The Market Today

TODAY’S CALENDAR

Small Business Confidence Rose Unexpectedly in May in the Face of U.S.-China Trade Escalation: Small business confidence jumped to a seven-month high in May as 9 of the 10 key underlying indices improved in the face of increasing tensions between the U.S. and China. While the result may not fully reflect the negative shift in sentiment during the month, depending on when survey responses were completed, overall optimism rose 1.5 points last month to 105, the highest level since 107.4 last October. The index tracking businesses’ assessment of whether now is a good time to expand operations posted the biggest gain, adding 5 points and also reaching a seven-month high. Indices tracking capital spending plans, economic expectations, and sales forecasts all rose 3 points during May. In addition, actual capital spending surged to match its second-best level of the cycle. Hiring plans improved slightly, current job openings were unchanged just below their all-time high, and the number of businesses that said finding workers was their biggest headwind rose back to its largest share on record. Business confidence is a key metric the Fed is tracking as it monitors the economic effects of trade tensions and other uncertainties that have clouded the economic outlook and cause markets to expect a return to accommodation by U.S. monetary policymakers.

Producer Price Inflation Ticked Down to Its Lowest Level in Sixteen Months: Headline and core producer prices rose an as-expected 0.1% and 0.2% MoM, respectively, in May, dropping the YoY rates to 1.8% and 2.3%. Core prices on a YoY basis have slowed in four of the last five months and are rising at their slowest pace in sixteen months (January 2018). Food prices fell 0.3% in May and energy prices were down 1.0%. Stripping out those declines, core goods prices were unchanged. Overall, services prices rose 0.3% and were up 0.5% when a drag from trade services, which tracks the retailing and wholesaling of goods, is adjusted out. Airfares and the costs of transporting and storing goods all posted above-average gains. Inflation pressures, or the lack thereof, continue to be a key for the Fed who is attempting to gauge the appropriateness of its current policy stance.

TRADING ACTIVITY

Yesterday – Treasury Yields Rose as Risk Sentiment Recovered on Tabling of Mexican Tariffs: The overnight risk rally persisted throughout U.S. trading on Monday, leaving Treasury yields higher and equities stronger on solid gains for tech, auto, and financial companies. The U.S. announced over the weekend it was suspending plans for tariffs on imports from Mexico in response to its southern neighbor pledging to help cutoff the flow of illegal immigration across the border. The plans for tariffs, announced on the final day of May, had compounded existing worries about trade flows between the U.S. and China, fueling fears that a breakdown in major global trade could lead to a global recession. The S&P 500 rose 0.5% Monday, the Dow jumped 0.3%, and the Nasdaq rallied 1.1%. Treasury yields turned up on the recovery in risk assets, pushing the 2-year yield up 5.3 bps to 1.91% and the 10-year yield up 6.7 bps to 2.15%, both the highest level in seven days.

Overnight – Investors Remain Upbeat Through More U.S.-China Noise: Global stocks extended Monday’s gains overnight and Treasury yields continued to recover away from their lowest levels since 2017. Sentiment has improved this week after a deal was reached between the U.S. and Mexico to avoid tariffs, and despite comments from President Trump early Monday that the U.S. would move forward with tariffs on the balance of Chinese imports if no progress is made between he and President Xi at the late-June G-20 meeting. An official from China’s Foreign Ministry said Tuesday, “China does not want to fight a trade war,” but “If the United States only wants to escalate trade frictions, we will resolutely respond and fight to the end.” Ignoring the words war, Chinese stocks were leading Tuesday’s global gains on reports the government was loosening acceptable uses for proceeds from special bond issues to help fund certain types of infrastructure investment projects. The CSI 300 rose 3.0% on reports of the additional. Strength in China boosted trade-sensitive materials stocks in Europe, which were leading a solid day for the Stoxx Europe 600. The index, which was 0.9% higher by midday, was also boosted by a strong day for autos, which had been hurt by the confrontation between the U.S. and Mexico. Just before 7 a.m. CT, U.S. equity futures had gained 0.5% and the Treasury curve had moved up around 2 bps, despite a drag from lower yields in Europe.

NOTEWORTHY NEWS

Job Openings Exceed Unemployed Persons for 14^th Consecutive Month: The April Job Openings and Labor Turnover survey, released yesterday, showed a slight pullback in job openings but evidence of labor-market strength in other areas.  Job openings pulled back from 7.474 million to 7.449 million, down 25k.  In contrast, there were only 5.824 million unemployed persons in April (according to previously released unemployment data).  The ratio of unemployed persons to job openings fell to 0.78, the lowest of the cycle and the fourteenth consecutive month in which there have been fewer unemployed persons than openings.  Hires were particularly strong, up 240k.  Job quits, traditionally an indicator of wage pressure, rose 21k to their second-highest level of the cycle.  Job layoffs did increase 59k but remain very low.  On a negative note, job openings are struggling to surpass their November high and the trend gives the impression that openings could have peaked.  Additionally, this data reflects activity in April and the May payroll report has already shown a softer labor market.