Big Data Week Ahead, and China's Manufacturing Economy
We will stick to our portfolio plan, focusing on the longer-term opportunities.
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* Looking to see if this big data week supports the market narrative
* China’s manufacturing economy strengthened, positive for the uptrend in our XLE shares
* We will stick to our portfolio plan amid an overbought and euphoric market, focusing on the longer-term opportunities
Equity futures point to a positive start for the second quarter of 2024, embracing Friday’s inflation-friendly February PCE data. While it was constructive, after reviewing the in-line February PCE report, based on the totality of recent data, we agree with comments from Fed Governor Waller and Fed Chair Powell last week that there is no rush for the Fed to begin cutting interest rates. Especially when the economy remains, as Powell put it, strong.
Much the way we look to triangulate stock price targets, we continue to think the Fed will want to see multiple measures of inflation moving together toward its 2% target because of the greater conviction it will bring. In keeping with that and as we suspected, Powell’s Friday comments reiterated the need to see more “good data” before the Fed begins a rate-cutting cycle.
Last night we learned the Caixin China General Manufacturing PMI increased to 51.1 in March from 50.9 in the previous month, beating market estimates of 51. It was also the fifth straight month of growth in factory activity and the fastest pace since February 2023, boosted by higher new domestic and international orders. That bolsters the case for the global economy, but it also means we are likely to see the uptrend in oil continue, giving further lift to our Energy Select Sector SPDR Fund XLE shares.
Later this morning, ISM and S&P Global will publish their final March Manufacturing PMI reports with their Services counterparts coming later this week. Today’s headline and new order data will clue us into the strength of the manufacturing economy while the data later this week will do the same for the Services sector, the one that has been driving the bulk of US economic growth.
We will compare the figures from S&P Global and ISM, especially for the manufacturing economy because of the very different expectations - while expectations for ISM’s March manufacturing data call for a continued contraction in that part of the economy, the forecast for S&P Global’s manufacturing figures is a return to growth. If both March manufacturing headline figures cross the expansion-contraction line of 50, they would bolster the current picture of the US economy and the market narrative even though they would be another data point toward the Fed slow-walking its way to rate cuts.
Timing the first rate cut
The insights on inflation and job creation to come from those reports will also be helpful ahead of the March Employment Report later in the week and the soon-to-be-upon published March CPI and PPI reports. Because the data found in those January and February PMI reports were good indications for what we’ve seen in the January and February CPI and PPI reports, it stands to reason this week’s data may provide an important signal when it comes to rate-cut timing.
Ahead of reviewing those coming insights, we still think the timing for the first rate cut will slip into H2 2024, and the probability of less than the three rate cuts shown in the Fed’s latest set of economic projections is rising.
As we get ready for the start of trading for the new quarter, last week’s AAII Sentiment Survey showed short-term optimism increases significantly with Bullish sentiment rising to 50.0%. Bullish sentiment reflects expectations that stock prices will rise over the next six months, and AAII noted that the 50% figure gapped up over the prior week and is not only “unusually high” but it is also well above its historical average of 37.5%. There is also the Citigroup Panic/Euphoria Model that has crossed into “Euphoria”. Per Citi, euphoria “levels generate a better than 80% probability of stock prices being lower one year later.” Hat tip to Helene Meisler for sharing that data point.
These and other data points will keep us on a cautious but opportunistic path with the portfolio. Coming off a new all-time high for the S&P 500 last week, the market is overbought and its valuation is stretched. While it could melt up further, this week’s economic data and the trickle of earnings this week and next will help us determine if the market is likely to stall out or power ahead.
While we parse those figures, we will continue to focus on companies with superior earnings prospects and favorable entry points for the portfolio. We continue to see a market pullback affording us more opportunity to put capital to work for the medium to longer term.
At the time of publication, TheStreet Pro Portfolio had no position in the securities mentioned.
