The first week of August begins with capital market participants focused on whether the long-awaited correction has begun. The last week of July presented some economic data points that suggest the Fed might be behind the curve with regard to its continued historically easy monetary policy.
- Q2 GDP reported above consensus estimates at 4%
- U.S. ISM Manufacturing “new orders to inventories” ratio came in at a robust 14.9
- Q2 Employment Cost Index rose 0.7%, the biggest gain since Q3 2008
- Initial Jobless Claims 4-week moving average is at its lowest since April 2006
Last week’s economic data fostered a sell-off for the S&P 500® Index (SPX) from the all-time high of 1991.39 on July 24 toward last Friday’s 1916.37 low, slightly ahead of the 100-day moving average of 1910.97. Last week I offered 1950 as a key support level for the SPX. Now that 1950 is breached, keep a technical eye on that new resistance level, as bullish forces must reclaim it quickly in order to keep the bullish momentum intact.
SPX Year to Date, as of August 4, 2014
Unfortunately, the week ahead does not present much on the earnings or economic calendar. In fact there is not much on this month’s calendar until the Kansas City Fed’s Jackson Hole economic symposium on August 21-22. Therefore, investors should rely on some internal indicators for possible guidance about whether that much debated correction is upon us.
1. U.S. Dollar Rally
Keep a watchful eye on the value of the U.S. dollar, which has risen sharply in the past few weeks to a high for 2014. Further appreciation of the U.S. dollar will be a near-term headwind for the capital markets. The SPX rally at the end of 2013 was largely driven by a corresponding U.S. dollar sell-off that benefited multi-nationals. Keep in mind, our domestic fiscal policy still relies on “monetizing our debt” and “robust exports,” both of which need a weaker U.S. dollar.
U.S. Dollar Index, August 5, 2013 to August 4, 2014
2. U.S. 2-Year to 10-Year Yield Curve Flattening
In late July, the yield curve for 2- and 10-year U.S. Treasuries continued to flatten. On July 29, it traded to 191 basis points. It began the year at 261 basis points. It closed at 202 basis points on Friday. Further weakness below 200 basis points will weigh on shares of financial institutions and negatively impact the overall SPX direction.