A Tale Of Three Trends (Technically Speaking For 9/1)

Yesterday, Fed Vice Chair Clarida added further clarification to the Fed’s new mandate. Regarding inflation, he noted that the Fed’s previous 2% goal was taken to mean that once inflation hit 2%, the Fed would raise rates. This effectively lowered inflation expectations, which, in turn, lowered overall inflation. By targeting an inflation average, the Fed is implying that it will let inflation run above 2% to counter the period of low rates. This will raise the public’s inflation expectations, which will (hopefully) help to prevent a period of dwindling price pressures a la Japan Whether this works or not is anybody’s guess.

ISM released the latest manufacturing index:

All numbers are very strong, save for the employment data. Most anecdotal comments are strong (emphasis added):

  • “Watching COVID-19 situations in Mexico, Brazil, Philippines [and] Hong Kong. High rates of COVID-19 surging. Currently, lines of supply no longer impacted by COVID-19 related events.” (Computer & Electronic Products)
  • “Business is very good. Production cannot keep up with demand. Some upstream supply chains are starting to have issues with raw material and/or transportation availability.” (Chemical Products)
  • “Airline industry continues to be under great pressure.” (Transportation Equipment)
  • “Current sales to domestic markets are substantially stronger than forecasted. We expected a recession, but it did not turn out that way. Retail and trade customer markets are very strong and driving shortages in raw material suppliers, increasing supplier orders.” (Fabricated Metal Products)
  • “Homebuilder business continues to be robust, with month-over-month gains continuing since May. Business remains favorable and will only be held back by supply issues across the entire industry.” (Wood Products)
  • “We are seeing solid month-over-month order improvement in all manufacturing sectors such as electrical, auto and industrial goods. Looking to add a few factory operators.” (Plastics & Rubber Products)
  • “Rolling production forecasts are increasing each week compared to prior forecast.” (Primary Metals)
  • “[Production ramp-up] has been a struggle. We have started and stopped lines numerous times at all 18 of our manufacturing plants due to COVID-19 issues. Surprisingly, our direct suppliers have done an excellent job on shipping ingredients and packaging on time.” (Food, Beverage & Tobacco Products)
  • “Strong demand from existing and new customers for our products, stable-to-decreasing input costs for our operations, and record numbers of new business opportunities from prospective customers’ reshoring measures. All trends continuing from the first quarter of fiscal year 2017.” (Electrical Equipment, Appliances & Components)
  • “Capital equipment new orders have slowed again. Quoting is active. Many customers waiting for the fourth quarter to make any commitments.” (Machinery)
  • “We are starting to see parts of our business rebound in August, while other parts remained weak. Some of our export business has come back for the first time since the start of COVID-19; however, domestic portfolios remain mixed.” (Paper Products)

The Markit PMI for the US was also strong (emphasis added).

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 53.1 in August, down slightly from the previously released ‘flash’ estimate of 53.6, but up from 50.9 at the start of the third quarter….

Contributing to the overall expansion was a faster increase in new order inflows in August. The rate of growth was solid and the steepest since the start of 2019. Firms often linked the rise in new sales to stronger client demand and increased marketing. New export orders also picked up, as companies registered the first upturn in foreign client demand in 2020 so far. Moreover, the pace of increase was the quickest in four years.

These are all solid developments for the industrial sector.

Let’s take a look at today’s performance tables:As usual, the QQQ tops the list, gaining 1.73%. The smaller-caps were interspersed throughout the table. Also note the long-end of the bond market was a top performer today.Basic materials caught a strong bid from the positive manufacturing news, as did the industrial sector. Technology was also at the top of the list. Two defensive sectors — health care and utilities — were at the bottom.

Right now there are three market trends, which we see in the 3-month charts:Treasuries have started to sell-off a bit. The TLT broke trend at the beginning of August and has been trending modestly lower since. Larger-caps are in a solid rally. The Dow, Nasdaq, and S&P100 all show similar strong charts.Mid, small, and micro-caps all broke trend earlier in the month and have been trading sideways.

As I’ve noted before, there is a mixed message above. The treasury market sell-off says, “higher growth” but the smaller-cap sell-off says, “slower growth.” At some point, something will have to give.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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