s&p 500-200mA 2012

Weekly Stock Market Report: Deflating the Reflation Trade

Tip: Use it as a quick guide for the direction of major markets in the short term. One client called me almost every day to ask the direction of the market. This cheat sheet will help you understand the market’s short-term trend.


Key drivers for the week of July 12, 2020

TIP – This is a brief summary of 1 minute. It’s a simple tool for investors and financial advisors to quickly and easily see what they should be watching for.

  • As global growth slows, the reflation trade is questioned. 
  • The earnings season has begun and stocks should be moving around a little.
  • Hiring difficulties, bottlenecks and price increases stall production and sales
  • Central bank meetings: BoC, BoJ, BoK, RBNZ, all seen keeping rates flat
  • Fed Chair Powell presents semi-annual Monetary Policy Report on Wed., Thurs.
  • U.S. data includes CPI, PPI, retail sales, production, consumer sentiment
  • Treasury auctions $120 billion in 3-, 10- and 30-year maturity securities
  • BoC to keep policy rate unchanged, but QE should be further reduced
  • BoJ: Rate is expected to remain steady, but will likely reduce growth and increase inflation forecasts
  • Japan economic reports: core machinery orders (core index), PPI, tertiary indices, production
  • China releases retail sales, fixed investments, trade and GDP reports
  • Eurozone HICP is due, as well as readings from Germany and France, Spain and Italy
  • UK Calendar has CPI inflation report and labor market
s&p 500-200mA 2012
s&p 500-200mA 2012

The Dow was up 1.3% to 34,870, with the S&P 500 1.13% firmer to 4369, while the NASDAQ rose 0.98% to 14,701. The dollar is strengtheningAfter a weakening Friday, the dollar index is rebounding. The DXY Dollar Index rose from a six-day bottom to a high of 92.35. This reversed more than half of the Friday decline. The return of risk appetite weakened the demand for Treasuries as a safe haven. Treasuries’ yields then surged and wiped out much of the week gains.

A selloff also resulted from the building of concessions ahead of the arrival of supply. Long-term rates for 10-year and 30-year bonds were down over 6 basis points in a bear steepening trading. The Fed released the Monetary Policy Report in preparation for Chairman Powell’s Humphrey Hawkins testimony. This did not represent a new development and had no effect.

Wall Street was on the rebound, but Treasuries were in the doldrums. The move was not triggered by anything. Investors have quickly forgotten the concerns about the Delta variant, and the slippage of growth. Equity bears slowed down the selling and bottom-fishers pushed the major indices up to new all-time records.

After a post-pandemic boom, the reflation trade appears to be deflating a little as Q3 begins. Investors are becoming increasingly concerned about signs of deceleration, particularly in China and America, which have been the engines of growth for the world so far. The spread of Delta has also exacerbated the worries.

Ironically, a part of the slowdown has not been caused by a decline in spending. Instead, it is due to heightened pent-up demands that are outstripping available supply. The shortage of material inputs, difficulties in hiring, and the subsequent rise in prices will be the main constraints in the future, as inventories will continue to fall due to bottlenecks.

Central banks will likely remain in ultra-accommodative modes for some time to come. China’s PBoC, for example, cut its RRR in response to concerns about the economy last week.


Supply Chain Issues & Christmas Season: It is likely that the supply chain issues will continue into Christmas. For many retailers, the Christmas season is a crucial time for sales. They can’t make sales if they don’t stock the product. I went to retailers such as Best Buy and found that the current supply was very low.

Budget Battle & Infrastructure Bill: Sen. Schumer sent a message to Senators stating that the priority for them after returning from their Summer Break is to pass an Infrastructure Bill and a Budget. The Democrats will probably use (or even try) “reconciliation” It is important to pass both a Budget Bill which will keep the Government open, and an Infrastructure Bill in order to satisfy their supporters.  It means there won’t be a “bi-partisan” The GOP will likely dig in. Both sides will focus on Senators Joe Manchin, Kyrstene Sinema and the Democrats because they need them both. “reconciliation.” In the past, polls showed that the Republicans were negatively affected by the shutdowns. It is therefore risky to go to this place immediately.

200 1D Moving average: According to BofA’s chief market technician Stephen Suttmeier, the S&P 500 has revisited its 200-day moving average in the second half of the year in 21 out of 35 years in which the S&P did not close below its 200 moving average the first half of the year. This gives it a 60% drop chance. However, the chance is much higher because the S&P only stayed above the 200MA only 13 times (14%) for a calendar year going back to 1929.

Inflation is on the rise: Dallas Federal Reserve warned this week that a period of moderate prices pressure is ending. Prices of goods may increase dramatically in the months to come. Many consumer goods firms are shrinking the size of their products, while maintaining the same price. The CPI for June will be published on Tuesday, before the testimony. The headline CPI is expected to increase by 0.4%, and the core CPI by 0.3%. This follows May’s respective gains of 0.6% and 0.75%. Gas prices rising by 3.0% should help boost headlines. If the results are in line with our forecasts, the headline for the 12 months will be down to 4.8% from 5.0% and the core rate will rise to 3.8% y/y from 3.0% y/y.

The bottom line

You get the idea. I could add several other analyst’s reports, but you already know what I mean. The second half of 2020 is expected to see a dip. A drop in the market will be accelerated by an increase in retail investors, and margin usage. Market Bulls’ only hope for the market to rise is a strong Christmas sales season, but it will require products.

The schedule for today is light. The Treasury only has two auctions, one for $58 billion and another for $38 billion (reopening). Kashkari also speaks some Fedspeak. In the second half of the week, the Fed’s Monetary Policy Report will be the main focus.

CPI, retail, production and confidence data dominate the data calendar. The start of the earnings season is underway, and the banks are once again leading the way.

Do you want to read our full report or just the excerpt?  

The Advisor Market Intelligence Report Financial advisors, investors and advisors all benefit from financial advisors Save time, cut the noise and perform better through unbiased Professional Market Research 

“Better info than the big investment companies. Your report is the only thing I consistently read to know what is happening and when to adjust portfolios.”  Dennis

Get a special discount for July 4th. $9.95/month (regular $19.95) You can save even more by paying $99.95 annually. (click here for annual).

It is important to note that the word “you” means “you”. Advisor Market Intelligence Report Includes:

  • Key Market Drivers – What is directly affecting markets?
  • Index & Sector Trends – You can use this information to determine which areas or sectors are experiencing an upward or downward trend.
  • Global Market Analysis – Get a high level picture of US and global economies.
  • Stocks to Watch – Stocks with dividend income and high-quality blue chips to watch
  • Economic Calendar – What’s happening this week?
  • Special Offers Reports – Get critical insider insight on key market movers such as inflationTax bills, and rare events.
Free AlphaBetaStock's Cheat Sheet (No CC)!+ Bonus Dividend Stock Picks
Scroll to Top