The Market Today
Chinese Exports Slip; Markets Focused on Upcoming ECB and FOMC Decisions
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Inflation, ECB, Retail Sales Unlikely to Alter Fed View: This week’s calendar will bring three reports of primary importance: Thursday’s CPI report, Thursday’s ECB policy decision, and Friday’s retail sales data. However, there is likely to be a high bar to convince Fed officials to waiver from what is likely to be a consensus view. After last week’s data showed a rebound in non-manufacturing activity, a perception of a tightening labor market, and a resumption of trade talks; it is likely that Fed sentiment will coalesce around just a 25 basis point cut. Granted, there remains the possibility that they attempt to get ahead of market expectations by cutting 50 basis points, but their recent commentary gives the appearance of a fringe view.
OVERNIGHT TRADING ACTIVITY
Chinese Exports Slip Amid Ongoing Trade War: Global stocks were generally stronger Monday and rising European yields had pushed Treasury yields up after Friday’s post-payrolls decline. The apparent optimism unfolded despite a weaker-than-expected export reading from China, reflecting fears the trade war’s negative economic effects remain well entrenched. Chinese exports were expected to have risen 2.2% in August, but declined 1.0% instead. Exports from China to the U.S. slipped for a second month and were 16% lower than a year ago. China cut the reserve ratio for its country’s banks last Friday and announced its top trade officials would travel to Washington for negotiations early next month (more below).
German Exports Rise In Rare Positive Report: The news out of Europe was more encouraging, as exports from the ailing German economy rose unexpectedly in July. Although dated by the August escalation of trade tensions, the report was a piece of good news for Europe’s largest economy. German yields were higher following the report, adding to upward pressure in the region from solid U.K. data and continued speculation about this week’s ECB discussion. A host of economic reports from the U.K. were better than expected, helping offset continued chaos around Brexit. Parliament is expected to vote down general elections for a second time prior to being suspended by PM Johnson at the close of business.
ECB To Cut, But Will They Do More: Equally important to the outlook for Europe’s economy and markets will be the ECB’s decision on Thursday morning. While the central bank is expected to cut its -0.40% deposit rate deeper into negative territory, there is still debate about the likelihood of a more comprehensive stimulus package. The updraft in yields overnight has partially been blamed on speculation the ECB could disappoint insatiable market expectations. Just after 7:30 a.m. CT, Treasury yields had racked European yields higher, by 2.0 bps on the 2-year note and 3.6 bps on the 10-year note.
ICYMI – September 6, 2019 Weekly Market Recap: Last week was short on trading days, but long on developments that provided an important update on the economic outlook. The week kicked off with new tariffs between the U.S. and China and worries about a general election in the U.K. However, as the week rolled on there were positive developments on both fronts. The U.K. parliament voted to block a no-deal Brexit and shot down PM Johnson’s hopes of general election. On Thursday, it was announced that the U.S. and China would meet in early October to discuss trade. Additionally, tensions in Hong Kong cooled after the government pulled the extradition bill responsible for sparking months of violent protest. Against a calmer geopolitical backdrop, the U.S. economic data was mixed and reinforced the divergence between the manufacturing and services sectors. The ISM’s manufacturing PMI contracted unexpectedly while the services index jumped more-than-estimated, resulting in the fourth widest divergence between the two indicators of the cycle. Friday’s mixed jobs report showed job growth slowed more than expected while a measure of wage momentum hit a cycle-high. The week ended with a speech from Fed Chair Powell that kept a 0.25% September rate cut the most likely outcome. The net effect of the news flow left U.S. stocks and yields higher on the week. Click here to view the full recap.