Economic data salad – August 2014. This past week has seen a slurry of economic data points as well as geopolitical events, that have been effecting the markets. It has been sort of an economic tossed salad of events, some good and others not so good. At the same time, we have had, what some are saying, a potential change in direction for the markets, as we have seen when the DOW took 300 point dive, this past week.
Of course the key issue is, is the economic salad to hot, that the Fed will act quicker than previously believed, to cool down the party. I spent some time over the weekend reading a lot on what different economic pundits are thinking and here is my summary list of economic salad ingredients effecting the markets today:
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[li]NFP jobs report – some were calling it negative, but I would call it a positive. With revisions, it was fairly in line at 209K. Anything over 200K is good. The quality of jobs and labor participation rates also showed improvement.
[/li][li]US GDP – in Q1 of 2014 at -2.9% and now in Q2 +4%. If you can believe this story, this is very big positive. However, when the number is this volatile, it does make one question the credibility of the report.
[/li][li]Fed decision – steady as she goes. The statement in my opinion was neutral. The markets are just waking up to the fact that, even a broken clock can be right 2 times a day.
[/li][li]PMIs – in the US they have been reasonably good. However, there is significant divergence with the rest of the world, especially the EU, which are all mostly flat. Will the US drag the rest of the world up, as it often does?
[/li][li]Earnings – what else is there to say, corporations are doing very well.
[/li][li]Dollar rally – driven by the general good US economic news and moderate inflation, this has been relentless and looks to continue. This puts commodities on the back foot.
[/li][li]Geopolitical events – across the Middle East, specifically Gaza, and the Russian involvement in Ukraine, dominated the headlines. But as of today, has had little effect on the markets. The world is learning to live with regional clashes – it will unfortunately take a bigger event to get the financial world to take notice.
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My overall take is that this recent equity market negativity is just a one or two week pull-back scenario. Perhaps we will get a pull back to support at 1900 on the SP500, and then a massive rally back to new highs. To get a major sell-off, we will need a more negative catalyst. That being said, notwithstanding the potential geopolitical fears, when sitting on top of the economic mountain, the only direction is down. We just need the first small snowball to create the avalanche. Soon long term economic macro drivers will come into play.
Blue Point Trading, William Thompson