The Market Today

China Will Talk Before Retaliating; Italian Government Makes Progress; Mnuchin Talks Ultra-Long Bond Issuance


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Blowout Quarter for Consumer Keeps 2Q GDP Tally at 2.0% in First Revision: GDP growth in 2Q was revised down from 2.1% to 2.0% in the report’s first revision.  Personal consumption was revised up from an already strong +4.3% to +4.7%, the second-strongest quarter for the consumer of this entire economic cycle.  This was, by far, the biggest revision to the 2Q data with the remainder of the revisions being weaker, but only fractionally so. Looking ahead at 3Q, inventory accumulation was revised down $2.7 billion and the trade deficit was marked $3.8 billion higher which will make the bars less-high for the 3Q report. Finally, the core PCE price deflator was notched down from 1.8% to 1.7%, yet another sign of below-target consumer inflation.

Trade Deficit and Inventories Positive for 3Q GDP: The advanced goods trade balance showed the deficit shrunk more than expected once again in July, down from $74.2 to $72.3 billion.  Retail inventories handily beat expectations, rising 0.8% in July, while wholesale inventories rose 0.2% for the month.  The smaller-than-expected trade deficit mixed with the better-than-expected increase in inventories bodes slightly better for 3Q GDP’s tally.  It is worth noting, it is only one month of data and prone to revisions.

New Jobless Claims Show No Sign of Softening Labor Market: Initial jobless claims for the week ending August 24 rose from 211k to 215k. After temporary spikes in May and June, initial jobless claims have settled back into the 210k to 220k range.


OVERNIGHT TRADING ACTIVITY

Mixed Eurozone Data Highlights Still-Soft Inflation: In data from the Eurozone, France’s 2Q GDP was revised up from 0.2% to 0.3% and their July consumer spending data rebounded.  Industrial orders in Italy disappointed, falling 0.9% MoM.  August’s economic confidence indicator from the European Commission beat expectations rising from 102.7 to 103.1, but remained in a strong down-trending channel.  Inflation data were softer as Spain’s CPI fell from 0.6% YoY to 0.4%, Belgium’s fell from 1.42% to 1.26%, and Germany’s fell from 1.1% to 1.0% (exp. 1.2%).

Chinese Spokesperson Indicates Willingness to Be Patient in Responding to New Tariffs: More importantly to overnight trading, Chinese Ministry of Commerce spokesperson Gao Feng said China would wait to respond to last week’s tariff increase in hopes of détente.  He said, “China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war. … China is lodging solemn representations with the U.S. on the matter.”  The news lifted investor spirits reversing Eurozone stocks to +1.4%.

Italian Equities Lead the Way As Government Coalition Progressing: Italian stocks have led the way overnight after investors expressed their pleasure to the news that President Mattarella had given Conte a mandate to form a new coalition government between the Five Star Movement and the Democratic Party.  That lead to a strong Italian bond auction, helping keep the Italian 10-year yield below 1.00%.

Treasury Yields Inch Higher and U.S. Stock Futures Jump 1.0%: U.S. futures are up 1.0% pointing to the Dow opening up 274 points on the positive sentiment. Moreover, Treasury yields have moved 2-3 bps higher from yesterday’s close across the curve.  The 10-year yield is up to 1.50% while the 2-year yield is up to 1.53% with the 2y10y inversion holding at 3.0 bps.


YESTERDAY’S TRADING ACTIVITY

U.S. Equities Recovered As Treasury Curve Steepened On Prospects Of Ultra-Long Bond: The major U.S. equity averages shook off some early nerves Wednesday, turning positive quickly after the open and pressing higher to notch solid gains near their best levels of the day. The Treasury curve felt the upward pressure from firmer equities, as well as late-day headlines about Treasury’s consideration of an ultra-long bond issue. Those factors combined to offset the downward pull from Europe and a solid auction of 5-year Treasury notes.

Stocks Rose As Energy Led Broad-Based Gains: In the absence of any negative noise on the trade front, the S&P 500 rose 0.7% as 82% of underlying companies closed up on the day. Energy companies led the way with crude prices rising for a second day following a bullish inventory report. The EIA reported a 10MM barrel drop in U.S. crude inventories, a 2.1MM barrel decline in gasoline stocks, and stronger demand indications that offset an uptick in production. Firmer equities, however, were just one factor affecting Treasury yields on Wednesday.

Treasury Curve Steepened In Response To A Host Of Factors: U.S. yields had been pressured lower overnight by falling yields across Europe, as hard-Brexit fears dragged down the U.K. curve and hopes for political stability pulled Italian yields to all-time lows. An auction of 5-year Treasurys stopped through and reflected solid demand, briefly breaking the intraday uptrend in yields. However, the curve closed mixed after a flurry of action in the final minutes forced longer yields back up near their highs of the day. Treasury Secretary Mnuchin said in a Bloomberg interview that an ultra-long bond “was under very serious consideration.” The 2-year yield dropped 1.0 bp to 1.50% while the 10-year yield settled up 0.8 bps at 1.48%. The 10-year yield was trading at 1.45% just minutes before the close.


NOTEWORTHY NEWS

Barkin “Monitoring” Impact of July’s “Mid-Cycle” Cut: Richmond Fed President Barkin said a strong U.S. economy faces risks from abroad, a dynamic that warranted the Fed’s “insurance” cut roughly a month ago. Barkin, who doesn’t rotate onto the voting committee until 2021, said “If you look at the data, the national economy appears great. Unemployment is at 50-year lows, GDP growth is solid and consumers…are spending.” “International economies are weaker, though,” he added, “and uncertainty – particularly around trade – is elevated. Business investment dropped in the second quarter.” Considering “that context, and with the risk of inflation muted, the FOMC decided…to make a mid-cycle reduction in interest rates” to provide “a little insurance” to the economy, and “we are monitoring [the rate cut’s] impact.”


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