Financial Outlook Week Ahead
Wall Street traders sometimes root for year-end “Santa Claus rallies,” but on Friday, hardly a creature was stirring as stocks finished slightly higher on the quietest full day of trading in more than a year. Health care companies brought in most of the gains.
Major U.S. indexes stayed in a narrow range throughout the day. Drug makers and other companies in health care did the best, while retailers continued to take small losses just before the holiday.
Energy companies also slipped, and they took their first weekly loss since the beginning of November. The Dow Jones industrial average, however, rose for the seventh week in a row.
Consumer sentiment ends December at 98.2, up 2 tenths from mid-month for a new cycle high. Gains are strong for both the current conditions and the expectations components, the former hinting at stronger month-to-month readings for consumer spending and the latter pointing to rising confidence in the jobs outlook.
Despite confidence in the labor market, there doesn’t seem to be much hope for wage gains. Inflation expectations are at record lows, at 2.2 percent for the year-ahead outlook, down 2 tenths from November, and at 2.3 percent for the 5-year outlook, down 3 tenths.
The jump in confidence during November didn’t translate into stronger consumer spending though high spirits would certainly seem a positive for the holiday shopping season.
The Commerce Department said Friday that new-home sales in November rose 5.2 percent to a seasonally adjusted annual rate 592,000. It was the fastest pace since July’s 622,000. Sales were up 16.5 percent from November 2015.
Sales in the Midwest shot up 43.8 percent, the region’s biggest monthly increase since October 2012. Sales were up 7.7 percent in the West, flat in the Northeast and down 3.1 percent in the South.
Technically, I’m expecting volatility to pick up once again and based on the overbought momentum, I’m expecting stocks to trade lower or develop range bound action over the next few weeks.
The most likely scenario is a steep and quick pullback to the 50 day moving average, which will give stocks the chance to balance throughout various sectors and begin moving higher once again.
The various sectors are completely out of balance and it will be extremely difficult for stocks to continue generating meaningful without a reasonable sized pullback to the downside.
Lastly, before I conclude to days analysis, take a look at the descending triangle that’s developing in the broad market.
Typically, descending triangles break to the downside and based on the overbought sentiment, the odds are probable that the overall market will break lower over the next few sessions.
I typically consider price action, momentum and volatility, aside from fundamentals and the only factor that’s out of line is volatility, which should have increased. Otherwise, the rest of the factors are pointing to breakdown to the downside, which will take us back down to the 50 day line.
Bond Market– The probability that the Federal Open Market Committee will increase its fed funds rate at its May 2017 meeting is 36%, which is unchanged from yesterday and the probability of a rate hike at the June meeting is 75%, when 69% was predicted yesterday.
Our analysis suggests the Federal Reserve will increase its fed funds rate one, or possibly two times next year, but not the three times that are predicted by FOMC officials and not the four times that a large investment bank indicated today.
It is likely that commodity and wage inflation will accelerate next year, which if we are correct, will adversely impact the 30 year Treasury bond futures the most since the long end of the curve is more susceptible to the inflation influence.
The main trend is lower for the entire interest rate futures complex, but especially for the thirty year Treasury bond futures.
Technically, bonds continue to trade within the confines of the bottom range of the channel and unless FED data becomes increasingly stronger, the odds are high that bonds will remain choppy or trade higher, before turning lower and reverting back to the main trend, which is lower.
The symmetrical triangle that’s developing should congest for a few more sessions and break higher if FED news continues to show vulnerability in Yellen’s aggressive timing to raise rates several times next year.
Global Currency Market
The U.S. dollar index remains near 14 year highs. The main trend for the greenback is higher and is likely to continue to be supported by a hawkish Federal Reserve.
Of the major central banks, only the Fed is on track to increase interest rates in 2017.
The British pond is lower on news that the U.K. current account deficit widened in the third quarter, as Britain reported its worst trade numbers in nearly three years.
The Canadian dollar and the Australian dollar are under pressure due to lower crude oil prices.
Have a safe and happy holiday!