The Market Today
China to Roll Back Tariffs, Markets Continue to Show Improved Sentiment
by Craig Dismuke, Dudley Carter
Coronavirus Update: The number of confirmed cases rose to 28,350 overnight including 3,796 new cases reported in mainland China. This is the second report from the N.H.C. in the past two weeks to show a drop in the number of new cases reported each day. The number of newly-reported deaths increased 73 to 563 total in mainland China, 565 worldwide. The case fatality rate has now dropped to 1.99%, the first time it has been below 2.00% in two weeks.
Productivity Improves but Remains Sluggish: Nonfarm productivity bounced back from its third-quarter contraction to gain 1.4% in the fourth quarter. The trailing four-quarter average is now up to 1.8% and has been slowly rising since 2016. However, productivity gains remain soft, particularly given the stimulus applied to this expansion, and a concern regarding the structural challenges for today’s economy. Unit labor costs rose 1.4% bringing its four-quarter average up to 2.4%. The labor cost in producing goods and services remains historically consistent with faster inflation than realized, as it has since mid-2014.
Initial Jobless Claims Drop but Continuing Claims Continue Rising: Initial jobless claims for the week ending February 1 dropped 15k to 202k, the lowest level since April and the third lowest number of new unemployment filings of the expansion. However, the number of repeat filers for insurance, continuing jobless claims, for the week ending January 25 rose 48k to 1.75 million and have trended higher since last April. This reflects a growing backlog of unemployed persons unable to transition to jobs and, therefore, a potentially slower rate of job growth.
Friday’s BLS Report: Going into tomorrow’s labor reports for the month of January, the indicators are generally positive that the economy saw another month of solid hiring. (See Chart of the Day)
Stocks Recoiled to Records Despite Continued Coronavirus Uncertainty: Investors continued to sanguinely brush aside fears of negative economic effects from the coronavirus, pushing the S&P 500 to a new all-time record and pressuring Treasury yields higher for a third session. The number of identified cases and deaths tied to the virus has continued to grow and many cities in China remain shuttered. In addition to activity shutting down in many cities in China, the country continues to be cut-off from the rest of the world as other nations attempt to keep the virus from spreading any further. Notwithstanding those worries, stocks have rallied sharply this week, the most recent leg higher attributed to a couple of early successes in lab tests to treat the virus.
Treasury Yields Moved Higher for a Third Day: The S&P 500 split the Dow (1.7%) and Nasdaq (+0.4%) with a 1.1% gain, completely unwinding declines over the last two weeks that unfolded after news of the initial outbreak. Energy companies led 10 of 11 S&P 500 sectors higher as crude prices finally joined in on the market recovery. U.S. WTI jumped 3.1% to break out of a bear market. The S&P 500 and Nasdaq both closed at new records highs. With equities strengthening again, Treasury yields pushed up in steepening fashion. The 2-year yield ended 3.4 bps higher at 1.44% while the 10-year yield added 5.2 bps to close at 1.65%. Adding to the upward pressure, a key economic survey showed the U.S. services sector strengthened more than expected to start 2020 (more below).
Stocks Keep Rising: The “sell” buttons on equity trading machines appear to be out of order this week as global indexes around the world improved for a fourth day. Reports of progress towards a possible treatment for the coronavirus lifted spirits yesterday, even as daily updates from China showed the illness continued to spread. Thursday’s extension of this week’s upside move was driven by an announcement from China that it was partially rolling back the tariffs it placed on $75B of U.S. goods on September 1 prior to the phase one trade deal. The statement from China’s Ministry of Finance said that “in order to promote the healthy and stable development” of U.S.-China trade relations, tariff rates of 10% and 5% will be lowered to 5% and 2.5%, respectively, midday on February 14.
Other Markets Show Less Gusto: Stocks in China jumped 1.9% and have now recovered two-thirds of Monday’s 7.9% decline. The rest of Asia saw similar or stronger gains while European markets rose 0.4%. Around 7 a.m. CT, U.S. futures were also up 0.4% and pointing to new records for the S&P 500 and Nasdaq. Despite continued strength in global equities, other markets were less enthused. Treasury yields took a step back after rocketing higher this week. Oil steadied and gold strengthened. The 2-year Treasury yield was 1.4 bps lower before this morning’s U.S. economic reports and the 10-year yield had edged back 1.6 bps. Already released this morning, and partially responsible for the lower yields, Germany’s factory orders in December fell 2.1% unexpectedly, the sharpest decline since February.
Services Survey Adds to Manufacturing Optimism: Adding to optimism created by the better-than-expected manufacturing survey released earlier in the week, the ISM’s Non-manufacturing index also rose more than expected to start the year. The headline PMI rose 0.6 points to a five-month high of 55.5 in January, adding another leg up in the trendline since the index bottomed at 53.5 last September. As was the case with the manufacturing report, current production contributed the most to the headline gain while a smaller positive change in new orders had a more modest impact. Disappointingly, the employment index cooled, holding above the most recent low from September but remaining at one of its weaker levels since early 2017. Away from the components that drive the headline, every other indicator, except for imports, softened from December. The tone in most survey data have continued to strengthen but hasn’t yet translated into firmer trends in actual business spending indicators.