The Zigmont Report (Daily Market Recap for 6/5/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own

Watched pot?  US equities did very little today and the flow was light too (93%).  News wasn’t interesting and the data du jour was the May ISM non-manufacturing release (58.6 vs 57.7 est & 56.8 prior).  Services constitute about 70% of the US economy, so a stronger reading for services bodes well for US GDP.  How hot will economic activity get?  It’s a good question.  The Atlanta Fed, widely considered to be one of the best GDP estimators, has a Q2 GDP estimate of 4.8% right now.

That number will get re-calculated tomorrow so it’s not set in stone but it’s the best guess of the moment.  It’s quite a big number too.  *If* the GDP prints with a 4-handle, I don’t think Wall Street is going to be as happy as Main Street.

The first *official* number for Q2 GDP shows up on June 28th so there’s some time before investors will have to deal with a hot (potentially) GDP print.  The FOMC will have already raised rates 25 bips by then (June 13th).

Here’s what I’m trying to say:

The markets are getting hints that the economy is hot.  The current data could be misleading though.  It could just be noisy to the hot side but *if* the economy is actually hot, *that’s* the condition where the Fed will abandon the 3-hikes-per-year plan.

The market is not ready for that.  The market was a little worried about an aggressive Fed path in late April and early May.  The Fed minutes calmed the markets down and reinforced the 3-hikes path.  However the minutes and the prior FOMC statement always addressed the ability of the Fed to be flexible *if* the data/economy required it.

At the time, a 4% economy was an outlier so investors just wrote it off as not-gonna-happen.  Well that was then and this is now.  It *may* happen.  Investors don’t seem to be pricing it in though.

Beats me why that’s the case but the market isn’t thinking like me.  Interest rates came down today and equities were essentially flat.

Obviously I may be off my rocker but I’m thinking that economic upside surprises, especially large ones, are becoming more likely and the response from the Fed needs to be anticipated.

We should continue to watch the little bits of data over the month but I get the feeling the market isn’t going to react significantly until the first GDP release on June 28th.

Lots of time to wait.

See you tomorrow,