The weeks leading into Labor Day are historically quiet. To write the obvious, the last three weeks have been the opposite of quiet. The must owned names are imploding. Oil was crushed then staged a 3 day 27% rally, the greatest since the Kuwaiti invasion, only to trade 8% lower on the fourth day.
Yesterday’s selloff was blamed on poor Chinese PMI data which can be explained away via the port explosion and in upcoming two day holiday commemorating the end of WWII. Markets however had no interest in explanations and sold off considerably, a decline I believe was amplified by HFT and ETF selling.
Some have commented that yesterday’s ISM data spooked the market but I will write the market had already achieved its morning lows before the data was posted. The ISM Manufacturing Index did post a two year low, the result of the ongoing impact of the dollar’s rapid appreciation and softening global demand. The data is consistent with GDP growth between 1.5% and 2.0%.
However, the markets ignored the continued strength in construction spending as July’s data was stronger than expected and June’s statistics were revised higher. On balance, auto sales were also stronger than expected.
Tomorrow the ISM non-manufacturing index is posted. It is expected this data will suggest the economy is growing in the 2.5% to 3.0% range.
What happen today? How will the markets interpret the Beige Book or the statistical compilation utilized at the upcoming FOMC meeting? Many have relied upon information that has been spoon fed to them by the FOMC. I think it is correct to write the Committee has sent mixed messages.
Perhaps the only concrete statement to make is the Federal Reserve will err in some regards as this massive stimulus is unwound given that never has there been $2.5 trillion in excess bank reserves and a $4.4 trillion Fed balance sheet. The question at hand will these errors be of great significance.
Last night the foreign markets were mixed. London was down 0.01%, Paris up 0.16% and Frankfurt up 0.16%. Japan was down 0.39% and Hang Sang down 1.18%.
The Dow should open moderately higher as prices in China stabilized. The 10-year is unchanged at a 2.14% yield.
