Introduction

An avalanche of economic data caused a bit of market wobble as FOMC outlook is reevaluated. Last week's speech by Janet Yellen, comments from Fed officials and data earlier this week had combined to spur some expectation the FOMC may raise rates as soon as the September meeting. Today's data nipped that in the bud but doesn't take a hike off the table completely. There are still signs the economy is reaching break out speed, the problem is that the signs remain spotty and the recovery slow.

There was a bit of news from the international scene to affect trading today as well. In China the official PMI was better than expected and above 50, showing signs of expanding activity in the large cap manufacturing sector, while the small/mid cap Caixin PMI came in at a tepid 50. Other news that may have some rippling effects throughout the region, and to a lesser extent the globe, is the collapse of the world's 7th largest shipping concern, Hanjin. The company's demise has led to several ships being seized by China and the risk of similar events elsewhere. Efforts to fill gaps left in global shipping routes are underway. Asian markets were mostly mixed on the news; Japan was up marginally, mainland China fell -0.73%, Hong Kong rose 0.81%

European markets were no stranger to market moving news. Initially higher on better than expected UK PMI the markets closed with losses as plunging oil prices and falling US indices weighed on sentiment. UK PMI needs to be noted, rising from a 3 year low to a 10 month high, the strongest gains in years, in the month following the Brexit referendum vote. The DAX and FTSE both closed with losses near -0.5%, other indices were not hit as hard.

Market Statistics

Lots and lots of information for the market to digest today and that is evident in the price action. The daily range was barely more than 0.75% of opening value but choppy. Early futures trading indicated a positive open for the indices for most of the morning. Lay-off data helped to support futures prices but weak auto sales, labor cost and productivity numbers combined to erase early gains. Trading was quiet at the open, there was some buying and the indices moved up by about a quarter percent but sellers overcame buyers by 9:45AM and sent the indices into negative territory.

At 10AM the selling intensified when construction spending data was released and sent the indices down to the low of the day, about -0.5% from yesterday's close. The market churned at this level for over an hour and then, shortly after noon, a rally recouped most of the early losses although resistance was hit near yesterday's close. Resistance held for the rest of the day although trading kept index prices near the highs up to and until the close of the session.

Economic Calendar

The Economy

Lots and lots of data today, the most in one day I've covered for quite a while. Starting off, the earliest release was the Challenger Gray & Christmas report on planned lay-off's. The number of planned lay-off's fell -29% to the second lowest level this year, 32,188. This is also a three month low, just off the 8 month low and -22% lower than this same time last year. The year to date total is now 391,288, -10% lower than last year at this time. Based on this data employers appear to be at least retaining employees/maintaining employment levels, a positive sign for the labor market.

The computer industry led this month due to lay-off's announced by Cisco. This is a continuation of a trend in lay-offs for the sector which began at the start of last year. Of note, Microsoft and Hewlett Packard are both responsible for thousands of lost jobs. The increase in lay-offs in this sector is not seen as a negative as they are due to restructuring/consolidations that are a net positive. Energy was second in terms of the number of lay-offs although the bulk of lost jobs were in the solar energy sector. Wal Mart announced just today 7,000 job cuts that will be included in the next report.


Initial Claims for unemployment rose by 2,000 to 263,000, last week's figures were not revised. The 4 week moving average of claims fell -1,000 to hit 263,000. This is the 78th week that claims have been below 300,000, the longest streak since 1970. Claims are trending near the long term 43 year low and are consistent with ongoing labor market health. On a not adjusted basis first time claims fell -0.7% versus an expected decline of -1.4%. On a year over year basis not adjusted claims are now -6.3% lower. The largest increases in claims were in Michigan, +2652, and Louisiana, +2280. The largest decreases in claims were in California, -2962, and Virginia, -1168.


Continuing claims rose by 14,000 from last week not revised figure to hit 2.159. The four week moving average also moved higher, gaining 4,500 to hit 2.159 million. Despite the gains second week claims continue to trend near long term lows and consistent with labor market health.

The total number of claims fell -22,536 to hit 2.100 million. This is the 5th week of decline since hitting the August peak, we can expect it to continue to fall for another 7 weeks based on historical/seasonal trends. On a year over year basis total claims are down -5% and consistent with labor market health.


Productivity and Labor Cost data was also released at 8:30AM and is what began to take the wind out of the markets sails. Second quarter productivity was revised lower to -0.6% from -0.5%, showing a decrease in the output of American workers. Labor cost was revised to +4.3%, more than doubling the original estimate, bringing the YOY gain to +2.6%. Driving the upward revision was a similar revision in wages, up 3.7% versus the originally reported +1.5%. While rear looking, this data is both negative and positive for the economy. Corporate profits will likely be impacted by higher labor cost and loss of productivity but the consumer will continue to improve on rising wages.

Construction Spending and ISM data was released at 10AM, spending data was flat and ISM contracted. Construction Spending was unchanged from the previous month but up 1.5% year over year. On a month to month basis, a 0.4% gain in residential spending was offset by a 0.3% decrease in non-residential spending. Year over year residential construction spending is up 1.7%, non-residential up 1.4%. These number are good but growth appears to have stalled so did little to support today's trading.

ISM Manufacturing report was reported as 49.4, showing a contraction in the manufacturing sector. This is well below forecast and put a curb on talk the FOMC may be raising rates at the September meeting. Within the report new orders, production and employment all fell and showing contraction while supplier deliveries are slowing. The only bright spot is that inventories are also falling which, eventually, will clear the way for renewed production.

Auto sales data was released throughout the morning. All showed a decline in sales from last August, most a little worse than expected, GM and Ford bucked that trend. GM shaved a half percent off expectations at -5.2%, Ford beat expectations by more than a full percent at -8.2%. Regardless, sales are far short of last years levels and expected to decline according to statements from Ford execs. Based on their view the market has peaked, the pent up momentum post financial crisis having lost steam, and will not hit record highs this year as previously expected. This is a concern due to the overly large influence booming auto sales has had on the economy. A peak is OK so long as activity remains stable, a decline in activity could have spillover effects.

Tomorrow is NFP day, the biggest day of the monthly economic cycle. Expectation is about 175,000 and I think this is probably about right. Labor data over the course of the month was good but seasonal trends do not support strong job growth. Unemployment however may fall, consensus estimate is for a drop of -0.1% to 4.8%, which suggest existing jobs are being filled even if new jobs aren't being created.

The Dollar Index

The Dollar Index took a hit today as ISM data, auto sales and construction spending all point to sluggish economy and no reason for the Fed to raise interest rates. The index fell about -0.40% seeking support along the $95.60 level which was broken earlier this week. Dollar strength over the past week or so was driven by hawkish sounding Fed Speak, now it seems the strength of that move is waning in light of the data. Tomorrow's NFP will likely have an effect on the market although I think it is generally accepted that the labor data is not the Fed's worry at this point. The index is sitting on a potential support at the $95.60 level consistent with a Fibonacci Retracement and moving average. A break below this level would be bearish and could take it down to $94.20 o lower.


The Oil Index

Oil prices took a dive today. First down -1%, then -2% and then more than -3% in blink of an eye. WTI lost nearly $1.50 and is now trading near $43.25. Supply, production and storage are all high and over powering demand. That's the bottom line, until that changes oil prices will remain under pressure. Downside target at this time is near $40, a break below there could go much lower if nothing emerges to support prices.

The Oil Index fell about -1.20% today, extending the drop below the short term moving average and breaking the 1,120 level. The index has now crossed the mid-point of its 5 month trading range and moving lower. The indicators both confirm this move and remain consistent with range bound trading. Downside target is near 1,075 provided oil prices do not snap back in the next couple of days.


The Gold Index

Gold prices rebound in today's session as data weakened the dollar. Spot gold gained about $5 to trade just above $1,315. Gold prices have been pushed down to what could become critical support levels by the recently strengthened dollar. This could be reversing, especially if the data continues to come in on the soft side. I'm watching $1,300 as critical support with upside targets at $1,325, $1,350 and $1,375 should the metal sustain a bounce. After the NFP, next week's Beige Book release may be the catalyst to keep an eye on.

The gold miners were able to post a nice rebound today as well. The Gold Miners ETF GDX gained nearly 3% but remain near the recently set low. The ETF has sold off along with gold, if gold rebounds expect to see it rebound along with it. A move up from here could mean as much as 20% upside if the recent high is retested. The indicators appear to have bottomed, which could lead to at least a small rebound. The risk is that the MACD peak is an extreme, convergent with a lower low, which suggests that a test of the low at least should be expected. If this is the bottom support is just above $25 with potential resistance just above today's close near $26.65. A break above this level would be bullish but need the support of rising gold prices to push it higher.


In The News, Story Stocks and Earnings

Apple was all over the news again today. The company, Tim Cook, has responded to the EU's claims of past due taxes calling them ridiculous, Ireland stands by its claim that no taxes are due. The new twist is that Cook now says those monies were earmarked for repatriation to the US, a move no doubt intended to bring Uncle Sam into the fray. Shares of the stock are as yet unmoved by this development, they gained about a half percent in today's session. What will be of importance is the expected launch of iPhone 7 in the not too distant future.


Campbell's reported earnings before the bell. The soup maker came up short on the top and bottom lines, producing a net loss for the quarter versus a small profit last year, disappointing execs and shareholders. The results are due to tepid sales growth and execution issues that CEO Denise Morrison hopes to fix in the future. Despite the results the board approved an increase to the dividend of 12%. Shares of the stock fell more than -6.25% on the news.


The Indices

The indices saw a bit of volatility today, first up, then down, then back to break even for the close. Today's leader was the Dow Jones Transportation Average which gained about 0.5%. Today's action however positive created a small, weak candle within recent trading ranges without much volume. The indicators remain consistent with range bound trading. A move higher will likely find resistance at the 8,000 level unless a strong catalyst emerges.


The NASDAQ Composite made the second largest gain today, about 0.29%. The tech heavy index created a small doji candle, more of a spinning top, just above the short term moving average but below the previous all time high. The index has been pulling back to support ever so slowly over the past few weeks and the indicators support this move. Support is near 5,200 and if broken could lead to further downside. Looking back over the past couple of months price action appears to be forming a rounding top which, if confirmed, could result in a moderate to deep correction.


The Dow Jones Industrial Average made the third largest gain, 0.10%. The blue chips closed below the short term moving average despite recovering from today's lows, this average may provide resistance moving forward. The indicators continue to show weakness and suggest the pull back may not be over. First downside target is near 18,250 with a chance of deeper correction to 18,000.


The SPX brings up the rear in today's action with no gain, and no loss, 0.00%. This may not be the first time I've seen this happen in more then 10 years of market watching but if it isn't I can't remember another time. Nevertheless, it doesn't really matter as today's action merely means the market is in balance, for today at least. Price action moved down to test support at 2,160 and set a new almost one month low. The indicators continue to weaken so I would expect to see support tested further, a break below would be bearish with possible target near 2,130.


The market continues to churn within the tight range it entered mid-July. It appears to be waiting for something and I am more and more convinced it is the end of the summer more than anything else. Tomorrow's NFP may spark a move to break the range but I do not expect much to come from it other than for job growth to remain stable relative to long term trends. The charts are showing persistent weaknesses, weaknesses highlighted by today's manufacturing and auto sales data, so I remain cautious even in the face of strong labor data.

Until then, remember the trend!

Thomas Hughes