Optimism over monetary policy and profits was the catalyst for a moderate advance. The market is suggesting almost an 86% chance of an interest rate reduction in September and almost 50 bps of easing is now anticipated by year’s end. There is little on this week’s economic calendar that could alter this view.
Regarding earnings, at the time of this writing 330 S & P 500 companies have reported earnings with 82% exceeding expectations. This beats last quarter’s profit surprise level of 78%. Moreover, earnings are greatly exceeding the 2.8% expected increase.
A strong case however can be made that corporations and analysts alike have created an environment where it would be easy to overdeliver as assumptions have been dumbed down.
And then there are tariffs, the news of which changes on a moment’s basis. There were some positive headlines, but a case can also be made that tariffs are becoming a “has been” narrative/story for the obvious reasons.
Over 90% of equity trading is done algorithmically defined as trading off momentum and headlines. Yesterday the background was positive, hence a moderate up day.
Considerable attention has been paid to the firing of the BLS Commissioner. As widely noted, the consistency of the data is that it has consistently missed expectations and then later revised perhaps by a large degree. The question as to why this is occurring has been asked numerous times.
It has been opined that the economy has changed dramatically whereas yesterday’s benchmarks are perhaps no longer as relevant as they once were, to flawed collection techniques to political gerrymandering.
It is widely acknowledged that every administration has moved the proverbial goalposts with perhaps the previous Administration’s moves were on steroids. [The changes backfired dramatically as the data went against the alterations made].
Like political polling, the response rates to the government surveys are not as robust as they once were. Many times, only 60% of the expected sampling was obtained and the rest was extrapolated.
These extrapolations were later viewed as wrong, perhaps to a large degree.
A major issue at hand is that today’s trading is dominated by algorithms based off seven-word headlines and momentum. Friday was an excellent example of the “bots” taking control of the Treasury market, exacerbated by an extreme lack of liquidity.
It has been often written the cheapest execution is often the most expensive transaction. This was the case Friday.
Technology based trading on momentum will implode. It is not a question as to if but rather as to when. There are many examples to support such a view. But the question is when and by what degree.
What will happen today?
Last night the foreign markets were up. London was up 0.42%, Paris up 0.27% and Frankfurt up 0.77%. China was up 0.96%, Japan up 0.64% and Hang Seng up 0.68%.
Futures are nominally higher on earnings and monetary policy optimism. The 10-year is off 8/32 to yield 4.22%.
