Market Perspective for June 23, 2014

There is positive news out of China to start the week as HSBC released their flash PMI number for June. The reading came in at 50.8, the highest in 7 months and indicates the manufacturing sector in China is back at expansionary levels. China still bears close watching; while the pickup in manufacturing is positive, the sector is closely tied to the global economy. The main risk in China still lies with the real estate sector and credit excesses. Still, from an American perspective, the rising PMI in China is good news.

An improving PMI out of China is also good news for energy demand. West Texas Intermediate Crude (WTIC) climbed back above $107 a barrel, a level it briefly held following the ISIS invasion of Iraq. WTIC is likely to stay in a narrow trading range this week. If it moves above $110 or below $104 per barrel, it would signal a short-term breakout to the up/downside.

Emerging markets are also near a high for 2014 but shares have traded sideways for eight days. The asset class has been weighed down by the inevitable pull back in India’s market, though shares in Russia, China and Brazil have also traded sideways. Although it doesn’t have far to go for a new high, the iShares MSCI Emerging Markets ETF (EFA) and similar funds paused right near a resistance line. A push higher would likely continue for several days as shorts are covered and bullish traders move in.

Markit released its flash U.S. Manufacturing Purchasing Managers Index for June this morning. The reading of 57.5 is the highest level since April 2010, indicating our domestic economy is continuing to improve. It was also a significant jump compared to 56.4 in May. Chris Williamson, the Chief Economist at Markit indicated “The strong reading also rounds off the best quarter for factories for four years, adding to indications that the US economy rebounded strongly in the second quarter from the weather-related weakness seen at the start of the year.

Economic Reports: Existing and new home sales for May will be reported. On Wednesday GDP revision will be released. Currently, the consensus is in the range of negative 1.7 percent to negative 2 percent growth in Q1.

Also, this week we’ll see core PCE for May, or personal consumption expenditures. The PCE price index is similar to core inflation and is the actual number the Federal Reserve uses for deciding policy. It is similar to the core CPI number we saw last week, which showed inflation at 0.3 percent in May, above forecasts of 0.2 percent. If PCE doesn’t match the rise in the core CPI, we will know why Yellen said the CPI number was “noise.” If it does pick up, energy and commodities should benefit along with stocks in general.

Look for the Dow Jones Industrial Average, Dow Transports and the Nasdaq to make new all-time highs this week. The Russell 2000 still has a ways to go, but it led the indexes last week and is likely to do so again if we get another up week.

Earnings: A light week for earnings that will see Nike (NKE), Carnival (CCL), Monsanto (MON), Walgreen’s (WAG), KB Home (KBH), Lennar (LEN) and General Mills (GIS) report.

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