The Market Today

TODAY’S CALENDAR

Business Investment Outlook Takes a Hit as April’s Capital Goods Data Misses with Negative Revisions: In the final economic report of the week, the outlook for business investment took a step back after capital goods orders and shipments trends disappointed to the downside. Capital goods orders dropped 0.9% in April’s first estimate, much weaker than the 0.3% decline economists had expected. Adding to the weakness, the estimated 1.4% increase in orders for March was revised down notably to 0.3% and overwhelmed a smaller 0.2% positive revision for February. The forward-looking indications from the orders data should weigh on 2Q GDP estimates and add to worries that growing uncertainty is tamping down business activity. In the more concurrent activity update, shipments were flat in April, better than the 0.1% decline expected, but another negative revision for March left the overall trend lighter than expected. Shipments had been estimated as unchanged for March but were revised lower to reflect a 0.6% decline. The negative adjustment could be reflected in business investment revisions in next week’s second look at 1Q GDP. Looking more broadly at this morning’s report, total durable goods orders and orders of durable goods excluding transportation categories both told a similar story of negative revisions offsetting an as-expected results for April.

TRADING ACTIVITY
Yesterday – Treasury Yields Tumbled Thursday After Data Raised Fears Trade Frictions Are Affecting Services Too: U.S. markets shifted sharply into a defensive posture after May data from Markit showed the negative impacts of trade tensions and uncertainty may be filtering into more than just manufacturing (more below). Overnight futures trading was already forecasting a rainy day for equity investors against backdrop of weakness across Asia and Europe in response to simmering trade concerns and elevated Brexit anxieties. China said that it wouldn’t resume trade talks until the U.S. “correct[ed] their wrong practices,” a likely nod to U.S. threats against Chinese tech companies and the recently increased tariffs. U.K. yields tumbled again after speculation that PM May could announce a date for her departure soon with her Brexit deal seemingly dead in the water. But equities’ weakness ramped up and Treasury yields shot lower after the Markit PMIs showed the worst month for manufacturing since 2009 and a three-year low for services activity. The S&P 500 did recover modestly into the close, trimming its worst tick at down 1.8% to a less-severe 1.2% loss. Investors jumped into safer assets to send the 2-year yield down 7.7 bps to 2.15% and the 10-year yield down 6.4 bps to 2.32%. At their lowest points, the 2-year yield traded at 2.119%, the least yield since February 2018, and the 10-year yield changed hands at 2.290%, a new low back to October 2017. While the 10-year yield settled 7 bps under the effective Fed Funds rate, Thursday’s rally actually steepened the 2s10s spread to 17 bp.

Overnight – Trade Concerns Keep Markets In Check, U.K. PM Steps Down: Global stocks were mostly firmer on Friday but Treasury yields’ retracement of yesterday’s tumble has been only modest. MSCI’s All-Country World Index was dinged for 1.3% this week through Thursday and has dropped 4.7% in May as investors anxiously watched the U.S. and China increase rhetoric around the ongoing trade dispute. Asian equities were mixed Friday but Europe’s Stoxx 600 moved 0.8% higher and U.S. futures had added 0.6% around 6:30 a.m. CT. Despite a sharp rally in Treasurys yesterday, yields only ticked higher from Thursday’s close. The 2-year yield was 1.7 bps higher to 2.16% ahead of this morning’s update on business spending and the 10-year yield had risen 1.1 bps to 2.33%. U.K. yields rose slightly more after PM May announced she was resigning her position effective June 7. May failed three times to whip up majority parliamentary support for the Brexit deal she negotiated with the EU. Her replacement, who will be chosen by her Conservative Party, will be faced with an increasingly tenuous situation that could result in a range of outcomes, from a no-deal exit to a second referendum. U.S. equity futures dipped and Treasury yields gave up their overnight increases after a Chinese Envoy said there have been no official talks about President Xi meeting with President Trump to discuss trade.

NOTEWORTHY NEWS

Markit Misses Upset the Markets: The Markit Flash U.S. PMIs had an unusually acute impact on U.S. markets Thursday, as overall activity slowed to its weakest pace in three years in May. In one of the first activity reports received covering the month of May, the composite PMI fell to its weakest level since May 2016, the manufacturing index dropped to its worst reading since September 2009, and services surprised to the downside with its slowest expansion since February 2016. As a result of the slump, which was reinforced by the softest level for new orders since in at least nine years, hiring cooled to its weakest pace in over two years. Adding to concerns created by weakness in current activity, business expectations for the future were the most downbeat since at least 2012 when that series began. Trade tensions have taken a noticeable toll on global manufacturing and pressured PMIs to multi-year lows. The latest Markit data showed that the negative trade shocks may now be affecting the services sector, a bigger macro concern for a U.S. economy that is driven heavily by services output.

New Home Sales Trend Better than Expected on Positive Prior Revisions: New home sales fell more than expected in April but the actual level of new homes that traded hands was in line with estimates because of positive revisions to prior months activity. Total sales fell 6.9% last month, worse than the 2.5% decline expected, to an annualized pace of 673k, roughly in line with the 675k economists had forecasted. The prior three months’ activity was revised up a total of 57k units, which pushed the March pace up to 723k, a new cycle-high for the series. There were greater-than-7% declines across the South, Midwest, and West that overwhelmed an 11.5% gain in the low-volume Northeast region. The composition of the April activity shifted toward higher-priced homes, pushing the median price up $36.4k to $342.2k, the highest in sixteen months. Despite some mixed results recently, the housing data have generally improved since mortgage rates tumbled back near 4%, and new home sales have been among the more upbeat housing reports. The average 15% improvement over the first four months of 2019 represents the best four-month run for the series since 2013.

Mester Prefers Patience Over Preemptive Rate Cut to Move Inflation Back to Target: A weakening inflation trend has caused some to speculate that the Fed could lower its policy interest rate to support price pressures moving back in the direction of their 2% target. However, Cleveland Fed President Mester said cutting rates to spur inflation “would be bad policy because we have another goal [maximum employment] and the risk you’d be running on the other goal would be excessive. ..Since we’re not far from our [inflation] goal, I’d rather do something that is more prudent, which is be willing to keep interest rates low.” She added, “Let’s hold rates where they are and be more willing to do that even though we have a very low unemployment rate, …Suppose we get some readings on inflation that are above 2%, I’d feel the same way. We really don’t have to respond to that.” She said that businesses in her district are concerned about the trade tensions and tariffs, but that finding workers remains a bigger headwind.