The Market Today
Capital Goods Orders Bounced Back but Markets are More Focused on Increasing Trade Tensions
by Craig Dismuke, Dudley Carter
Durable Goods Orders Twice as Good as Expected: February’s report on durable goods orders took a step in undoing some of the recent disappointment for the series. Total durable goods orders were up 3.1% MoM compared to estimates for a smaller 1.6% gain and January’s 3.6% drop was trimmed to -3.5%. Excluding transport orders, which tend to be volatile month to month, orders rose 1.2%, better than the 0.5% improvement expected. Revisions for ex-transports order were also positive, with January revised from -0.3% to -0.2% and December up from 0.7% to 0.8%. Honing in on the business spending categories, capital goods orders rose 1.8%, double the 0.9% expected increase, while revisions were roughly neutral. Shipments of business goods were also much stronger than expected, up 1.4% MoM compared with the more modest 0.5% gain expected. January’s shipments were revised from down 0.1% to up 0.1%. The implications of the February report are positive for both private investment and the overall growth outlook for the first quarter.
Later this morning, Census Bureau data is expected to show new home sales rebounded 4.6% in February but remained at their slowest pace (620k annualized units) in four months. New home sales sank nearly 15% between November 2017 and January 2018. The rebound would follow similar strength in existing home sales data from earlier this week and offer another point of reprieve for a sector that has struggled in recent months amidst rising prices and higher mortgage rates.
But this morning’s economic reports may again be largely ignored by markets which seem completely focused on the developments surrounding global trade. As discussed below, President Trump signed a tariffs proposal yesterday aimed at imported goods from China. Hours later, Chinese officials released a retaliatory response that included counter tariffs targeting certain U.S. goods imported into China. The market response to the tariffs back-and-forth has been unkind to equities (more below). However, a couple of potential stumbling blocks were removed from Friday’s itinerary. A government shutdown was averted after the Senate passed the $1.3T omnibus spending bill (the House voted “Yay” on Thursday) that increases defense spending by $80B and outlays on domestic programs by $63B. Those amounts were agreed to back in early February but needed to be allocated across the various spending categories. In addition, the White House announced exemptions from the steel and aluminum tariffs, set to go into effect today, for several U.S. allies. The modification will exclude for now, Argentina, Australia, Brazil, the EU, and South Korea but didn’t offer relief to other countries such as Russia, Turkey, and Japan.
Yesterday – Stocks Tanked as the President Signed China Tariff Proposal, Announced Other Potential Punitive Measures: It was a brutal day for U.S. equities Thursday as the major indexes nearly doubled already-steep losses after the President signed the expected tariffs proposal aimed at China. Early reports signaled the tariffs could be aimed at roughly $50B of goods imported from China, or just under 10% of the total $506B reported for 2017 by the U.S. Census Bureau. However, in his remarks the President indicated the affected amount could be closer to $60B. In addition to the tariffs on goods, the White House alluded to restrictions to Chinese investments in U.S. companies and technology. Just before high noon central time, roughly the time the proposal was signed, the Dow was down 1.5% and the S&P was 1.3% lower. By the close, those losses were even more severe. The Dow finished down 2.9% (724 points) and the S&P 500 closed off 2.5%. Both indexes are now negative for the year. Thursday’s tumult in equities extended yesterday’s post-Fed rally in U.S. yields. The 2-year yield fell 2.7 bps to 2.28%, the 5-year yield drifted down 5.1 bps to 2.62%, and the 10-year yield sank 5.9 bps to 2.82%.
Overnight – Trade Tensions Send Global Equities Into a Tailspin: Following Thursday’s free fall by major U.S. indexes, the pain for equity investors pushed west across the Pacific as Asian equities sank. The President’s announcement yesterday of tariffs on up to $60b of Chinese goods unnerved U.S. markets and received a quick response from Chinese officials. China announced they would retaliate with tariffs on approximately $3B of goods imported from the U.S. (just over 2% of the 2017 total), items such as fruits, wines, nuts, port, and steel pipes among other thing. In addition, China’s Ambassador to the U.S. said “If somebody imposes a trade war on China, we’ll fight to the end. A potential trade war has become a concern for markets and appears to have taken a couple of steps closer to becoming a reality. China’s CSI 300 dropped 2.87%, Japan’s Nikkei dropped 4.5%, and South Korea’s Kospi shed 3.18%. The sentiment wasn’t much better in Europe, where all major national indexes were down and the Stoxx Europe 600 had fallen 0.7%. But global sovereign yields have been surprisingly resilient considering the negativity in global equities. Sovereign yields ticked higher with the 2-year Treasury yield up 0.4 bps to 2.28% and the 10-year yield 1.3 bps higher ahead of this morning’s February durable goods report.