The Market Today

China Keeps Yuan Stronger than Key Level after Treasury Formally Labels the Country a Currency Manipulator


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

JOLTS Job Openings and a Couple of Fed Voters: A quiet economic calendar clears the way for markets to continue digesting trade developments from the last several days, the latest being the Treasury designating China a currency manipulator just after Monday’s market close (more below). At 9 a.m. CT, the JOLTS report is expected to show job openings were little changed in June at 7.326MM, below their best level of 7.626MM from November but still a strong level historically.


More importantly, however, will be comments from two Fed officials who will vote on policy decisions for the remainder of the year. Evans from Chicago is scheduled to hold a breakfast for members of the media, while Bullard from St. Louis will give an economic update at 11 a.m. CT in Washington. Both voted in favor of cutting rates on July 31 and have signaled support for additional easing before the year is out. Today’s appearance will provide an opportunity to learn if the escalation of trade tensions over the last several days, and the resultant market response, have added a sense of urgency to their outlooks for lower rates. Yesterday, two additional voters, Governor Brainard (voted for the cut) and Kansas City Fed President George (dissented to the decision), both used a variation of the word “monitor” when asked their opinions of the recent developments.


TRADING ACTIVITY

Yesterday – Spiraling Trade Tensions Wrecked Wall Street on Monday: Wall Street imploded Monday as the gloves came off in the trade fight between the U.S. and China, causing investors to dump risk assets in a severe global flight to quality. China followed through with last week’s pledge for retaliation to the U.S. announcing plans to add a 10% tariff to an additional $300B of Chinese goods. Ahead of the open of U.S. trading, China allowed its currency to weaken past a sensitive 7 yuan-per-dollar conversion and media reports indicated it planned to halt purchases of U.S. agricultural products, further escalating already-heated tensions and drawing the ire of President Trump. The Ministry of Commerce released a statement later confirming China would stop buying goods from U.S. farmers, and saying it would “not rule out import tariffs on newly purchased U.S. agricultural products after August 3.” President Trump voiced his frustration on Twitter, saying China’s actions make it “obvious” they are “intent on continuing…with unfair trade practices and currency manipulation.” A weaker yuan is considered to be a key weapon in China’s arsenal and a serious escalation. The Dow and S&P both dumped just under 3% in their worst performance of the year. Treasury yields plummeted to continue a volatile few days, and futures repriced aggressively to reflect expectations for the Fed to add notably to the initial 0.25% of insurance it took out at its meeting in July. The 2-year yield sank 13.9 bps to 1.57%, the lowest since October 2017, as the 10-year yield dropped a similar 13.8 bps to 1.71%, the lowest since October 2016. Fed funds futures rose in price (fell in yield) to project a nearly coin’s-flip chance between a 0.25% or 0.50% cut at the September meeting. After markets closed for the day, tensions reached new heights after the U.S. Treasury formally designated China as a currency manipulator. U.S. equity futures immediately weakened on the headlines, pointing to more pain on Tuesday.


Overnight – Markets Find Their Footing as PBOC Fixes Yuan Stronger than 7-Per-Dollar: Global markets steadied a couple of hours into Tuesday’s session after another slippery start sparked fears that Monday’s melee would continue. The Treasury’s designating China a currency manipulator led to analyst debates about the grounds of the accusation and discussion of possible action steps, considering the U.S. already has tariffs in place. The move also sharpened the market’s focus on the PBOC’s daily fixing rate for the yuan, to see if the central bank would set the official peg past the key 7-yuan-per-dollar rate. After the Treasury’s surprise announcement just after Monday’s market close, but before the PBOC’s, U.S. equity futures tumbled nearly 2% and the 10-year Treasury yields fell 3.7 bps to as low as 1.67%. Following the PBOC’s fixing the yuan at 6.9683 per dollar, weaker than Monday but below 7, those moves reversed. Around 7 a.m. CT, the S&P 500 had climbed back to trade 1.2% higher while the 10-year yield had risen to 1.76%, up 5.4 bps. The PBOC said in a statement that recent depreciation of the yuan was market-driven, not manipulation. Earlier, Chinese stocks slipped 1.1%, but had declined as much as 2.7%. European equities also recovered while yields in the region remained mostly lower. Taking a break from trade, Germany’s factory orders were stronger than expected in June while its construction PMI pointed to contraction in July for the first time in nine months. The German 10-year bund yield was trading down 1.6 bps and at a new all-time low of -0.53%.


NOTEWORTHY NEWS

ISM’s Surprise Services Slump Shows Economic Cracks Widening Beyond Manufacturing: After last week’s weaker-than-expected manufacturing PMI fell to a 35-month low, the ISM’s non-manufacturing index fell unexpectedly in July, compounding concerns that a weakening global economy and deteriorating global trade environment is feeding back into the critical U.S. services sector. The headline PMI slumped 1.4 points to 53.7, disappointing expectations for a 0.4-point gain to 55.5 and registering its weakest reading in three years. A notable slowdown in current activity and weakness in new orders were only partially offset by improvement in the employment. The business activity index dragged the most on the headline, tumbling 5.1 points to 53.1, its weakest level since the second half of 2016. New orders also slowed to a three-year low. Perpetuating the recent tension between a weakening outlook but resilient labor market, the employment index rose 1.2 points to around its average for the last eighteen months. Separately, Markit countered the ISM’s pessimism by revising up their initial estimate for services sector activity in July.


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