Recent poor economic numbers are adding steam to expectations the Fed will cut rates later this year, reports Bill Baruch, President of BlueLineFutures.com.
E-mini S&P (ESM)
Yesterday’s close: Settled at 2805, up 55.50
Fundamentals: Federal Reserve Chair Powell lit a fire under equity markets yesterday affirming the committee is ready to “act as appropriate”. We have said it before, and we will say it again; the Fed is in the driver’s seat. In recent remarks, Fed officials have overall called for a rate cut in this economic environment or if conditions deteriorate. On Monday, Manufacturing PMI matched the worst on record and ISM Manufacturing was the slowest since October 2016. Here’s the thing, manufacturing in Germany and China has been contracting for months. A dismal U.S read was widely expected since the preliminary read on May 23. Risk assets have digested this dose of poor growth and the Fed has come to the rescue.
Additionally, this slow growth echoes an escalating trade war between the U.S and China; the market is eyeing a meeting between the two leaders at the G-20 Summit in Japan later this month. Until either growth worsens, the Trump-Xi meeting doesn’t deliver or if inflation pokes its ugly head and keeps the Fed from cutting rates, we are likely to see risk assets attempt a recovery at the very least. This morning, the CME’s FedWatch Tool has priced-in a 25-basis point rate cut in 2019 with a 98.1% probability. There is an 85% probability the Fed cuts by 50 basis points this year and a 91.4% chance they do the first 25 by September. The services sector is front and center today and data from the Eurozone was better than expected. U.S Services PMI is due at 8:45 am CT and the more closely watched ISM Non-Manufacturing is released at 9:00 am CT. But first, ADP Payrolls was another dismal data point showing only 27k jobs created in May versus 180k expected. Remember, this market does not want to be reminded that growth is slowing.
Technicals: We completely Neutralized our Bearish Bias heading into yesterday after support levels were pinged Monday and the recovery took out resistance levels overnight.
Crude Oil (CLN)
Yesterday’s close: Settled at $53.48, up 0.23
Fundamentals: After holding a higher low yesterday versus the Sunday night open and stabilizing through the afternoon, Crude lost ground when API reported large builds across the board; +3.545 million barrel of crude, +2.696 million barrels of gasoline and +6.314 million barrels of distillates. This was very bearish relative to the more neutral expectations. However, crude surprisingly held ground overnight in what was arguably a constructive session. Maybe news of a meeting between Russia’s Energy Minister Novak and Saudi’s Energy Minister Al-Falih on June 10 has helped buoy the tape, or more simply, maybe it’s is just oversold and waiting for confirmation of the API data from the official EIA report. EIA expectations are for a 0.849 million drop in crude, a 0.630-million-barrel increase in gasoline and 0.499-million-barrel increase in distillates. Results in line with these expectations would now help lift price action. Estimated production must also be watched closely.
Technicals: Support is budding at the lows and comes in at $52.11-$52.43, keeping waves of selling in check.
Gold (GCQ)
Yesterday’s close: Settled at $1,328.7, up 0.8
Fundamentals: Gold has again ripped higher. Dollar weakness and a stable picture in Treasuries is allowing the metal to catch-up to the broader macro picture, one that signals a 75.1% probability the Fed will cut rates at or before the July 31 meeting. Last night, Chinese Services PMI was the latest whiff. On the heels of dismal Manufacturing earlier in the week, ADP Payrolls this morning was another poor data point and ISM Non-Manufacturing is due at 9:00 am CT. if data continues to underwhelm at the least through Nonfarm Payroll on Friday then Gold is priming for a $1400 print in the near future.
Technicals: Gold has extended gains clearly out above the $1,327.7 mark and is now testing the front-month high of the year at $1,349.8. The August contract high was $1,361.5. We have never wavered from our long-term Bullish Bias in both Gold and Treasuries.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com.
