Introduction

The day started with meetings of central bank governors. The Bank of Japan with Kuroda at the helm enacted the sweeping quantitative and qualitative easing policies we have all been expecting. That was one move telegraphed to the markets well in advance. Though expected the announcement sent the Nikkei soaring and the yen sliding. The follow up to the BOJ announcement were similar meetings by the ECB and BOE. These two banks did not change policy but promised to continue providing easy policy and help where needed. These pledges did come with caveats and it was those parts of the statements the markets took hold of.


Economic data here at home has turned a little sour. While still expansionary it has now become not-good-enough. Weaker than expected ISM and employment data yesterday were foreshadowing today's unemployment claims and possibly tomorrow's Non-Farm Payrolls. Today's data was a little mixed, the number of initial claims rose unexpectedly while the lagging continuing and total claims numbers both fell. Challenger also reported on March lay-off's. The good news is that lay off are declining, the bad news is that they are still at historically high levels.

The markets did their best to shrug off the negatives and grasp hold of the positives. Futures were positive going into the open and trading took the S&P up about 7 points within the first half hour or so. Trading throughout the day was a little choppy, all three major indexes retreated to near breakeven on three occasions before the final push back up to near the day's high before the close. The near term support of 1550 held today, will it hold tomorrow? The recovery and rally are hinging on employment, a bad NFP could be bad for the bulls.

Around The World

The big news from around the world was central bank meetings. The BOJ and the ECB both held their monthly policy meetings and both banks acted as expected. First up was the BOJ and its new chief Haruhiko Kuroda who is a known supporter of fiscal easing. The BOJ decided to act on the pledges of Kuroda and Prime Minister Shinzo Abe and more than doubled the current asset purchases as well as other changes. The BOJ is now targeting longer term bonds, etf's and other assets in its efforts of quantitative and qualitative easing. The BOJ is now purchasing over $81 billion on a monthly basis and has indicated this will continue until the 2% inflation target is reached. The Nikkei surged over 2.2% on the news and reached a new four and a half year high. The yen lost a lot of ground to the dollar and the euro. The USD/JPY jumped about 2.5 yen crossing back above the 95 level in a strong move up from the moving average and long term support. Current upside targets for USD/JPY exists around the recent highs of 96.70 and the longer term resistance near the 100 level.

USD/JPY

Later in the day the ECB and BOE concluded their meetings as well. These banks did not change any policy but statements from Mario Draghi weighed heavily on stocks that had been holding steady. Draghi says that the ECB cannot replace the lack of capital in the banking system or compensate for any government lack of action. He added that policy would remain accommodative but it seems clear that we shouldn't expect too much from the ECB at this time. Another article I read this morning reminded me of the fact that the ECB and the BOE have done the least in terms of QE over the last few years. With this in mind it is not surprising that the European economy is lagging in the recovery. Other comments about weakness spreading throughout the region helped to push European stocks lower and the euro to lose ground versus the dollar. The EUR/USD pair fell on the news and broke the 1.2750 level before finding intraday support and bouncing back up to make a new near two week high. The EUR/JPY remained strong and made a big move up from a long term support.

EUR/USD

The Economic Data

Stock futures were pointing to a higher opening ahead of today's economic releases. The moves by the BOJ and ECB were as expected and shrugged off in favor of our news. The string of weak reports we have gotten this week have brought some caution to the market, this mornings releases added some confusion to the outlook. Challenger reported on March layoffs at 7:30 AM. March layoffs declined by 11% in March from February, a good sign in the near term. Longer term first quarter layoffs are at the highest level since 2011.

Unemployment claims data were also a little gloomy. There was expectation for a jump in claims but not the 28,000 reported. Initial claims were 385,000 this week, about 25,000 higher than expected. The four week moving average also gained, adding 11,250. Only one state, Virginia, had a decrease of more than 1,000 claims. Despite the large jump in claims only five states had a gain of more than 1,000. California topped this list with 8,700 new claims, followed by Texas and Kansas with 2,700 and 1,600. The low levels of new claims on a state by state basis suggests the total decline was driven by a broad but mild decline across the country. Mild declines are OK, its the mass lay offs we need to be wary of.


Continuing claims fell this week from a mild upward revision of the previous week's data. Continuing claims dropped 8,000 to hit a three week just off the 5 year low set a month ago. There could be gain in continuing claims over the next week or two based on the jump in initial claims today. If initial claims does not come back down the downtrend in continuing claims may come to an end. We should also expect to see some seasonal volatility now that Easter is over. Total claims also fell, continuing the two and half month downtrend begun in mid January. This is a good sign for the overall unemployment rate which is being released tomorrow.



Unemployment is expected to hold steady at 7.7 or maybe tick up by a tenth but I suspect that with down trending total claims, a drop in layoffs and a steady labor market unemployment may drop a tenth. The ADP number was weaker than expected yesterday but still at a reasonably healthy +150,000. The NFP numbers, also released tomorrow, are expected to hold around the 190,000-200,000 level. A decline in jobs would be another sign of potential weakness. March jobs should have seen a pick up due to Easter hiring, a weak number could also point to weaker retail sales. Unemployment may also be impacted by people reentering the work force and increasing the total number of workers.


The Oil Index

Weak European outlook and weak U.S. data combined to push oil prices lower today. The price of light crude fell over 1% in the early part of the day and held that loss into the afternoon. Brent did not fall quite as much but did trade to the negative. Natural gas was the only one of the three to post gains and rose about 0.75%. This marks the fourth day of declines for crude as it falls away from the near two month highs near $98. This drop from the two month high looks like it could be confirming the double top reversal from February's highs just over $98. The oil index had a volatile day but failed to move back above an up trend line. The current candle could may be signaling a short term bottom but it will need to move back above the up trend line within a day or two. If not this move is potentially bearish for the index which had been struggling with resistance at 1350. It is unlikely for oil, the oil outlook or the oil industry to make sustainable gains until the path of the economy is clear.

The Oil Index

The Gold Index

Gold some ground in the early part of today's session but made most of it back by the close. This is the third day of declines for gold as it moves down strongly from the $1600 resistance. The $1550 level was breached briefly but support later in the day brought the spot price of gold to $1553. The policy moves by the BOJ and signs of weakness voiced by Draghi were the cause of today's moves. The Gold Index has mirrored the decline in gold and has dropped below the 61.8% retracement of the '08-'12 bull market. Now that the index has breached this level it seems more likely that the it will continue to retrace that bull market with the next down side target around the 78.6% level of $110. Stability in the U.S., easing in Japan and weakness “spreading” in the EU should help the dollar continue to strengthen and impact gold prices.

The Gold Index

The Housing Index

The housing sector is supposed to be the driver of the next round of economic recovery. The rebounding real estate market is supposed to increase construction, boost jobs, improve spending and grow the economy. So far the data is supporting this but just how strong and how far it will go is uncertain. The Housing Index has retreated from a five year high over the last two weeks. This has mostly been caused by a string good but not as good as expected data. The index is in danger of breaking its uptrend but as of yet that has not happened. The indicators are bearish but don't lead me to think the trend line is in danger of being broken with this test.

Housing Index

The Transports

The Dow transports was a loser in today's trading. This index has now made four down days since retesting the recent highs. The index is in danger of reversing now, failure to find support could lead to a correction. The index is currently within a range between 6,000 and 6,250 so those are the important lines to watch. The MACD and stochastic indicators on the weekly charts are still bullish but indicating a further pull back may be in the offing. Momentum is declining from two successively smaller peaks and approaching the zero line. Stochastic is indicating an overbought and extended market. The current weekly candle is a very ominous dark cloud cover but it won't be valid until after the close tomorrow. A bounce tomorrow could completely alter it.

Weaker than expected economic data is having an impact on future expectation. The second quarter is expected to weaker than the first but how weak is yet to be answered. Tomorrow's jobs report is an important look at what to expect and will likely impact the entire market. The recent drop in the transports could be telegraphing a turning of the market, or it could be consolidating for another move up. On the daily charts bearish MACD is very strong and looks to be pointing the way down for the transports but this may be a false signal. The index is still in an up trend and may be consolidating above support. A break below support and trend is required for a shift in stance but caution is a must, confirmation of support is needed to remain bullish. Trading in this index tomorrow and into Monday could give a clearer picture of direction.

The Dow Transportation Average

The S&P 500

The S&P 500 seems ready to spring above the all time high levels if it can just get past this weaker round of data. Tomorrow's NFP report, while always closely watched, may have more importance than usual. The S&P is at record levels now and the market desperately wants the bull to continue. Yesterday's drop brought the index down to near term support where it was halted and staged its bounce today. Adding to the support is the 30 moving average. A good NFP report tomorrow, one that relieves fear of a slow 2nd quarter and supports a growing recovery, could help the market move up from this support and firmly into all time high territory. However, crossing above resistance and into new territory is extremely risky for the bulls. The secular bear is out there somewhere and won't let the bull break through without a fight.

S&P 500

The VIX failed to retreat down to the pre-2008 levels and has in fact moved up to challenge the 14.75 level. This line is the lower end of what was the calm or safe range I have been following the last few years. This level marks the point where the market let go of lingering fear from the financial crisis and began this most recent leg of the bull market. Another break above this level could be indicating a shift in market sentiment as traders and investor grow more and more wary. The bull market is still drifting up but there are signs of weakness and reasons to be afraid.

The VIX

Tomorrow the NFP and unemployment rate will be the big headline market moving event. Expectations for a miss are high in light of the ADP report and unemployment claims. Because we have already seen some weakness and are now halfway expecting it with the NFP perhaps the blow will be softened. If this is the case perhaps a mild disappointment in jobs growth would still be OK for the market but again maybe not. Regardless, what will be important is what the figures and accompanying reports say about the future expectations and what that may mean for corporate earnings. First quarter earnings start in a week and those reports, as well as second quarter guidance,will set the tone for spring trading.

Until then, remember the trend!

Thomas Hughes