The Market Today
China Toys with Key Rates; U.S. Gives Huawei 90-Day Extension
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Geopolitics and Jackson Hole to Dominate Quiet U.S. Calendar: This week’s economic calendar is relatively quiet with just a few reports later in the week. July’s existing home sales data is scheduled for Wednesday while the new home sales report is slated for Friday. The August Markit PMIs will be released on Thursday and focus will be on the services PMI and any evidence that the consumer and/or service sector are slowing. Thus far, the consumer has remained resilient, buoying the broader economy through the recent uncertainty. Even in the absence of scheduled economic reports, any news on the plethora of global uncertainties could move markets this week.
Most intriguingly this week, the Kansas City Fed will host its Jackson Hole Symposium on Thursday and Friday. This annual meeting has been a forum Fed officials have used in previous years to signal the markets. Some analysts have speculated that the Fed needs to cut intra-meeting and have theorized that the Jackson Hole meeting would give them a good opportunity to do so. However, Fed officials have used the meeting to signal intentions, but have shown a preference for not conducting monetary policy actions from Jackson Hole. As such, we expect Friday’s news to be a dovish speech from Chair Powell on Friday (9 a.m. CT) justifying a monetary policy response to an uncertain global outlook amidst below-target inflation. It does appear that the Fed will need to cut by, at least, the September 18 meeting, perhaps cutting 50 basis points. Whether they begin this cutting process in Jackson Hole or in Washington DC is mostly irrelevant. The more essential issue is that they, in fact, ease policy.
Overnight – Markets Off to a More Upbeat Start After Last Week’s Inversion Spurred Fears of Recession: Risk markets appear reenergized Monday and bond yields have recovered higher on hopes the fears of a recession may force non-monetary policymakers in key global economies to take preventive action. Chinese stocks led all global gains following reports the PBOC was reforming how a key interest rate is set in hopes to stimulate economic activity amid the ongoing slowdown. The CSI 300 rose 2.2% overnight as investors hope the reforms to the Loan Prime Rate will enhance the transmission mechanism for PBOC policy into the real borrowing rates for Chinese companies. Signals from the fiscally-conservative Germany government that it could loosen the purse strings to contain a slowdown boosted Germany’s DAX 1.7%. Germany’s finance minister said “the last crisis cost us 50 billion euros, according to my estimates. We have to be able to muster that and we can muster that” to counter any future recession “with full force.” Data last week showed Germany’s economy contracted in the second quarter and Germany’s Bundesbank said Monday “Overall economic performance could again decline slightly.” Germany yields popped higher last Friday on a suggestion of looser fiscal policy and rose another 3.2 bps overnight, the first back-to-back daily increases in five weeks. Treasury yields were swept up in the consensus move higher, with the 2-year yield up 3.6 bps to 1.51% and the 10-year yield 4.9 bps higher to 1.60%. Just after 7 a.m. CT, U.S. equity futures were stronger by 1.1%. Also grabbing a headline within the last hour, Commerce Secretary Ross said the U.S. was granting China’s Huawei a 90-day extension to transact business with some U.S. companies. In a conversation with the press on Sunday, President Trump indicated that an extension may or may not be granted.
ICYMI – August 16, 2019 Weekly Market Recap: Recession warnings were plastered across market media starting Wednesday after the 10-year Treasury yield fell below the 2-year yield for the first time since 2007, knocking 2.9% off the S&P 500 in its second worst day of the year. The curve inversion occurred ahead of U.S. trading after data showed Chinese industrial output at its weakest pace in 17 years and a second-quarter contraction of economic activity in Germany. The resultant worries about global growth reversed optimism created Tuesday by an announcement that tariffs on certain Chinese goods would be delayed from September 1 to December 15, while some other products would be removed from the proposed list altogether. Those events occurred against a backdrop already made shaky by concerns about Hong Kong and Argentina that knocked 10 bps off the 10-year yield on Monday alone. The weekly downtrend in yields continued Thursday after China said it would be forced to retaliate to the U.S. tariffs and an ECB official told the WSJ he expected “significant and impactful” stimulus measures to be announced next month. In response to his pledge for policy support, the 10-year Treasury yield tracked tumbling European yields lower, touching a three-year low of 1.4732% midday Thursday. Those events overshadowed a U.S. economic calendar that was relatively stable, included a stellar retail sales, but was capped by a concerning consumer confidence report. For the week, the S&P 500 finished down 1%, the 10-year yield dropped 17.9 bps, and the spread between it and the 2-year yield ended at 7.9 bps. Click here to view the full recap.