Technically Speaking: The Rally Is A Head-Fake

Overall, these are still pretty good numbers. Plus, we've only had a few months of weakness, so it's premature to be concerned.

US numbers conclusion: Overall, the U.S. economy is still in good shape. Services are growing at a solid pace which should help to offset manufacturing softness. While jobs data was concerning, it's only been weak for a few months. While we should keep an eye on it, there's not enough data to draw a firm conclusion.

The RBA lowered rates 25 basis points to 1.25%. They specifically noted that the trade situation is providing downside risks (emphasis added):

The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased. Growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries. In China, the authorities have taken steps to support the economy, while addressing risks in the financial system. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.

On the surface, the Australian economy is in decent shape. However, the Q/Q growth rate has been declining in the last two quarters. Business sentiment is weaker, which has led to declining investment and soft lending to small and medium-sized business. Softer business conditions combined with weak trade environment was probably spurred the RBA to cut rate.

The ECB maintained their current low rate while also stating that rates would be kept at current levels through 2020. Put another way, "for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.". While this wasn't as bold a statement as Draghi's 2012 "Whatever it takes" moment, it does indicate a firm commitment to keeping the EU economy afloat. Here is how the ECB described the EU economy (emphasis added):

Euro area real GDP rose by 0.4%, quarter on quarter, in the first quarter of 2019, following an increase of 0.2% in the fourth quarter of 2018. However, incoming economic data and survey information point to somewhat weaker growth in the second and third quarters of this year. This reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties, which are weighing, in particular, on the euro area manufacturing sector. At the same time, the euro area services and construction sectors are showing resilience and the labour market is continuing to improve. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, the mildly expansionary euro area fiscal stance, further employment gains and rising wages, and the ongoing – albeit somewhat slower – growth in global activity.

EU manufacturing has taken the brunt of the downside problems associated with weaker international trade; German manufacturing has been especially harmed. Still, the service industry is still growing, unemployment continues to decline, and retail sales are still growing.

The Reserve Bank of India Cut rates 25 basis points. The bank was especially concerned about international developments:

Let me now turn to the key global and domestic developments that the MPC reviewed. At the outset, it noted that global economic activity has not been able to sustain the improved performance seen in the first quarter of calendar 2019 in the face of the deepening slowdown in trade and manufacturing, which has impacted advanced and emerging market economies alike. Inflation remains below target in several economies. In advanced economies, incoming data for the second quarter of 2019 point to loss of momentum relative to the first quarter. In major emerging market economies, economic activity has either slowed or has contracted. It is in this context that central banks across the world have moved to an accommodative stance in setting monetary policy. Financial markets have been unsettled by the acrimonious US-China trade tensions. Crude oil prices remained volatile, reflecting evolving demand-supply conditions and geo-political concerns. Most EME currencies have depreciated against the US dollar.

Not the heavy emphasis on international weakness, where emerging market economies where growth has either "slowed or contracted".

Central banks conclusion: The RBA, ECB, RBI, and Fed all acknowledged that trade is now a larger risk for the global economy. It was probably a contributing factor to the RBA's rate cut, and could be a reason for a future Fed action. At a minimum, all three banks this week erred on the side of downside caution.

Let's start with the performance table:

The markets needed a week like this with solid growth. But, underneath, problems remain. The large-caps rallied strongly with the DIA up nearly 5%, the SPY (NYSE:SPY) advancing 4.5%, and the QQQ rising a bit over 4%. But, as has been the case for most of the Spring rally, the small-caps underperformed. Just as concerning, the Treasury market also moved a touch higher.

Despite the good news, however, we still have the same problem we had at the start of the week.

First, the good news: large-cap indexes rallied:

The QQQ broke through resistance and advanced by printing a strong bar.

The SPYs bar today was a bit weaker but it's still positive.

But, then we have the "bad news". The markets rallied today as they anticipated a weak employment report would lead to a Fed rate cut. Given that, we should have seen the small-cap indexes move strongly higher as well. But we didn't.

The IWM did break through resistance. But prices are stalled below the 20-day EMA.