufacturing in Europe and China and the picture you get is a stronger dollar offsetting domestic growth (as evidenced by continually declining factory orders).
The Fed Reserve has taken its best shots and is now resigned to the normalcy of allowing free market gods sort wheat from chaff. Meanwhile, Europe and China’s central bank policies are having limited success in creating the desired effect of significant and sustainable economic stimulus. (For a recap of the week’s bullish and bearish economic events and other data, please refer to Hillbent’s daily archives.)
This week’s performance table speaks volumes in the most exaggerated manner possible. Rapidly rising treasury rates are clubbing fixed income investors over the head like baby seals and telling anyone who is left to exit bonds. Dollar strength is suppressing utility stocks and commodities (e.g. Gold and Oil) as they all suffered considerable weekly losses. Real estate assets also declined but may only be in correction or consolidation mode as this capital market tends to hold its own in rising interest rate environments. Stocks gave investors a respectable amount of positive performance, but their alpha-dog appears to be the small-cap Russell-2000. What is the canary in the coal mine trying to tell us?
The market seems to be content with the prospect of incrementally rising rates and comfortable taking its cues from domestic and other G-8 members’ economic data. Seems pretty rational for now unless…
The 2100 level remains a sticking point and psychological challenge for the SP-500. Stocks obviously lost some of their momentum this week but still managed to look good while losing it. If you follow our daily reports (see archives), then you are well familiar with the narrative that the benchmark index accomplished the low probability feat of reclaiming the support of its previous bullish channel. It appears to be attempting a similar move with its weekly trading patterns. Overcoming resistance in this time-frame will be a tough challenge, but if successful, then the outlook for stocks would be very bullish indeed. Otherwise, if it fades the resistance at the bottom range of the channel, then the outlook turns bearish.
Be patient and vigilant with Hillbent for the Market Direction…
- Market Momentum
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- Technical Analysis
- SP-500 Support & Resistance Pivots for November 9-13, 2015
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