Mostly Good Data
The holiday-shortened week finished essentially unchanged despite having to digest both the FOMC minutes and the employment report.
The June jobs report came in at a better than expected 222 K, while the April and May numbers were revised up from 174,000 to 207,000 and 138,000 to 152,000, respectively. Unemployment came in at 4.4%, up slightly from May’s 4.3%. Some commentaries will try to make that increase seem significant, but when unemployment is this low, small fluctuations are to be expected and not to be made an issue. However, the average hourly earnings might be an issue, coming in at a disappointing 0.2% increase, and the previous month revised down to 0.1% from the original 0.2%. If this lack of wage inflation continues, then the FED’s plans to normalize rates could be called into question — more than it already is.
The lack of wage growth is the main drag on the economy and the single-most important reason that we have yet to see a full recovery. We need wage growth to increase labor’s share of corporate income if we expect the economy to grow at a more normal rate. The chart below shows how labor’s share of income remains below the average of 80% that was in place two decades ago.
The minutes of the June FED meeting did not provide any new information; the committee wants to raise rates and start reducing the balance sheet before the end of the year. The CME FedWatch tool remained unchanged at 60% probability of a rate hike in December
For its part, the stock market is ignoring the prospect of higher rates, and focusing instead on the growth evident in the business cycle. The GAAP earnings reported so far for Q2, show an increase from 94.50 to 100.29, up by 6.1%. Recessions are not known to start when earnings are growing, and we (and the FED) are betting that growing earnings, combined with sustained low unemployment, will produce the much-needed wage growth.
Equities
The AAII bull sentiment indicator was essentially unchanged, while neutral sentiment shifted three points over to the bearish sentiment. This leaves the bull-to-neutral/bear ratio unchanged at 30%-to-70%. This level of uncertainty/fear, is not typical for market tops, so despite all the headlines declaring the markets overvalued, we see continued upside to this bull. However, we continue to wait for a correction.
{This section is for paid subscribers only}
The put-to-call ratio has formed a down-spike which, in the past, has been followed by a correction in the S&P 500 85% of the time. This supports our near-term expectation of a correction in equities (chart below).
{This section is for paid subscribers only}
Long-term, however, we continue to see strength in the equity markets. The continued growth in GAAP earnings, the bullish technical moving averages, and the continued positive 10-year minus 2-year Treasury rate-differential, all point to a continued long-term bull bias in equities (see three charts below).
{This section is for paid subscribers only}
The European equities, as measured by the STOXX 600 index, are once again trading with a positive correlation to the S&P 500 (both have trended down). We expect further short-term weakness while the SPX corrects, but we are looking for a rally after that. We will maintain our IEV position in anticipation of that rally (chart below).
{This section is for paid subscribers only}
Gold
Gold’s path of least resistance is down.
{This section is for paid subscribers only}
The USD/JPY FOREX ratio has continued to rally and put pressure on gold (chart below).
{This section is for paid subscribers only}
We wish our subscribers a profitable week ahead and ask that email be monitored for Trade Alerts.
Regards,
ANG Traders
Join us at www.angtraders.com and replicate our trades and profits.
Email queries to info@angtraders.com
