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Muted, But Comfortable, Response to Good News



Chief Market Analyst

The stock market is overbought on a short-term basis and due for a pullback. That has to be said, but that doesn’t mean the market has to listen. Markets can stay overbought (or oversold) longer than you think, and thus far, this market isn’t bowing to conventional thought.

The S&P 500 closed at a new high on Monday and so did the Nasdaq Composite. Neither encountered any selling interest of note. The trading session was accented with a steady bid and a steady progression to higher highs that saw both the S&P 500 and Nasdaq close at their highs for the session.

Things are somewhat subdued this morning. The futures for the major indices are little changed and are trading a smidgen above fair value, which is presaging a flattish to slightly higher start for the cash market.

Interestingly, there is news out there that is good news, yet the response to it has been muted.

  • JPMorgan Chase (JPM)Citigroup (C), and Delta Air Lines (DAL) all exceeded consensus quarterly earnings estimates and provided encouraging commentary on business activity.
  • The Treasury Department canceled its designation of China as a currency manipulator ahead of Wednesday’s signing of the Phase One trade agreement.
  • China’s exports jumped 7.6% yr/yr in December, marking the first jump in exports since March.
  • According to industry sources, global PC shipments increased in 2019 for the first time since 2011.

Separately, the Consumer Price Index for December brought good news in relative terms, as there weren’t any overshoots compared to expectations. Total CPI was up 0.2% m/m, as expected, while core CPI, which excludes food and energy, was up a softer-than-expected 0.1% ( consensus +0.2%).

With the monthly changes, total CPI is up 2.3% yr/yr, versus 2.1% in November. Core CPI was up 2.3% yr/yr, unchanged from November.

The key takeaway from the report is that it won’t cause any immediate re-think of the Fed’s policy position.

Core CPI has been up 2.3% yr/yr for three straight months, so the inflation rate isn’t running away from the Fed, which seems to have adopted a willingness to let inflation run above its longer-run goal for a bit before moving on rates; moreover, the CPI data takes a backseat to the PCE price data as the Fed’s preferred inflation gauge, and the latest report showed core-PCE inflation up just 1.6% yr/yr.

The Treasury market looks fairly comfortable following the release of the CPI data. The 2-yr note yield is unchanged at 1.58% and the 10-yr note yield is down one basis point to 1.84%.

The stock market looks comfortable, too. It may not be taking off on the good earnings news, but that’s probably only because so much good earnings has been priced in already for a market trading at 18.5x forward twelve-month earnings, which is a 24% premium to the 10-year average, according to FactSet data.

The more notable takeaway, however, is that the market still isn’t selling off in a demonstrable way either, probably because market participants recognize that there has yet to be a demonstrable break in the trading trend that has been their friend since mid-October.

Originally Posted on January 14, 2020 – Muted, But Comfortable, Response to Good News

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