Farmers & Merchants Bank

Is stronger economic data really a good thing for the equity market?

The Leading Economic Index (LEI) was down for its 15th consecutive month. Over the last six months, the big three detractors from the LEI have
been the inverted yield curve, weak consumer expectations, and falling ISM new orders. Is it possible these may have bottomed already? This
could very well be the case based on data this week.

• The July S&P Manufacturing Purchasing Managers’ Index jumped from 46.2 to 49.0. The widely followed ISM comes out next week.
• Consumer expectations, which goes into the LEI, just posted its second-largest two-month change in the last 10 years. It is at its highest level in 18 months.
• Trucking volumes for July are coming in better than the historical average following a protracted downtrend.
• The U.S. Dollar Index has been falling sharply in recent weeks, a condition which historically leads to an increase in manufacturing activity.
• The Chinese currency has strengthened a bit, which many consider a precondition to material Chinese stimulus.

The other key piece of economic data is jobless claims. The widely followed four-week moving average moved from 190,000 to 256,000 in June. This was more than 30%, which is historically the threshold for recession probabilities to spike. However, this series has now fallen back to 233,000. History suggests this data point needs to start spiking higher very soon or its signal of impending recession is negated.

Is the Fed done hiking?

The Federal Reserve raised the Federal Funds Rate to 5.5% on Wednesday. It is deemed to be the last hike by many analysts. This may prove to be a false assumption given that business activity is picking up, the deficit has ballooned to 8%, the employment market remains tight, and commodities are moving higher on a falling dollar. Maybe the market is changing its mind quickly with the 10-year Treasury up 14 basis points so far today. Equities are putting a big gap-up, reversal-down day with the Dow Jones Industrial Average diving into the red and likely ending the streak.