E Markets: Peaks

Knowing if you are at the peak starts with checking out to see if there is a ceiling or a taller peak to consider, it ends with looking down as the descent is always harder, if not faster. I spent much of one summer hiking a good part of the Appalachian Trail from Georgia to Maine. You learn about peaks and valleys with your boots as they move from blisters to callouses. The rythem of markets is much the same. The December valley, the January peak – the February confusion – as the trail isn’t so obvious ahead. We are on the razor path between fear and greed as the global slowdown clearly accelerates in January even as trade deal hopes, Fed pauses and China stimulus counter punch. The gloomy global PMI reports are important as they are forward-looking, yet today is more about the backward story of US jobs and the noise around the 5-week government shutdown, cold weather and the ugly politics. Markets are geared up to be stuck as the technical resistance in the S&P500 make any return to the previous peak less obvious. The FOMC outlooks for 2019 and beyond US growth suggest the Trump inspired 3% plus GDP from tax reform and deregulation has peaked. The balancing act of the jobs report rests on the peak in employment against its cost. The availability for new workers and their cost matters to how companies plan the year but the lower CPI from Korea to the flash EU HICP suggest we are also at a peak. The surge in lending in China also appears to be peaking – as usual into the new year holiday – with Reuters reporting that the PBOC told banks to moderate the pace of loans. At the same time, Beijing consumers were given an incentive to buy TVs and refrigerators this week. The lower China PMI and the reversal of the CNY put that back as a key driver for risk post the US jobs report given the Xi/Trump meeting is now the next moment for investors to see if trade fears have truly peaked. The sharp reversal in CNY today merits attention to all that are comfortable with 2800 S&P500 bull targets.  

Question for the Day: Do the US payrolls matter or is this all about US/China trade? The rally up in risk in oil and equities in January stands out and the Fed pause, end of the US government shutdown and the prospects for an end or extended truce to US/China trade tariffs drove much of the market even as the global picture on growth peaked. The swing in mood maybe a good place to think about how the non-farm payrolls fits into the picture. There is one big risk today in the wage components as higher labor costs will give the FOMC less patience should financial conditions return to a more steady and easy state. The power of China growth and trade concerns to keep US prices in check seems less obvious and most likely reflected in business investments. The ability to call a peak in Fed hikes rests on the participation rate in the US, the average hourly earnings and the hours worked. As usual, the jobs report looks key to trading even as the uncertainty over the numbers thanks to the government shutdown increases.

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