Deflation Shadows Bulls With Disequilibrium In Capital Markets


View from the Hill 17 November 2014

by J. Clinton Hill

Deflation is casting a larger shadow over the U.S. equity bull market, and I believe that the Fed may be forced to defer raising rates if the U.S. Dollar continues its upward trajectory while weaker G-8 members (Japan, China, and Europe) maintain highly accommodating policies. As the last man standing, the USA is winning by default, but is this sustainable? Meanwhile, some market pundits regard the drop in oil prices as a long term positive influence for the economy.

Perhaps, but I am inclined to disagree as the trifecta of a stronger dollar, oil supply glut and falling demand for energy are actually the consequences of a global deflationary feedback loop. Agriculture and other export prices are declining and our booming energy sector could very well become a pocket of employment weakness. Continually lower energy prices do not benefit the global economy or its geopolitical stability (i.e. Russia or ISIS). Something has to give to restore equilibrium in the capital markets before things get ugly. Global economic growth or a truce between Shale Producers and OPEC?

Market Summary: November 10th – 14th, 2014

Market Conditions

Despite the economic backdrop mentioned above, price trends for major U.S. equity indexes remain bullish. However, this week’s trading volume was @ 40% to 50% less than average weekly volume for the SP-500 (SPY), Nasdaq 100 (QQQ) and Russell 2k (IWM). Market momentum is robustly positive, but if our benchmark SPY is to be regarded as a reliable indicator for the broader markets, it is showing signs of deceleration, besides being overbought. Regardless of any of the above, the trend is our most respected friend and deserving of reverence by both traders and investors.

 

 

 

 

Bullish Events

Consumer

  • USA / Retail Sales Oct-2014: By now, everyone who is anyone should know that oil and gasoline prices have decreased dramatically and are impacting the consumer sector of the economy in a positive manner. Retail Sales (excluding autos and gasoline) were up 0.6% m/m vs. estimates @ 0.5% and prior revised @ 0.1%.
  • Economic Growth

  • Eurozone / GDP Q3-2014: GDP in the EU accelerated faster than estimated @ 0.2% qtr/qtr and 0.8% yr/yr (NSA) vs. estimates @ 0.1% qtr/qtr and 0.7% yr/yr. Germany also reported slightly better than expected GDP Flash @ 0.1% qtr/qtr and 1.2% yr/yr vs. estimates @ 0.1% qtr/qtr and 1.0% yr/yr (NSA). France’s GDP Flash came in @ 0.3% qtr/qtr vs. estimates @ 0.2% and prior @ 0.0% and its yr/yr growth ticked up to 0.4% vs. estimates @ 0.4% and prior @ 0.3%.
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