Dolan: US Consumer Strength A 'Catch 22'

As 2016 started out, the direction of the US economy for the year was clearly going to be decided on the backs of US consumers. With Washington in gridlock, and in an election year to boot, there was no other viable source of dynamism to spur the economy on. As the US limped out of the 4Q and into the New Year, markets grew increasingly concerned that US consumption would falter. Just a week ago the financial twit-o-sphere was all aflutter over the prospects of a US recession.

What Recession?

Today we got the first look at US consumer spending for 2016 and it suggests the US consumer is alive and well, if not actually hale and hearty. Both January personal income and personal spending beat forecasts, rising 0.5% and 0.4% (real spending), respectively, the largest monthly gains in about 6 months. Final Michigan sentiment also beat expectations, rising to 91.7 from the preliminary 90.7, but still below December’s 92.6. Housing data has also remained solid as has employment numbers.

So, all the underpinnings of a solid US consumer outlook remain in place. That’s a good thing, right? In the bigger picture, undoubtedly yes. In the short run, however, it’s another piece of the calculus that puts a Fed rate hike back in play. We saw that reaction in markets today, where otherwise indisputable good news only saw risk assets see-saw.

Futures market expectations of a March or April Fed rate hike ticked up only slightly on the day and are at 12% and 20%, respectively, up from near-zero just two weeks ago. My view remains the same that the Fed will stay on hold as the risks remain biased to the downside in light of lingering sluggishness overseas and ongoing doubts about prospects at home. But that will not stop markets from spasms of re-pricing as the data comes in. It looks like we’re at one of those inflection points and I would be extremely protective of recent gains.

Technical Market Outlook

In the short term, we’ve had a nice rebound off the Feb. 11 lows (S&P 500 +7.6%) and some short term indicators are becoming overbought, though most still have room to run. All in all, the technical picture still looks quite bullish for risk assets. As a proxy, the S&P 500 closed above the 50-day sma (not my favorite indicator), but is struggling against some other resistance. We don’t yet have a decisive break of the neckline of the potential double bottom pattern mentioned last week at 1947/48, but we are close. WTI crude also tested and failed to break its equivalent neckline at 34.82.

Perhaps more ominously, the top of the daily Ichimoku cloud (graph below) was tested and held. On the weekly cloud chart, the Kijun line was tested at 1963 and also held, suggesting the longer-term downtrend has yet to be overcome. Again for the S&P 500 as a proxy, stay focused on that 1948 neckline. The top of cloud will be at 1958/59 for the next few weeks; a daily close above could signal an acceleration on the upside.

The overall picture remains one of a likely bottom forming and my preference is to use remaining weakness to add to longs on dips. Over the next few days/weeks, the prospect of Fed rate hike being priced back in has the potential to trigger yet another short-term setback. (BTW, I wouldn’t be surprised to hear comments that the Fed is now ‘behind the curve.’)

In the S&P 500 I’m focused on support at the 1916/1917 area where the Tenkan (purple) converges with the bottom of the cloud. Below that is the Kijun line (yellow) at 1886 and rising. If I’m right, and you missed the most recent rebound, you could get another chance to get in lower. If I’m wrong, and I hope I am, we will see more decisive breaks higher and the surprisingly abrupt drop that started the year will be reversed equally abruptly.