The Market Today

China Moves on Hong Kong

by Craig Dismuke, Dudley Carter


Coronavirus Chartbook (Click Here) – Updated by 9:00 a.m. CT

Monitoring the Headlines – Re-opening Watch: Scotland and Puerto Rico published plans to gradually remove some restrictions and the mayor of Washington D.C. said a phased re-opening could begin next Friday. President Trump acknowledged that locking down the country for a period was the correct call but “now it’s time for our country to open.” He expects doing so will lead to an “epic” comeback, a sentiment echoed by two of his closest advisers. Economic adviser Kudlow agrees with the administration’s expectations for a “V-shaped recovery” and Treasury Secretary Mnuchin expects a “gigantic increase” in activity in the fourth quarter.

Monitoring the Headlines – Stimulus Watch: While optimistic about the economy’s trajectory in a couple of quarters, Mnuchin said there is a “strong” chance more stimulus will be needed. The House recently passed a $3 trillion stimulus bill seen as a starting point for negotiations. Kudlow indicated funding for infrastructure could be part of additional emergency aid but became the latest noteworthy name to pour cold water on the idea of a negative Fed policy rate. President Trump said there is a “lot of ammunition left” in the Fed’s arsenal but he doesn’t expect it will be needed. However, fiscal authorities might have a “nice shot” at one more aid bill.


There are no reports on the U.S. calendar today ahead of the much-needed holiday weekend.  Investor focus will remain on the developments between China and Hong Kong (more below) with a glance at the ECB Minutes upon their release.


Stocks Fell Back as Tensions Between the U.S. and China Grow: Global equities fell Thursday as brewing tensions between the U.S. and China offset any optimism created by signs of life in economic PMIs and another weekly decline in jobless claims. Data Thursday showed global PMIs remained comfortably in contraction but perked up in May (more below) and while new jobless claims are still tragically high, they have fallen for seven consecutive weeks. Despite signs of some economic stability, a series of events this week has stirred tensions between the world’s two largest economies which have resurfaced amid the search for the source of the virus outbreak. Developments continued to unfold on Thursday, weighing on global stocks and knocking the S&P 500 down 0.8% from a 10-year high reached on Wednesday. Treasury yields remained range-bound and ended little changed with the 2-year yield down 0.2 bps to 0.17% and the 10-year yield up 0.8 bps to 0.67%.

U.S.-China Tensions: Tensions continued to build Thursday after China announced the National People’s Congress would vote on legislation aimed at “establishing and enhancing the legal framework and enforcement mechanisms for safeguarding national security.” The action, seen as an attempt to tighten China’s grip on Hong Kong, led to a couple of U.S. senators, one Republican and one Democrat, proposing a bill to sanction entities that are complicit with those efforts. President Trump later said the U.S. will respond “very strongly” to any effort by China to infringe on Hong Kong’s autonomy.


Hong Kong Bill Adds to Investors’ Weekly Concerns: Hong Kong’s Hang Seng index fell 5.6% Friday following China’s announcement that it was considering a bill to strengthen its national security interest in the Special Administrative Region. The move dusted off concerns about renewed tensions between the communist country and Hong Kong citizens. Even before the virus shut down Hong Kong, its economy had been tipped into a recession by months of pro-democracy protests against Chinese overreach. The latest development weighed on risk markets already under pressure from swelling tensions between the U.S. and China. Equities fell across the rest of Asia and were struggling for direction in Europe. Oil had recovered some but remained down more than 3%.

China Pulls Its Official GDP Target: China also announced overnight that it was pulling its official growth target for the first time amid “great uncertainty regarding the COVID-19 pandemic and the world economic and trade environment.” The Chinese yuan fell to as low as 7.14 yuan per U.S. Dollar, a low back to October 2019. In Japan, the government and central banks said it would work together to fight the virus’s effects after the Bank of Japan announced a new emergency business lending program. Japan’s core inflation fell below 0.00% for the first time since 2016. At 7:30 a.m. CT, U.S. futures were back near unchanged after an earlier decline while Treasury yields remained lower. The 2-year yield was down 0.6 bps at 0.16% as the 10-year yield dipped 2.6 bps to 0.65%.


PMIs Pushed Higher in May but Remain Notably Below Pre-Virus Levels: Consistent with global results released earlier in the day, U.S. economic activity recovered somewhat in May based on the Markit Composite PMI pushing up 9.4 points from 27.0 to 36.4. The manufacturing index recovered from 36.1 to 39.8, falling just short of the 40.0 level economists had penciled in. On the other hand, the services index rose 10.2 points to 36.9, nearly double the expected rebound to 32.5. The trend is consistent with expectations that relaxed restrictions across the country will allow some activity but restart but continued uncertainty could weigh for some time.

Existing Home Sales Plunged in April: Existing home sales plunged 17.8% in April, less than the 19.9% decline expected but easily the sharpest downturn since 2010. Combined with the 8.5% drop in March, sales are down nearly 25% over two months to an annualized pace of 4.33 million units, the weakest since 2011. Sales fell double-digits across all four geographic regions as most of the country remained under strict stay-at-home orders. While more recent improvement in purchase applications data offer some hope of recovery as restrictions are lifted, it is clear that housing’s hot streak ended in 1Q and the sector will weigh on growth in 2Q.

Williams Sounds Like the Others: New York Fed President Williams’s said the virus-dependent outlook is incredibly uncertain and opaque and fiscal authorities may need and can afford to provide more stimulus, saving discussions of deficits and debt levels for another day. The economy should rebound in the second half of the year and lifting restrictions will offer a better feel for the true economic damage. Consumers are likely to be “hesitant” to return to normal and the “shape or timescale of the recovery” will remain unknown for some time. Williams noted that, “negative interest rates is not the right tool to be used right now.”

Clarida Keeps Messaging Intact: Fed Vice Chair Clarida said he expects a pick-up in the second half of the year after some “unremittingly awful” near-term results, but admitted that the outlook is incredibly uncertain and acknowledged an “unusually wide” range of economic outcomes could play out. The Fed’s actions are “buying some time” for the economy but more may be needed from both monetary and fiscal officials as it will “take some time” for activity to recover. He said updated forward guidance could come “down the road” and expects more discussions around possibly using yield curve control. He doesn’t, however, support negative rates.

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