The Market Today
China Says Rolling Back Tariffs
by Craig Dismuke, Dudley Carter
Initial Jobless Claims Remain Encouraging Sign for Labor Market and Broader Economy: Initial jobless claims for the week ending November 2 fell from 219k to 211k, dropping near the low end of their four-month range. The four-week moving average for new unemployment claims remained at 215k. As payroll growth has slowed in 2019, new filings for unemployment benefits have not seen an increase. Historically, slowing job growth coupled with an increase in unemployment claims have preceded economic slowdowns (see Chart of the Day). However, if claims continue to remain low, as they have done, we interpret the slower payroll growth to be a function of late-cycle growth, rather than an inflection point signaling contraction.
Kaplan and Bostic on the Tape: Dallas Fed Bank President Kaplan is scheduled to speak again today at 12:05 p.m. CT along with Atlanta Bank President Bostic at 6:10 p.m. Kaplan, a voter in 2020, spoke Tuesday and indicated a satisfaction with the current monetary policy stance, highlighting the market-based feedback of a positively-sloped yield curve.
Stocks Dropped On Trade Delay and Oil Slump: After an uneventful open, U.S. stocks were caught flat footed by reports that a meeting between Presidents Trump and Xi to potentially sign a phase one trade deal could be pushed in December. The S&P 500 opened quietly against a backdrop of calm global markets following a three-day rally that was sparked by reports of progress on trade. With a matter of minutes, the S&P 500 had dropped from up 0.1% to down 0.3%. After floating sideways in negative territory for just over an hour, the index slowly recovered and ended the day essentially unchanged. The Dow also ended flat while the Nasdaq dropped 0.4% on weakness in tech. Energy companies, however, were the biggest drag on the S&P 500, hurt by a drop in oil prices that was spurred by reports OPEC isn’t seeking sharper production cuts. Compounding the drop in oil prices, U.S. inventories grew more than expected last week.
Treasury Yields Moved Lower by Trade Headlines and Strong Auction Demand: Treasury yields were lower heading into the U.S. session, but spiked down with equities on the possible delay of a trade deal signing. The 10-year yield’s drop sped up after a strong lunchtime auction saw the awarded yield stop through by more than 1 bp. For the day, the 2-year yield dropped 1.8 bps to 1.61% and the 10-year yield slipped 4.2 bps to 1.82%.
China Said They Have Agreed with the U.S. to Rollback Some Tariffs: Treasury yields have more than unwound yesterday’s decline and equities have moved higher on comments from China’s commerce ministry that both sides of the trade negotiations agreed to phase out some tariffs as part of the phase one trade deal. A spokesman for the ministry said “In the past two weeks, the lead negotiators from both sides have had serious and constructive discussions on resolving various core concerns appropriately, …Both sides have agreed to cancel additional tariffs in different phases, as both sides make progress in their negotiations.” Additionally, a Chinese news outlet reported that China was considering removing a ban on U.S. poultry imports.
Yields Recovered Wednesday Dip on Concerns About a Deal Delay: Those developments reinvigorated recent optimism around progress toward a trade that was disrupted Wednesday by the Reuters report that the deal could be delayed into December. The 10-year yield, which had edged down 1 bp overnight, jumped to move up 5.9 bps on the day at 7:30 a.m. CT to 1.88%, its third-highest mark since July. Equity futures reversed into positive territory to put contracts on the S&P 500 up by 0.4%. The effects were widespread, weakening haven assets such as gold and the Japanese yen while lifting global equities and yields across Europe. Germany’s 10-year yield added 5.4 bps to -0.28%, the highest yield since mid-July.
Bank of England Holds but Hints at Possible Cut: Despite the rising tide across the sovereign debt market, U.K. yields unwound their upward response to China’s tariff-rollback comments and the front end of the yield curve actually moved back below Wednesday’s closing levels. Despite the Bank of England holding rates unchanged on Thursday, the decision unexpectedly elicited two dissents in favor of a rate cut to cushion an already-slowing economy from “persistent” risks. While acknowledging recent developments had “markedly” reduced the risk of a no-deal Brexit, the bank cut its growth forecasts and Governor Carney said overall risks remained skewed to the downside. The 2-year Gilt yield was down 1.2 bps and the British pound was weaker.
Williams Said Data Will Determine if Policy Moves from its Current “Moderately Accommodative” Position: As part of a Wednesday panel, New York Fed President Williams said the labor market remains strong, but isn’t creating the inflation pressures one might expect with unemployment near its 50-year low at 3.56%. The Fed’s data dependency has resulted in a reassessment of full employment estimates, and the recent rate cuts, even with unemployment so low, show the Fed is not blindly following a model-based outlook. The three rates cuts since July have put policy in a “moderately accommodative” position and should prove “very effective” in offsetting risks the economy faces. He believes a neutral setting for fed funds is closer to 2.50%, but where the path leads from here will be solely determined by the data. Looking even further ahead, Williams said that if the economy was to unexpectedly fall into a downturn, the Fed would cut rates to zero, strengthen its forward guidance to reinforce its accommodative posture, and restart asset purchases; another implicit dismissal of negative policy rates.