There's a Red Flag on This Market Rebound
The Flash April PMI data could reignite market stagflation concerns.
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Stocks are rebounding today on word of potential progress on trade deals with several countries, including Japan and India. Also helping prop the market up are reports that the “ball is moving in the right direction with China.”
As we discussed on Monday, though, we’re not as optimistic as some just yet on a potential deal between the U.S. and China, but as fresh developments emerge, we’ll continue to revisit our thinking. Despite that potential trade deal progress, equity trading volumes for today are quite low compared to average trading ones over the trailing three months, which suggests conviction may not be all that high when it comes to Tuesday's rebound. We see it as reaffirming our view that final trade deals and their details matter more than headlines that indicate some progress.
Earlier this week, we discussed why Wednesday's batch of April economic data, and what it shows about the speed of the economy and inflation, could alter expectations for the economy and monetary policy. Because of continued pre-buying ahead of tariffs, the data may not be as dire as some think it could be. The market consensus for the April Flash Manufacturing PMI is for it to fall to 49.4 from 50.2 in March, while the Flash Service figure is expected to retreat to 52.8 in April from 54.4. That combination suggests a headline composite Flash PMI figure near 52 for April, which means the economy is still growing but at a slower pace compared to most of the last 12 months.
If that’s the headline figure we get and Flash PMI comments about inflation pressures tick up as expected, that could reignite concerns over stagflation, something that is likely to keep the Fed on the sidelines for longer than the CME FedWatch Tool indicates. With the market in an environment where it is trading day to day based on the latest headlines, such an outcome in Wednesday's Flash data without any meaningful and fresh developments on trade deals is likely to lead the market to give some of today’s gains back.
We also have to keep in mind the quarterly results after the close of Tesla TSLA, a stock that comprises around 1.5% of the S&P 500. The market consensus calls for the company to deliver EPS of $0.35 on revenue of $21.85 billion but we’ll be as interested in its comments about rare earth stockpiles and how that could limit production levels in the coming quarters. We’ll also want to hear Tesla’s comments on the competitive landscape and how China’s retaliatory tariffs are impacting its business.
