The Market Today

Largest Trade Deficit on Record as Imports Outpace Exports Again


by Craig Dismuke, Dudley Carter

4Q ECONOMIC OUTLOOK WEBINAR – Thursday October 7, 2021 at 10:00 a.m. CT (Register Here)

Vining Sparks will host our 4Q Economic Outlook Webinar on Thursday.  The Delta wave has had a muted impact on economic activity relative to the first two waves.  However, imbalances have formed across multiple aspects of the U.S. economy.  One outworking of these imbalances has been the sharp, and surprising, rise in inflation.  We will dig into the details of these issues during our presentation, along with how we expect these issues to affect future interest rates.


TODAY’S ECONOMIC DATA

Largest Trade Deficit on Record as Imports Outpace Exports Again: The August trade balance showed a larger-than-expected deficit as imports rose more than expected based on the goods-only trade report.  Imports rose $4.0b while exports rose just $1.0b growing the monthly deficit to $73.3b. This makes August the largest monthly trade deficit on record. The supply chain disruptions and port problems are likely delaying the resumption of normalcy to the trade figures.  For now, there is no evidence of the trade deficit declining as the global economy begins to recover from the pandemic.

Service Sector PMIs and Fedspeak: The service sector PMIs from both Markit (8:45 a.m. CT) and ISM (9:00 a.m.) will be released today. The ISM index is expected to pull back from 61.7 to 59.9 which would be the weakest reading since February.  The PMIs have increasingly cited the lack of labor supply and the supply chain disruption as causes for slower activity, as well as the rise in COVID-19 cases.  Speaking today is Fed Vice Chair Quarles who is expected to address the transition from Libor (12:15 p.m. CT).


YESTERDAY’S ECONOMIC NEWS

Factory Orders Report Includes Small Upward Revisions for Capital Goods: Total factory orders improved 1.2% in August and 0.5% when transportation categories are excluded. The durable goods orders component rose 1.8% as previously estimated and 0.3% excluding transportation orders, up from the 0.2% initial estimate. A 78% increase in the volatile non-defense aircraft category overwhelmed an 18% decline for defense aircraft activity and a 3.3% drop in auto-related orders. The capital goods components that track business investment in equipment were also revised up 0.1% each from preliminary August estimates; core business orders rose 0.6% while shipments increased 0.8%.

Bullard Repeats Inflation Risks Are to the Upside: St. Louis Bank President Bullard was one of the first officials to say that the Fed should begin normalizing policy, and do so quickly to give policymakers the option to raise rates if inflation pressures don’t moderate as most expect. On Monday, Bullard reiterated his concerns about inflation, saying, “The risks are to the upside, that we will get higher inflation into 2022.” While the median forecast in the September projections was for core PCE inflation of 2.3% next year, Bullard believes it will be higher at 2.8%. The Fed is closely monitoring longer-term inflation expectations for signs of a drift up and away from the central bank’s 2% target. While most believe expectations are still at levels consistent with target, Bullard cautioned, “I am concerned about changing mentality” among economic participants that could begin to apply upward pressure to these longer-term expectations.


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TRADING ACTIVITY

Stocks Started the Week on Their Back Foot As Recent Rise for Treasury Yields Resumed: Stocks opened lower to start the week and the losses began to accelerate sharply within the first hour of trading. Tech companies were the worst performers, driving the Nasdaq 2.1% lower and weighing heavily on the S&P 500. The broader index slumped 1.3%, erasing last Friday’s jump that had briefly eased the pain from September’s 4.8% sell-off, the steepest monthly decline since March 2020 (more below). Monday’s drop left the index below its 100-day moving average. Some of the more defensive sectors were shielded from larger declines, but trailed a 1.6% jump for energy companies. While it may agitate the inflation concerns that have crescendoed in recent weeks, a big gain for crude prices kept stock values of energy producers buoyant. OPEC and its allies elected to stick with its current plan for gradual monthly supply increases, despite growing worries about an energy crunch heading into winter in the Northern Hemisphere. U.S. WTI rose more than 2% to $77.62 a barrel, marking its highest level in almost seven years. Despite the weakness for equities, the recent move up in Treasury yields resumed Monday. The 2-year yield rose 1.4 bps to 0.28%, the 5-year yield added 1.6 bps to 0.94%, and the 10-year yield increased 1.7 bps to 1.48%.

Market sentiment recovered as European bourses opened Tuesday after Asian stocks closed broadly lower. The Stoxx 600 climbed 0.7% through lunch, enough to erase Monday’s 0.5% decline; a positive finish would mark the second up day over the last eight sessions. Despite larger-than-expected declines in September PMIs from Italy and Spain, the Eurozone’s initial Composite PMI was revised up 0.1 to 56.2, finalizing a 2.8-point drop from August, on small positive revisions for Germany and France. Just before 7 a.m., U.S. equity futures had risen 0.5% despite further gains for energy commodities and Treasury yields. Oil prices rose more than 1% to push U.S. WTI near $79 a barrel, a high since 2014, and U.S. natural gas prices climbed more than 3% to their highest level since 2013. The 5-year Treasury yield rose 1.6 bps to 0.96% and the 10-year yield added 1.2 bps to 1.49%.


NOTEWORTHY NEWS

ICYMI – September 2021 Monthly Review: Treasury yields remained confined to recent ranges leading up to the Fed’s highly anticipated September meeting amid uncertainty about Delta’s impact on the economy and the possibility it could further aggravate supply constraints that have boosted inflation. Job growth slowed sharply in the August report and despite cases in the U.S. turning lower, disruptions from the July-to-August case surge and existing supply-side issues remained pervasive. Labor shortages and supply bottlenecks are increasingly becoming a concern, sparking worries that inflation may not moderate as quickly as hoped. The Fed signaled at September’s meeting that it will likely announce plans for tapering asset purchases when officials gather in early November. The Fed’s new forecast expected weaker growth this year and stronger inflation pressures, the latter shifting the dot plot higher to depict the possibility of quicker lift-off and swifter rate increases. Shorter Treasury yields climbed to their highest levels since early 2020 while the 10-year yield hit a high since mid-June. The S&P 500 fell 4.8%, its first decline in eight months and worst performance since March 2020. Click here to view the review.


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