The Market Today
Business Investment Weakness As Trade Saga Rolls On
by Craig Dismuke, Dudley Carter
Business Investment Disappoints To Start The Second Quarter: This morning’s slate of data was a disappointment, with the Chicago Fed National Activity Index reentering its below-average growth trend and July’s durable goods reports sending a downbeat signal for business investment. The Chicago Fed’s index fell back below zero, where it has lived for seven of the last eight months. The drop in July, which wouldn’t reflect any of the escalation in trade tensions in August, placed the index at its fourth weakest reading since 2016.
Business Spending Remains Weak And Worrisome: Adding to the morning’s woes, the durable goods orders data depicted a downbeat assessment of ongoing business investment. Also unlikely to capture any new concerns created by new August tariffs, capital goods orders rose a stronger-than-expected 0.4% in July, but were revised down in each of the prior two months. Shipments of capital goods fell short of the 0.1% gain expected, contracting 0.7% in July, and were also plagued by downward revisions to prior activity. The recent trend for both series looks weaker than expected, points to weaker growth in business investment and lower GDP estimates, and continues a worrisome trend for Fed officials anxiously watching for additional weakness.
Dallas Fed Survey On Deck: At 9:30 a.m. CT, the Dallas Fed will release its latest survey for August, which will show how manufacturing businesses in the region responded to the trade rhetoric being ratcheted higher in recent weeks. The index is expected to improve but remain negative.
LATER THIS WEEK
A Sundry Of Economic Reports: There are several important reports to be released later this week, including pending home sales for July, a second estimate of 2Q GDP, and data on trade and inventories. However, more important will be an update on business and consumer spending, and the Fed’s preferred inflation measure.
Business Spending Remains A Focus And A Fear: In addition to this morning’s capital goods orders data and regional Fed surveys, there are two additional business surveys later this week that could help triangulate the effect of new tariffs on business activity
Consumer Is Keeping Economy Stable, But Worries Could Be Creeping In: Friday’s personal spending report is expected to confirm the signal of consumer strength from a previously released retail sales report, but there are some questions as to how it will fare in the future amid greater trade fears. The two key consumer confidence measures are expected to have weakened notably since the trade situation began to deteriorate earlier this month.
OVERNIGHT TRADING ACTIVITY
Markets Rattled By Spiraling Trade Tensions: Global markets remain completely focused on the unrelenting twists and turns in the U.S.-China trade saga. After selling off Friday in response to China placing new tariffs on U.S. goods, and the U.S. raising the rates it charges (and plans to charge) on Chinese goods, markets tumbled anew at the outset of Asian trading as tensions remained high over the weekend. China’s Finance Ministry said “The Chinese side strongly urges the U.S. side not to misjudge the situation, not to underestimate the resolve of the Chinese people, and immediately stop wrong actions, or the U.S. will have to bear all the consequences.” Later Sunday, President Trump said it was within his power to declare the situation a national emergency, with the White House later adding that the president “regrets not raising the tariffs higher.”
Markets Recover On Reports The White House Trade Phone Rang: After dropping as many as 9 bps to as low as 1.44%, the 10-year yield recovered to unchanged on reports of a call between the two countries. Within the last several hours, President Trump said “China called last night our top trade people and said ‘Let’s get back to the table’, so we’ll be getting back to the table.” China has so far disputed a call was made, but China’s Vice Premier did earlier say, “We are willing to solve the problem through consultation and cooperation with a calm attitude.” Although this song and dance has been seen many times before, the glimmer of hope helped push S&P 500 futures back into positive territory and up 0.5% on the day. The Treasury curve had recovered to just below Friday’s finish.
ICYMI – August 23, 2019 Weekly Market Recap: Fed Chair Powell’s Friday speech, expected to be the biggest market event of the week, was overwhelmed and overshadowed by unexpected escalation of trade tensions. In a relatively quiet week for the data, a couple of housing reports posted mixed results but more important were the Markit PMIs. Those broader reports signaled manufacturing activity contracted for the first time since 2009, while the services index matched its weakest pace in several years. But the bigger focus was the Fed and Friday’s surprising escalation of the U.S.-China trade fight. The July minutes said that most agreed the recent rate cut was a mid-cycle adjustment, and showed there continued to be divided opinions. That lack of consensus was also evident in Fedspeak leading up to Powell’s Friday remarks, where he avoided much direct guidance, but did seem to setup for a possible September rate cut. However, trade tensions stole the show with China announcing new retaliatory tariffs, and drawing a sharp and swift rebuke from the White House. President Trump ordered U.S. companies to look for ways to shift business away from China and said he was raising tariffs on Chinese goods. The combination of events pushed the yield curve back into inversion several times and left yields back close to their lowest levels in years. Click here to view the full recap.