The Market Today
China Calls Off Trade Discussions
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
A Few Important Reports Including Presumed Fed Hike: There are a handful of important economic reports this week, including the Fed’s preferred PCE inflation report on Friday along with August’s Personal Income and Spending data. Economists expect the income and spending data to remain solid and inflation to remain close to the Fed’s 2.0% target. There are also two reports on consumer confidence, on Tuesday and Friday. However, the big news of the week will come on Wednesday via the FOMC meeting. The Fed is expected to hike its overnight rate for the 8th time during this cycle. The big question will be the Committee’s commitment to a 9th hike in December. The Fed’s median projection rose from hiking three times in 2018 to four in their June decision. Now the markets, which were very skeptical of a fourth hike in 2018, is pricing in almost a 100% chance of a December hike. Secondarily, we will be closely watching how the dot plot evolves. Will they lower their dots to help keep some shape to the yield curve or raise their dots given the strong data? Third, the Fed is likely to drop the phrase from their Official Statement saying that policy remains accommodative. We view this as largely a mechanical decision and not a reflection of the hawk/dove sentiment on the Committee. Rather, we will be looking to the dot plot to gauge the Fed’s mood.
Stocks Run Higher Despite Higher Yields, Escalation of Trade Battle: It is worth noting that last week’s market activity (more below) with stocks hitting new record highs and bond yields rising to near-cycle highs, occurred amidst an escalation of trade barriers and the belief that the Fed is about to hike and continue doing so. Historically, these type of challenges have roiled equity markets and sent bond yields lower. Market sentiment has obviously shifted to view the strength of the economic data and corporate earnings as more compelling than the drag from trade and higher rates.
Overnight – Stocks Dip as Tariffs Kick In and China Cancels Weekly Trade Talks with the U.S.: Global equities slipped to start the week as trade tensions between the U.S.-China continue to simmer. The tariffs that were announced last week (more below) went into effect at midnight and hopes for a quick resolution this week faded. After U.S. markets closed Friday, reports indicated China had called off trade talks that were scheduled for this week. Overnight, a Chinese news outlook cited a government report as saying, “The door for trade talks is always open but negotiations must be held in an environment of mutual respect,” not “under the threat of tariffs.” Chinese markets were closed for a holiday, as were several other in the region, but European equities were broadly weaker. The Stoxx Europe 600 was down 0.3% with all but one of its 11 sectors in negative territory. Energy companies were the only ones to move into positive territory, helped out by a rally in crude prices. Brent crude (+2.4%) broke above $80 per barrel while WTI (+1.8%) breached $72 per barrel; both were new highs back to December 2014. Speculation had grown that OPEC and its partners could announce an even larger output increase at this weekend’s meeting. However, they decided the status quo plan was sufficient. Global yields were exclusively higher overnight, with the 2-year Treasury yield up 0.9 bps and the 10-year yield 1.1 bps higher ahead of a quiet Monday U.S. calendar that will become increasingly crowded as the week progresses.
ICYMI – September 21, 2018 Weekly Market Recap: Investors were cautious last Monday after weekend reports had indicated the U.S. could move forward with the next round of China tariffs forthwith. The S&P 500 slipped 0.6% to start the week and the 10-year yield ticked lower. After markets closed, the White House released a statement making those tariffs official. Beginning September 24 (today), the U.S. will apply a 10% tariff on $200B of Chinese imports, a rate that will increase to 25% on January 1. If China retaliates against certain sectors of the U.S. economy, tariffs on another $267B will be pursued. China quickly retaliated with tariffs of 5% or 10% on $60B of U.S. goods. Despite the escalation, the actions weren’t as severe as feared; it was thought the U.S. could immediately implement a 25% tariff and China had previously mentioned a 20% charge. Stocks jumped Tuesday and stayed firm for the remainder of the week. The S&P and Dow both set record highs on Thursday and the Dow doubled down on Friday. Treasury yields held a Tuesday spike with the 2-year (2.81%) and 5-year (2.96%) yields reaching new cycle highs Thursday. As to the economic data, housing was the focus and the soft-data story remained intact. Home builder confidence held at a 12-month low. Housing starts jumped on swings in multi-family activity but building permits tumbled. Single-family permits fell the most since 2011. Existing home sales were flat in August, falling short of estimates for a fifth consecutive report and holding at their slowest pace since 2016. Click here to view the full recap.