The Market Today
China Closes Out Annual Congress Meeting, BoJ Holds, North Korea Considers Nuking Denuclearization Talks
by Craig Dismuke, Dudley Carter
Disappointing Regional Fed Report: The New York Fed’s Empire Manufacturing index fell from 8.8 to 3.7 in the March report, another disappointing report for manufacturing sentiment. The components of the report were weak. The new orders index fell from 7.5 to 3.0, its weakest level since May 2017. Moreover, expectations for new orders, number of employees, and capital expenditures six months from now all fell while expectations for prices paid rose. One of the few positives was an increase in the current outlook for number of employees, which rose from 4.1 to 13.8. However, manufacturers may be feeling a bit of squeezed margins with the index tracking prices paid rising 7 points and the index tracking prices received falling 5 points.
Manufacturing Output, Job Openings, and Consumer Confidence: At 8:15 a.m., CT, the February Industrial Production and Capacity Utilization report is expected to show a small uptick in production, including a 0.1% MoM increase in manufacturing output. At 9:00 a.m., the January JOLTs report is expected to show a pullback in job openings from December’s new record high of 7.335 million. And also at 9:00 a.m. the University of Michigan’s Consumer Confidence report will hopefully show another leg up after February’s small reversal from the 4Q drop.
Yesterday – Stocks, Treasury Yields Held in Check by Trade Uncertainty: U.S. stocks and Treasury yields flipped above and below their respective closing levels several times throughout Thursday’s sessions, but ultimately ended the day not far from where they began. A sense of uncertainty was present before the opening bell after news broke ahead of the U.S. session that Presidents Trump and Xi wouldn’t meet to finalize a trade deal until at least the end of April. Previous speculation was that the pair could get together to dot the i’s and cross the t’s of a new deal later this month. Futures fell on the headline in pre-market trading and the major indices stayed closed to unchanged for most of the day. The biggest dip during the session came after January’s new home sales missed estimates, although positive prior revisions made the MoM change appear worse than it was (more below). The Dow (up) and S&P 500 (down) both changed by less than 0.1%. Action was similarly subdued in the Treasury market and neither asset classed seemed excited by the latest Brexit developments. The UK parliament voted overwhelmingly (412 to 202) in support of delaying the March 29 deadline, although an official extension ultimately needs the blessing of the EU (all 27 countries). Thursday’s vote does little to clear the uncertainty and there are likely to be additional votes next week. For the day, the 2-year Treasury yield (2.46%) dipped 0.4 bps, the 5-year yield (2.43%) was unchanged, and the 10-year yield (2.63%) added 0.9 bps.
Overnight – China Closes Out Annual Congress Meeting, BoJ Holds, North Korea Considers Nuking Denuclearization Talks: Investors pushed global equity prices higher overnight while sovereign bond yields remain seemingly stuck near the low end of their recent trading ranges. Chinese stocks were more than 1% higher to lead the mostly upbeat day across Asia. Chinese officials last week kicked off the annual meeting of the National People’s Congress by lowering its economic growth target for 2019 and announcing stimulus measures, including (VAT) tax cuts. At Friday’s closing press conference, Premier Li said, “We certainly need to take strong measures to face the downward pressure,” and confirmed that tax cuts will become effective April 1. He pledged, “We won’t let the major economic indicators slide out of their proper range.” About the time of the Premier’s remarks, the Bank of Japan announced no changes to policy and said it expects the “slowdown in overseas economies” to affect Japan’s near-term growth prospects. In Europe, core inflation was confirmed at 1.0% YoY in February while car registrations posted their smallest decline in that last six months. Weakness in the auto sector, primarily caused by new emission regulations in 2018, were blamed as a major factor behind German nearly tipping into a technical recession at the end of last year. U.S. equity futures were following the global trend higher while Treasury yields edged lower. The 2-year yield was earlier down 0.6 bps while the 10-year yield had declined by 1.4 bp. The sharpest move lower in yield overnight came on a headline that North Korea’s Kim Jong Un was considering suspending ongoing denuclearization talks with the U.S.
January’s New Home Sales Report Weak, but Unconvincing: New homes sales disappointed expectations in January, declining 6.9% from December’s pace to an annualized pace of 607k. On a positive note, the November and December data were revised 4.8% and 5.0% higher, respectively. As such, January’s drop was from a notably better level. Moreover, sales in the South were exceptionally weak, falling 61k (annualized). Included in the Census Bureau’s South region are Virginia, Maryland, and the District of Columbia. The government shutdown in January likely weighed on activity in those regions. As such, the disappointing January report is likely to prove temporary. Additionally, even with January’s drop, new home sales have convincingly rebounded since troughing at an annualized pace of 552k in October. Mortgage rates peaked at 4.94% (30-year fixed) and have since declined to 4.31% (Freddie Mac Mortgage market Survey). In fact, the West – the most rate-sensitive region and a region less likely to have been affected by the shutdown – saw a 40k (28%) increase in sales in January.
Update on Fannie Mae and Freddie Mac Single Family Security Initiative: Vining Sparks’ Investment Product Strategies group updated a primer on the upcoming Fannie/Freddie Uniform Mortgage-Backed Security Initiative. The initiative is set affect MBS securities beginning May 7th. Fannie and Freddie will begin issuing the new UMBS on June 3. For more information, click here.