The Market Today

A Day of Better-Than-Expected U.S. Data, but Trade Will Remain the Focus


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Building Permits and Housing Starts Both Beat Expectations: April’s month-over-month change for housing starts was weaker than expected, but a positive revision to the initial estimate for March resulted in a stronger-than-expected absolute level of activity. Housing starts rose 5.7%, short of the 6.2% gain expected, but the 0.3% decline previously estimated for March was revised up to a 1.7% gain. As a result, starts totaled 1,235k units, better than the 1,209k expected and a three-month high. Single family starts rose a strong 6.2% as three of four regions gained, while activity in the South slowed by a disappointing 5.6%. One step earlier in the building process, permits were up a better than expected 0.6% and March activity was revised better, from -1.7% to -0.2%. The overall level of 1,296k for new permits was slightly stronger than the 1,289k expected. The details were mixed showing the monthly gain driven entirely by a boost from the multi-family sector; single family permits fell 4.2%. Single-family permits have slowed now for five-months in a row. Lower rates have had a positive effect on the housing data but weakness in single-family permits shows there is still room for further recovery.


Philadelphia Fed Business Outlook Improves: A day after the Empire Manufacturing index topped expectations, a similar survey from the Philadelphia Fed was better than expected. The Philadelphia Fed’s Business Outlook Survey jumped 8.1 points last month to 16.6, a four-month high but still below stronger levels from the two previous years. New orders slowed but shipments picked up while the number of employees grew but the average workweek shortened.


Initial Jobless Claims Fall Back More Than Expected: Initial Jobless Claims fell more than expected last week, with total new claims dropping 16k to 212k. Still, the four-week average rose almost 5k to 225k as the most recent reading replaced a near 50-year low of 193k from five weeks ago. Continuing claims also fell more than expected, and the macro signal from the claims data continues to be of a strong labor market.


Three Morning Fedspeakers: There are three Fedspeakers on the schedule throughout the remainder of the morning. Fed Governor Quarles will go back to capitol hill at 9 a.m. CT for a second day of congressional testimony covering the Fed’s supervisory role. At 11:05 a.m. CT, President Kashkari from Minneapolis will discuss his outlook for monetary policy and the economy. Overlapping his remarks, at 11:15 a.m. CT Fed Governor Brainard will offer her take on what she expects from the economy and how it could impact policy over the near-term.


TRADING ACTIVITY

Yesterday – Investor Sentiment Turns Up Reports of Auto Tariff Delay, USMCA Progress: Stocks opened lower Wednesday amid a global risk-off trade that had pushed Treasury yields to their lowest levels in more than a year. Weaker-than-expected industrial and retail reports from China and the U.S. showed the incessant trade tensions are taking a toll on both economies. Noise around Italy’s fiscal situation and mentions of a no-deal Brexit from a top U.K. official added to the dour mood. The S&P 500 dipped 0.7% out of the gate and bottomed about the time the 10-year yield touched 2.359%, the third lowest level since 2017. However, stocks reversed higher and into positive territory around 9:15 a.m. CT and Treasury yields trimmed their declines on a headline that President Trump was planning to delay a decision on auto tariffs past the current May 18 deadline. European stock markets rallied sharply on the headline, moving out of negative territory and closing at their highest levels of the day. Less than an hour later, Treasury Secretary Mnuchin said the U.S. was close to reaching an understanding with Canada and Mexico to remove tariffs on steel and aluminum as part of finding a path forward for the updated NAFTA deal. Canada’s Foreign Affairs Minister was in Washington Wednesday and said trade talks with the USTR had been productive. While China tensions remain elevated and the day’s economic data disappointed, the positive trade developments elsewhere served as a pressure relief valve of sorts. The S&P 500 ended the day 0.6% higher while the Treasury curve shifted down between 3.7 bps and 4.1 bps between the 2- and 10-year notes, with the entire span closing the day below the effective Fed Funds rate.


Overnight – Global Markets Calmly Keep an Eye on Trade Developments: After a weak start during Asian trading, U.S. equity futures and Treasury yields both turned higher around 4 a.m. CT as investors kept an eye on simmering tensions between the U.S. and China. Some positive trade developments involving the U.S. and other partners boosted spirits Wednesday, but an executive order from the White House and a proposed update to the Bureau of Industry and Security’s (BIS) Entity List later Wednesday refocused the attention back to China. The executive order, titled “Securing Information and Communications Technology and Services Supply Chain,” prevents U.S. companies from purchasing tech products from companies that the government considers to pose a national security risk. Shortly after the order was signed, the BIS said it would add Huawei Technologies to a list that would prevent it from selling its products to U.S. companies. Huawei has been previously involved in the trade tensions after Canada arrested its CFO on behalf of the U.S. for breaking sanctions on Iran. China’s Commerce Ministry said, “China has emphasized many times that the concept of national security should not be abused, …China will take all the necessary measures to resolutely safeguard the legitimate rights of Chinese firms.” Nonetheless, equity futures were up around 0.3% around 7 a.m. CT with earnings-related, pre-market gains from Walmart and Cisco, both Dow components, giving equities a boost. Bucking Thursday’s global trend of lower yields, Treasury yields were higher ahead of the morning’s U.S. economic data.


NOTEWORTHY NEWS

Manufacturing Output Remained Weaker than Expected in April: Industrial production contracted unexpectedly in April on weakness in utilities output and another disappointing month for manufacturing. Total industrial production stumbled 0.5% last month, disappointing expectations for no change. While mining production rose 1.6%, utilities output dropped 3.5% and manufacturing activity fell unexpectedly by 0.5%. The April decline extends a disappointing start to 2019 manufacturing that has seen output contract at an annualized 4.7% rate, the sharpest four-month drop since June 2009. U.S. manufacturing hasn’t been immune to the global weakness that has resulted from the prolonged trade tensions between the U.S. and China. April’s disappointment, on the heels of the weaker-than-expected retail sales earlier in the day, only adds to the uncertainty around the economic outlook.


Home Builders Report More Optimism than Expected: The NAHB’s Home Builder Index rose more than expected in May to a seven-month high on a pick-up in the number of people walking through new homes and a continued recovery in the sales outlook. The foot-traffic index rose 2 points to 49, the current sales index strengthened for a fifth consecutive time adding 3 points to 72, and expectations for sales six months from now recovered 1 point to 72. Each index posted its best level in seven months. Lower rates, partially the result of uncertainty about the outlook for key components of the U.S. and global economies, has helped buoy activity in the housing sector.Barkin Sees No Reason to Move Rates: Richmond Fed President Barkin summed up why he supports the Fed’s patience with monetary policy, saying in a speech Wednesday that “There’s not a strong case to push rates higher when inflation is under control; there’s not a strong case to move lower when growth remains healthy.” He noted that inflation’s downturn “might well be due to transitory factors” and said he’s keeping an eye on economic sentiment. He believes that “the economy can move in ways not fully justified by moves in fundamentals,” before giving a lengthy defense of why he suspects economic sentiment is “up in importance.” He concluded by highlighting that consumer confidence had rebounded but that business confidence remained “fragile”, adding “It’s our job as policymakers to try and support it.” There are three Fedspeakers on the schedule throughout the remainder of the morning. Fed Governor Quarles will go back to capitol hill at 9 a.m. CT for a second day of congressional testimony covering the Fed’s supervisory role. At 11:05 a.m. CT, President Kashkari from Minneapolis will discuss his outlook for monetary policy and the economy. Overlapping his remarks, at 11:15 a.m. CT Fed Governor Brainard will offer her take on what she expects from the economy and how it could impact policy over the near-term.


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