The Market Today
The U.S. and EU Agree to Work to “Resolve” Trade Differences
by Craig Dismuke, Dudley Carter
Durable Goods Show Strong Business Investment Despite Headline Miss: The June preliminary read on durable goods orders showed businesses continue to invest in equipment despite a disappointing result in aircraft orders. Aircraft orders are excluded from the core readings because of their enormous volatility each month. Defense aircraft orders rose 20.2% while nondefense aircraft orders rose 4.3%. Expectations were for an even stronger jump. As such, total orders for goods expected to last 3 years rose 1.0%, below the expected 3.0% increase. Excluding the volatile transportation items, orders rose 0.4% and May’s orders were revised up from +0.0% to +0.3%. All told, orders excluding transportation items were 0.2% strong in June than expected. In the key core capital goods orders tally, orders rose a solid 0.6% MoM along with a stronger May revision. As an indicator of future business investment, this was a very positive result. Shipments of the same items, an indicator of current-quarter business investment, also beat expectations rising 1.0% in June. It now appears that business investment in equipment will rise near 5.0% in 2Q helping boost 2Q GDP even higher. Moreover, the outlook for future investment appears positive.
Trade Deficit Normalizing: The June advance goods trades balance report showed a larger increase than expected in the trade deficit, from $64.8 billion in May to $68.3 billion in June. The shrinking trade deficit is likely to be a temporary phenomenon after exporters rushed to get goods shipped in advance of increased tariffs.
Initial Jobless Claims Remain Low: Also released this morning, initial jobless claims for the week ending July 21 rose from 208k to 217k. After posting the lowest number of new claims since December 1969, the current report shows a continuation of the healthy labor data.
Yesterday – Earnings and Economics Drove Early Trading, Trade Talks Took Over Late: Corporate earnings, economic data, and trade talks all played a part in Wednesday’s market moves. A mix of sector stories netted the S&P 500 a 0.9% gain to 2,846, its highest level since January 29. Technology companies gained 1.5% to lead 10 of 11 sectors higher as investors awaited post-close earnings data from Facebook Inc. Tech’s outperformance lifted the Nasdaq by 1.2% to a new all-time high. Back within the S&P, the consumer discretionary sector added 0.7% but gains were capped by drags from home builders and automakers. An ETF tracking home builders sold off after soft data on new home sales in June (more below). Automakers slipped after GM cut its full-year guidance and before Ford announced its quarterly results. While the S&P 500 had trended positively throughout the day, it soared into the close on reports of positive developments out of the U.S.-EU trade talks. Early headlines said the EU had agreed to buy more liquefied natural gas and soybeans from the U.S. and address industrial tariffs. In a subsequent joint statement, the parties agreed “to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.” President Trump said as part of the process, any further tariffs (think autos) would be tabled and the parties would work to “resolve” those already implemented, by the U.S. on steel and aluminum and by the EU in retaliation. The news also pushed Treasury yields up to close at their highs for the day. The 2-year added 2.4 bps to 2.67% while the 10-year yield reversed a 1-bp drop to close 2.6 bps higher at 2.98%.
Overnight – Positive Trade Developments Lift Stocks, ECB Keeps Policy Pledge: Hopes that the U.S. and EU have taken a first step towards a possible trade deal have had positive effects on global assets overnight. After pushing up U.S. equities on Wednesday, prospects that a trade war between the long-time allies could be avoided pushed the Stoxx Europe 600 0.4% higher. Germany’s DAX was out front with a 1.1% gain, not surprising considering the impact that potential U.S. tariffs on auto imports would have had on its darling auto manufacturing industry. As stocks in the region moved up, European sovereign yields rose ahead of this morning’s ECB decision. The message from the official statement was unchanged. The central bank pledged to keep rates unchanged through next summer, trim current net asset purchases of 30 billion Euro by half in September, and cut off net asset purchases (not reinvestments) completely after December. ECB President Draghi’s press conference is currently ongoing. U.S. stock futures were mixed with Dow contracts 0.2% higher and Nasdaq contracts off 0.7% following historic shifts in shares of Facebook. The company’s shares are down more than 20% ahead of the open after reporting its first revenue miss since the first quarter of 2015, disappointing user growth, and telling analysts it expects total expenses to grow faster than revenue through at least next year. Treasury yields sidestepped the upward pressure from Europe as the 2-year yield held unchanged and the 10-year yield drifted 1.1 bps lower.
New Home Sales Slumped, Adding to Concerns of Housing Slowdown: New home sales slumped a sharper-than-expected 5.3% in June to their slowest pace in eight months. Total annualized sales slipped to 631k units compared to estimates for a smaller decline to 668k. Adding to the disappointment, the combined tally from the prior three months was revised down 27k units and the YoY gain of 1.8% was the weakest since August 2017. Activity firmed in the Northeast, the smallest region by volume, while contract signings in the three other regions slowed: listed high to low by volume, South -7.7%, West -5.2%, and Midwest -13.4%. Unlike the trends in the existing home sales from earlier in the week, both the median and average price ticked down. The median price fell for a third month in a row to $302,100, the lowest since February 2017 as lower priced homes continued to account for a larger share of total sales. Homes with a price tag greater than $400k accounted for 27.6% of total sales, the lowest share since October 2016, while homes between $150k to $299k accounted for 46.6%, the highest since February 2017. Supply-side metrics showed a cycle-high of 301k new homes were in inventory at the end of June, which when combined with the slower sales pace, pushed months’ supply up to 5.7, the highest since last August. After the June report, the general uptrend for new home sales that persisted from 2011 to 2017 appears to have leveled out, compounding the effects of weaker existing sales in stirring concerns of a housing slowdown.