US stocks rally to top of recent range, despite slight FOMC Minutes

Stocks climb, remain in recent range

Despite a small hiccup around the release of the FOMC Minutes, stock markets put in a day of positive trade last night, with the benchmark S&P 500 adding 0.8%. Activity was low again, short-term momentum remains slightly skewed to the downside, and there was a failure – by the US stock market, in particular – to break out of its recent range. However, sentiment has tangibly improved, with the VIX falling back into the 15 level for the first time in 3 weeks. Stock markets seem to be in a holding pattern right now. A burgeoning desire to renew risk-taking seems to be there, but there lacks an appropriate catalyst.

FOMC Minutes a little on the hawkish side

All-in-all, last night’s Fed minutes didn’t support this impulse in the market. The tone of the document was probably on the more-hawkish-than-expected-side, and lent credence to the belief that July’s Fed-cut was a “one-and-done” phenomenon. Investors haven’t place to much weight on the significance of the document. Circumstances between now and the Fed’s last meeting have changed too much to consider the information perfectly relevant. Bond yields have still climbed nevertheless, with focus turning to this weekend’s central-bank-talk-fest at Jackson Hole, to judge whether the Fed is coming around the idea of cutting interest rates as aggressively as is being priced-into markets right now.

Global PMIs and economic growth to take focus

Global economic growth becomes the central theme in global markets in the next 24-hours, though. Manufacturing PMI data is released out of both Europe and the United States, and ought to give a good “forward-looking” insight into GDP growth in each region. A reminder: Manufacturing PMI numbers provides a rather accurate representation of an economy’s business cycle. Falls in the measure have almost portended a looming economic-slowdown – especially in the United States. As of late, Manufacturing PMI figures – mostly in Europe, but increasingly in the US too – have deteriorated and trended downward. Tonight’s data will be assessed by whether this trend is continuing.

Global PMI expected to confirm weaker economic outlook

Another reminder: a print below “50” in the PMI is considered “contractionary” and a print above “50” is considered expansionary. Estimates for tonight’s data suggest that the US PMI will come-in at an expansionary 50.5; but the European, along with the highly significant German PMI, figure will print at 46.3 and 43.1, respectively. The European numbers is of clear concern, given they’re already in contractionary territory. But the US PMI numbers are probably of greater import. They have plummeted since the beginning of 2019, suggesting that there is trend of slowing activity in US Manufacturing, which could soon become an outright contraction in the sector, too.

Waiting for policymakers to right the ship

The cause, reason and consequences of a continued slowdown in European and US PMIs are subjects of debate. However, the prevailing narrative seems to be that: the global economy is ending a rather long business-cycle; this cycle is being truncated by the ill-effects of the US-China trade-war, as business investment slows-down; the end of this cycle implies a looming global recession of some description; and policymakers are going to throw the kitchen sink at the global economy to keep this recession from happening. This estimation of the global economic outlook has almost become the status quo. The point of contention now is how capable policymakers are of halting this process.

Recent trends looking entrenched in the market

Opinions are split down philosophical lines as to the answer to this question. Can bureaucrats fight the tides of history and economics? Is economic-orthodoxy effective in tackling the challenges the global economy faces? The answers are various. However, market pricing is telling quite an apparent story. Interest rates are going to be cut aggressively in coming months. The fall in long term-bond yields speaks of a new era of quantitative easing. Gold has the wind at its back as investors search for alternatives to government bonds and fiat currencies. And stock markets are volatile because there’s doubt about whether growth can actually turnaround, or not.

A prolonged period of sideways trading?

These themes appear highly enmeshed within the fabric of the global economy, and are apparently here to stay. It won’t be until the data turns around, and the cascade of earnings growth downgrades ends, that market participants will free to re-adopt a bullish bias. This turnaround will probably take as long as it does for monetary policy stimulus to work its magic in the global economy, which tends to be at least a quarter-or-so. As such, until then, it looks as though markets will keep moving from data-point-to-data-point, and headline-to-headline, with one eye on central bank policy, as the hunger for yield tangles with the need for capital preservation.