The Dow Jones Industrial Average respected support at 20000, signaling another advance. Probably to 21000 but it could carry as far as the upper trend channel at 22000. Twiggs Money Flow troughs above zero indicate strong buying pressure.
* Target: 18000 + ( 18000 – 16000 ) = 20000
The ASX 200 respected its new support level at 5600. Twiggs Money Flow respected the zero line, suggesting buying pressure. Follow-through above 5750 would offer a target of 6000*.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
The FTSE 100 respected its new support level at 7000/7100. Rising Twiggs Money Flow indicates buying pressure. Follow-through above 7350 would signal an advance to 7500* and offer a long-term target of 8000.
* Target: 7100 + ( 7100 – 6700 ) = 7500
Dow Jones Euro Stoxx 50 is a long way below its 2007 peak at 4500 but has formed a solid base at 3000. Rising Twiggs Money Flow signals long-term buying pressure, while long tails on recent weekly candles indicate shorter term enthusiasm. Recovery above 3300 would signal a fresh advance.
From Tim Wallace at The Age:
Nine years on from the start of the financial crisis, the US recovery may be overheating, Legal & General Investment Management economist James Carrick has warned.
He has predicted a series of interest rate hikes will tip the US into a 2018 recession.”Every recession in the US has been caused by a tightening of credit conditions,” he said, noting inflation is on the rise and the US Federal Reserve is discussing plans for higher interest rates.
Officials at the Fed have only raised interest rates cautiously, because inflation has not taken off, so they do not believe the Fed needs to take the heat out of the economy.
But economists fear the strong dollar and low global commodity prices have restricted inflation and disguised domestic price rises. Underneath this, they fear the economy is already overheating.
As a result, they expect inflation to pick up sharply this year, forcing more rapid interest rate hikes.
That could cause a recession next year, they say. In their models, the signals are that this could take place in mid-2018.
I agree that most recessions are caused by tighter monetary policy from the Fed but the mid-2018 timing will depend on hourly earnings rates.
Hourly earnings are a good indicator of underlying inflationary pressure and a sharp rise is likely to attract a response from the Fed. The chart below shows how the Fed slams on the brakes whenever average hourly earning rates grow above 3.0 percent. Each surge in hourly earnings is matched by a dip in the currency growth rate as the Fed tightens the supply of money to slow the economy and reduce inflationary pressure.
Two anomalies on the above chart warrant explanation. First, is the sharp upward spike in currency growth in 1999/2000 when the Fed reacted to the LTCM crisis with monetary stimulus despite high inflationary pressures. Second, is the sharp dip in 2010 when the Fed took its foot off the gas pedal too soon after the financial crisis of 2008/2009, mistaking it for a regular recession.
Hourly earnings growth has risen to 2.5 percent but the Fed is only likely to react with tighter monetary policy when earnings growth reaches 3.0 percent. Recent rate rises are more about normalizing interest rates and are no cause for alarm.
I am more concerned about the impact that rising employment costs will have on corporate earnings.
The chart below is one of my favorites and shows the relationship between employee compensation and corporate profits (after tax) as a percentage of net value added. Profit margins rise when employment costs fall, and fall when employment costs rise.
Employee compensation is clearly rising and corporate profits falling as a percentage of net value added. If this trend continues in 2017 (last available data is Q3 2016) then corporate earnings are likely to come under pressure and stock prices fall.
Source: Warning of bump for Donald Trump next year with slide into recession
The forward Price-Earnings (PE) Ratio for the S&P 500, depicted by the blue line on the chart below, recently dipped below 20. In 2014 to 2105, PEs above 20 warned that stocks were overpriced.
We can see from the green and orange bars on the chart that the primary reason for the dip in forward PE is more optimistic earnings forecasts for 2017.
We can also see, from an examination of the past history, that each time forward PE dipped below 20 it was an opportune time to buy.
History also shows that each time the forward PE crossed to above 20 it was an opportune time to stop buying. Not necessarily a sell signal but a warning to investors to tighten their stops.
Quarterly sales figures are only available to June 2016 but there are two stand-out sectors that achieved quarterly year-on-year sales growth in excess of 10 percent: Consumer Discretionary and Health Care.
Interestingly, apart from Energy where there has been a sharp drop in earnings, sectors with the highest forward PE (based on estimated operating earnings) are the defensive sectors: Consumer Staples and Utilities. While Consumer Discretionary and Health Care are more middle-of-the-pack at 16.7 and 15.4 respectively.
Both the DAX and FTSE 100 display Twiggs Money Flow troughs above zero, indicating long-term buying pressure.
Germany’s DAX is approaching its 2015 high of 12400. Twiggs Money Flow signals long-term buying pressure but expect resistance between 12000 and 12400.
The FTSE 100 is retracing to test its new support level at 7000/7100. Rising Twiggs Money Flow indicates buying pressure. Respect of support is likely and would signal an advance to 7500*.
* Target: 7100 + ( 7100 – 6700 ) = 7500
India’s Sensex found support at 26000 and is headed for a test of medium-term resistance at 29000. Twiggs Money Flow recovery above zero indicates medium-term buying pressure. Breakout above 29000 would find long-term resistance at 30000 which may prove to be stubborn.
The ASX 200 continues to test its new support level at 5600. Twiggs Money Flow is now declining, reflecting medium-term selling pressure. Breach of support is likely and would test the lower trend channel around 5500 but the primary up-trend is unchanged.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
The ASX 300 Banks Index has undergone a sell-off in the last few weeks, weighing heavily on the broader index. Declining Twiggs Money Flow indicates medium-term selling pressure. Respect of support at 8000 would indicate that the up-trend is intact.
NAB are predicting that the RBA will cut rates twice in 2017.
This ties in with the Credit Suisse view: if Donald Trump succeeds in reducing the US trade deficit, it will cause a USD shortage in international markets. And, in Australia, “a USD shortage tends to exert downward pressure on rates, bond yields, the currency and even house prices.”
Macrobusiness joins the dots for us: “a rising USD this year is very bad for commodity prices and national income while being bearish for interest rates and the AUD.”
Bloomberg editorial view:
America’s trade pact with Mexico and Canada reshaped all three economies, creating a highly integrated and competitive economic zone. The evidence is clear that, in the aggregate, this helped American workers — and not just because Nafta and other free-trade agreements make goods cheaper and promote U.S. exports. A subtler point is equally important: When a U.S. firm takes advantage of Nafta by moving jobs abroad, those investments spur demand for workers at home.
This surprising and little-understood benefit isn’t theoretical speculation. On average, the evidence shows, when U.S. manufacturers create 100 new jobs in Mexico, they create roughly 250 new jobs at home. U.S. manufacturing employment has declined over the years — but, as one study of Nafta puts it, more manufacturing jobs are lost from companies that don’t invest abroad. When U.S. companies build foreign plants, they not only hire more U.S. workers, they also invest and spend more on research and development — at home.
This striving for success in a connected global economy is disruptive: Some workers lose in the process, even as others (in larger numbers) gain. So the U.S. needs a stronger social safety net, better schools, more support for training and worker mobility, subsidies for low-wage employment and other measures. Sheltering U.S. firms from competition with import barriers, or blocking their foreign investments with threats or other interventions, will make them less competitive — and make Americans overall worse off.
NAFTA is not to blame for poor economic growth in the US. It’s open to debate whether the evidence presented in this article is correct, but imposing tariff protection is seldom the answer. It’s often a case of short-term gain, long-term pain as protected industries lose competitiveness.
