The Market Today
Busy Week of Data Starts with EU Removing October 31 Deadline
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Busy Week of Data and FOMC Policy Decision: This week’s economic calendar is packed with data and events capable of yielding meaningful volatility. We will see data on housing (Tue.), 3Q GDP (Wed.), PCE inflation (Thu.), manufacturing (Fri.) and the October jobs reports (Fri.). On top of the important data, we’ll also get an FOMC policy decision mid-week. Markets expect the Fed to cut rates as evidenced by Fed Funds Futures pricing in a nearly-100 percent likelihood of a 25 bps cut. However, Fed Funds Futures are also pricing in additional cuts in the future which the Fed is likely to want to push back against. Also this week, four of the seven largest companies on the S&P 500 will report 3Q earnings.
Brexit Negotiations to Take Shape: Also on the radar this week, the fate of Brexit remains in the balance. The EU has already approved a 3-month extension over the weekend after French President Macron dropped his objection to it. Now the U.K. Parliament will vote today on elections to be held December 12. If this passes, we will see seven weeks of campaigning revolving around differing Brexit plans. However, some of the no-deal Brexit risk will be off the table for now.
Trade Volume Continues to Shrink: September’s advance goods trade balance report showed a larger-than-expected reduction in the deficit, down $2.7 billion from August. The drop in the deficit came as both imports and exports fell. Exports fell 1.6% but imports dropped an even larger 2.3%, helping shrink the overall deficit. Auto exports were particularly weak. Autos account for less than 10% of exported goods but made up 46% of the decline in exports. While the decrease in the deficit will boost GDP figures in the short term, slowing global trade continues to be a concern for U.S. economic stability. Exported goods are now at their lowest level in 16 months while imported goods are at their lowest level in 22 months. Also in the report, wholesale and retail inventories both disappointed expectations.
Chicago Fed National Activity Index Shows No Sign of Inflation: The Chicago Fed’s National Activity Index unexpectedly dropped from +0.15 to -0.45, its third weakest reading since 2016. The CFNAI is an aggregation of 85 different economic indicators including reports on 1) production and income, 2) the labor market, 3) personal consumption, 4) housing, and 5) sales and inventories. For context, when the CFNAI’s three-month average is above +0.70 following an expansion (or a one-month reading above 1.00), a period of more rapid inflation is expected to occur. The 3-month average for the CFNAI is now down to -0.24.
OVERNIGHT TRADING ACTIVITY
Markets Open Optimistically Monday: Treasury yields and U.S. stocks were both on the rise Monday showing as investors look ahead to an incredibly important week for the U.S. economic data. Before the heavy weekly influx of U.S. economic headlines begins, Monday’s focus has been on another soft economic indicator out of China and the EU’s decision to give the U.K. until January 31 to make a decision on Brexit.
Profits Drop in China: Industrial profits in China declined 5.3% YoY in September amid ongoing global weakness and its battle with the U.S. over trade. The September decline was the steepest in four years. Asian equity markets, however, were generally stronger to start the week following last Friday’s positive progress on trade (more below). A state-run Chinese media outlet confirmed over the weekend that negotiators “agreed to appropriately resolve the core concerns of both parties.” China’s CSI 300 rose 0.8%.
EU Gives the U.K. Extension to January 31 Before Parliament’s Vote on Elections: The other major focus has been on the EU’s decision to grant the U.K. a flexible extension of the Article 50 deadline, currently set to expire at midnight on Thursday, through January 31, 2020. The nature of the extension would allow the U.K. to leave sooner than the end of January should parliament pass the recently negotiated Brexit deal in the interim. Prime Minister Johnson, who loathed anything other than a small technical delay, is expected to open a vote today in parliament on holding general elections on December 12th. U.K. yields were little changed Monday.
U.S. Assets Show Firmer Tone: Amid the signs of trade progress and optimism that a no-deal Brexit is not a worry for this week, Treasury yields were higher and curve was steeper before the U.S. session. The 2-year yield rose 2.8 bps while the 10-year yield was up 4.2 bps around 7:30 a.m. CT. Futures on the S&P 500 were 0.3% higher which could put the index at a new all-time high when cash trading opens.
ICYMI – October 25, 2019 Weekly Market Recap: U.S. stocks and yields rose last week after the U.S. announced that trade negotiators had made progress on finalizing some aspects of the recently-announced phase one trade deal. Brexit remained in the headlines as conflicting votes showed U.K. parliament broadly supported PM Johnson’s new agreement with the EU, but wanted more time to sift through the details. The economic data continued to be somewhat disappointing, but nothing too disastrous. New and existing home sales both declined but held the general uptrend that began after mortgage rates tumbled. Durable goods were notably weaker than expected, a sign business investment is likely to remain weak amid elevated uncertainty. And the first look at October activity in the Markit PMIs signaled stability, but at soft levels and with several key underlying indices showing reason for continued caution. Click here to view the full recap.