The stock market completely ignored Trump’s $500 billion tariff threat and the fact that the tariffs on $34 billion worth of Chinese goods kicked in on Friday. Every action thus far has been small. This was a sell the bluster, buy the action trade. Unless the larger tariffs that have been threatened get enacted, there won’t be a large effect on the economy. Stocks will fall whenever the chance of large tariffs increases because of a public statement made by a major geopolitical power. The market also powered through the potential for a hawkish Fed as there is a 52% chance the Fed raises rates at least 4 times in 2018. That’s not to say there aren’t bullish catalysts for stocks to move up. Most economic data points look good and earnings growth remains strong.

The S&P 500 increased 0.85% and the Nasdaq increased 1.34%. Every sector was positive in the S&P 500 as healthcare and technology led the way, posting gains of 1.45% and 1.24% respectively. The S&P 500 is about 1% away from the June and March highs. Generally, triple tops don’t occur which would mean, technically speaking, a breakout will likely occur next week. If that occurs, the even tougher resistance which is the all-time high comes into play. We’ll review that after the June levels are surpassed. The CNN Fear and Greed Index is only at 40 which signals fear. That’s great news as it means the market has room to take out the June high without getting extremely overbought. The index will probably be in the 50s if the S&P 500 moves up 1% on Monday.

Dollar & Treasuries

I haven’t reviewed the dollar in the past few days. It has been declining as the index went from $95.39 on June 28th to $93.96 on July 6th. The S&P 500 has moved up in that period which makes sense because the strong dollar is a headwind for the internationally focused S&P 500 firms. If the dollar falls to $90, it’s more likely that the S&P 500 will hit a new record.

For the first time in a while, the yield curve steepened slightly as the 10-year yield fell 0.074 basis points to 2.82% and the 2-year yield fell 1.42 basis points to 2.54%. The 10-year yield is very low as it approaches the May 29th low of 2.78%. The 2-year yield is still below the May 16th high of 2.59%. I strongly believe it will break that high this summer. The latest difference between the 2 yields is only 29 basis points. It will be a hotly debated point at the next Fed meeting in 4 weeks.

Declining Trade Deficit

It’s interesting to see the trade deficit continuing to narrow because that’s the entire point of these tariffs. The tariffs weren’t large enough to influence the April and May numbers. My point here is that even without the tariffs, the deficit is falling. It’s ironic to see scuffles occur while the situation is sorted out by the market. The trade deficit in April was revised from $46.2 billion to $46.1 billion. The trade deficit in May was $43.1 billion which beat the consensus for $43.7 billion. These results are great for the Q2 GDP report, solidifying the possibility growth will be above 3.5%.

Exports were up 1.9% and imports were up 0.4%. Goods exports were up 2.6% and goods imports were up 0.5%. Capital goods exports were up strongly. Services exports were up 0.6% and services imports were down 0.1%. To be clear, services trade is much smaller than goods trade. China’s trade surplus with America was $33.2 billion. It was $152.2 billion year to date which is a 13.5% increase from last year. To be clear, it’s good news to see consumption of Chinese goods increasing as it signals the American consumer is strong; it’s just bad for the GDP calculation and will ignite the ire of President Trump who wants to lower the deficit with China.

Very Strong Services ISM PMI

The non-manufacturing ISM report had a PMI of 59.1 which beat estimates for 58.4. This was the strongest report since February 2018. The 12 month high is 59.9 in January 2018. It beat the 12-month average which is 57.9. This report is consistent with 3.7% GDP growth which is right in line with many forecasts. The table below shows the breakdown of the non-manufacturing and manufacturing indexes. Business activity was up 2.6 points to 63.9 and new orders were up 2.7 points. Just like the manufacturing report, the prices index fell, but it’s still at an elevated level. It was down 3.6 points to 60.7.

(Click on image to enlarge)

As you would expect with such a great report, there were positive comments from business leaders. There also were complaints of increasing prices even though the index fell. A retail trade company’s management stated, “Sales have remained strong and are continuing to increase. Currently, we are on pace for a top-line record. The bottom line is more flat, as we have been fighting commodity cost increases and exchange-rate variances throughout the first half of 2018.”

GDP Estimates

The Rapid Update CNBC average tracking estimate shows 3.9% GDP growth with a range between 3.4% and 4%. The NY Fed Nowcast isn’t in that range as it is at 2.79%, meaning it was unchanged from last week. Revisions caused the Nowcast estimate to fall 6 basis points and the ISM manufacturing index helped it by 6 basis points. The Q3 GDP estimate was revised sharply higher as it went from 2.46% to 2.71%. The ISM manufacturing report helped the estimate by 34 basis points. I’m expecting Q3 to show weakness, but I’m open to changing my mind.

The Atlanta Fed model is in the CNBC range as its Nowcast fell from 4.1% growth to 3.8% growth. The estimate for consumer spending growth fell from 2.9% to 2.7% and the estimate for real gross private domestic investment growth fell from 7.1% to 6%. The estimate for the impact net exports will have on growth went up from 0.62% to 0.7%. The St. Louis Fed Nowcast expects 3.35% growth, putting it 5 basis points below the low end of the CNBC range.