A number of items have popped up recently. Most of them are not much important on their own, but when combined paints a bearish picture for risk assets.
Yesterday’s US Consumer Confidence number was surprisingly bad, and warrants a closer look. First, the difference between those responding ‘jobs plentiful’ vs ‘jobs hard to get dropped: (last print drawn in because BBG didn’t update for some reason)
Furthermore, the difference between those expecting higher incomes and lower incomes has fallen to the lowest level in more than 3 years:
Neither of these points are substantial on their own, but the size of the drops, in conjunction with broadly complacent sentiment and rich valuations (see chart below: forward PE is at the highest levels since early 2011, even though earnings growth expectations are substantially lower) makes them a point for concern.
Furthermore, the US Economic surprise index has turned south:
Higher Oil prices are starting to feed into gasoline and add to inflation expectations. Gasoline futures (orange) have increased off the lows and are halfway back to the highs. Along with price increases in other sectors, short term inflation expectations are not far from the highs of previous years.
Finally, the market tone is shifting. Market reaction to the ADP figure was minimal, despite the fact that is was better than consensus and the highest print since last March. Today’s close on the SPX is the worst 1 day change YTD. Several market participants I’ve spoken to seem to expect a mid to late February drop, which suggests the drop could happen before that.
With the positive month end bias ahead, risk assets could rally a bit more. A real sell off needs an ‘excuse,’ but once we get one the market seems likely to move lower.
- US ADP Employment improved to 192k vs 165k exp and 215k prev
- 4Q GDP printed -0.1% vs 1.1% exp on the back of sharp drops in defense spending, inventories, and net exports. The details, however, were much better. Personal consumption rose a solid 2.2%, while investment and housing also increased sharply.
- Thu: German Unemployment, US Personal Income, Jobless Claims, Chicago PMI
- Fri: Europe PMI, ItalyUnemployment, US Employment, UMichigan Confidence, ISM
- Mon: China HSBC Services PMI, RBA
- Tue: European Services PMI, US ISM Non-Manufacturing