The major averages are giving us little to work with in the way of price action. They’re just treading water, sitting comfortably inside trading ranges that have lasted all year.
Below we see a daily chart of the S&P 500, with the index staying inside a 75 point range for the last six-months.
Conventional technical analysis would view this as a flag or continuation pattern, representing a period of consolidation before a resumption of the prior trend. That’s a nice way of looking at things, but we have no way of knowing what truly lies ahead. The break up, or down, will happen as the average discounts changing future economic conditions, not in response to imperfect patterns of historical price movement.
Speaking of economic conditions, this is a data-heavy week, and the fireworks have already begun. The grand finale will be Friday’s monthly jobs report.
This morning we got a look at the latest Personal Income and Outlays report and a couple of readings on manufacturing.
Personal spending rose 0.2% in June, following a 0.7% increase in May. These figures are constantly touted as “not good enough,” but consumer spending is doing just fine, having risen 3.7% over the past year. It’s perfectly okay if consumers periodically choose to rebuild their personal balance sheets rather than immediately spend every dime they earn.
[Read: Conditions in the US Are Improving, Not Deteriorating]
More importantly, personal income rose for the third straight month, climbing 0.4% in June. The faster pickup in income vs. spending led to a modest uptick in the savings rate, from 4.6% to 4.8%. Again, while this may not immediately translate into higher corporate profits, it’s a good thing for consumers and the economy in the long run; it’s more fuel in the tank.
The Fed’s preferred inflation gauge, core PCE, rose a very modest 0.1% in June. On an annual basis, this measure of inflation shows prices have risen 1.3% over the past year.
That’s not a good sign if you’re the Fed and you want to raise interest rates. Core CPI is looking a little better, tracking between 1.7% and 1.8% over the past five months, but neither of these measures is showing an upward trajectory.
The Fed keeps reiterating its desire to be “confident” that inflation will move back towards the 2% target. In looking at the chart below, which shows core PCE in blue and headline PCE in red, there is little support for that case.
The last time core inflation was near its 2% target was at the beginning of 2012. Since then it has been on a downward trajectory, seemingly falling further from that threshold each month. Core PCE hit a double bottom near 1% following the financial crisis. Interestingly, we’re not very far away from that mark now.
However badly the Fed wants to raise rates, they have to deal with reality. And the reality is that one of their mandates is not being met, and would be further harmed by tightening monetary conditions. I’ve argued the case for a “one-and-done” rate increase, just to test the waters, but beyond that, rates are going to stay accommodative for quite some time.
[Read also: Rate Hikes, Yield Curve, and the Stock Market]
The lack of inflation is also keeping a lid on longer-term interest rates, which is a blessing for the economy.
In the chart below, we see the yield on the 10-year Treasury. The move higher over the past six-months has occurred in response to anticipation of Federal Reserve rate hikes. But as pointed out in previous articles, the long-end of the yield curve is set primarily by inflation expectations, or lack thereof.
The rise that we’ve seen during 2015 pales in comparison to the taper tantrum spike, and demonstrates the bond market once again getting ahead of itself. It’s going to be a low rate environment for quite some time, until we truly see sustained and rising inflation.
Moving on, two separate readings on manufacturing showed positive signs of expansion, but nothing to take your breath away.
The ISM Manufacturing Index slid 0.8 points to 52.7. Readings above 50 indicate expansion. On the more negative side, and a direct result of the strong dollar, new export orders contracted for the fifth time in seven months.
The PMI Manufacturing Index echoed the former report with a reading of 53.8, also indicating slow but steady growth. Both this report and the ISM showed improving domestic demand, a positive reflection on American consumers.
Overall, the economy appears stuck in this low-growth environment. The strengthening dollar has penalized multinational firms, suppressed manufacturing, and is throwing wrenches into the mix in terms of falling commodity prices.
With the outlook uncertain, it’s not a huge surprise that major averages remain range bound. We’re just going to have to sit and watch developments as they arise, until we see a discernible trend start to emerge.
The preceding content was an excerpt from Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
