The Market Today
Equity Stall Continues and Yields Move Lower as Trade Tensions Remain in Focus
by Craig Dismuke, Dudley Carter
Mortgage Applications Rose for the First Time in Five Weeks: A quiet economic calendar today will leave the markets squarely focused on the fluid headlines related to renewed concerns about U.S.-China trade. In the lone economic report, mortgage applications rose 2.7% last week, breaking a four-week stretch of weakness that persisted throughout the month of April. The report had positive implications for home buying activity as a 4.2% gain for purchases was responsible for the lion’s share of the weekly gain, and nudged the purchase index back near its best levels of the cycle. Refinancing activity picked up by a more modest 0.8%, the first weekly gain since March. The MBA’s 30-year mortgage rate ticked lower by 0.01% to 4.41%, just 0.05% above its lowest level since early 2018 and far from the 5.17% peak back in November. Lower rates are expected to combine with slower price gains to keep housing activity stable in the months ahead.
Also this morning, Fed Governor Brainard made brief remarks at the start of a “Fed Listens” event in Richmond, one of the town halls aimed at giving the public an opportunity to weigh in on the Fed’s years-long review of its policy framework aimed at ensuring it’s using the best policy options available to consistently meet its dual mandate. Brainard mentioned average inflation targeting and yield-curve targeting as potential policy tools that could be explored and might be helpful in the “new normal” economic environment in which “it seems likely that equilibrium interest rates will remain low in the future” and “inflation doesn’t move as much with economic activity and employment as it has in the past.” However, she also noted that, “Of course, we may find that the preferred approach is modest enhancements to the tools that proved their worth during the crisis.”
Yesterday – No Repeat Comeback for U.S. Equities As Trade Concerns Proved to Heavy: There was no Monday-like turnaround story for equities in Tuesday’s trading with the Dow sinking 1.8% and the S&P 500 stumbling 1.7% amid the re-escalation of trade tensions between the U.S. and China. U.S. equities sank Monday after President Trump threatened Sunday to increase the tariff rate and the amount of goods those tariffs affect, but staged a slow and steady recovered that cut the ultimate losses to just a fraction of what they were. However, a couple of headlines after equities closed Monday (but before Treasurys quit trading) led to lingering uncertainty Tuesday that increasingly weighed on the indices on Tuesday. While tech companies were the worst performers, trade-sensitive industrials and materials stocks closed near the bottom of the indices for a second day. Treasury yields, having already spiked lower Monday late in the session, posted modest declines relative to the weakness for equities. The 2-year yield dropped 0.6 bps to 2.28% while the 10-year yield settled 1.3 bps lower at 2.46%.
Overnight – Trade’s Dominance of Weekly Market Headlines Continues Wednesday: Investors have remained cautious overnight in response to the renewed uncertainty around the state of the U.S.-China trade negotiations. A report from Reuters overnight said China had made “systematic edits to a nearly 150-page draft trade agreement” that had “deleted its commitments” to address intellectual property theft and forced technology transfers. Equities have continued to stall amid the concerns, which were also reflected in increased demand for Treasurys that has pressured yields lower and a firmer tone in safer assets such as the Japanese Yen. The strengthening currency drove the 1.5% decline in the export-focused Japanese stock indices while China’s CSI fell a slightly smaller 1.4%, extending this week’s loss to 6.3%. Data overnight showed an unexpected decline in China’s April exports but an unexpected pick-up in import activity. In Europe, German industrial production was better than expected but yields were down for a fourth consecutive session. The German 10-year yield slipped 1.6 bps to -0.05%, its lowest level since March. Yields in the U.K. were leading all global declines and the British Pound was Wednesday’s worst performing currency. The conservative government has restarted talks with the opposition Labour party in an attempt to reach a Brexit compromise, but there have yet to be signs of progress. Around 7:45 a.m. CT, the 10-year Treasury yield was 2.7 bps lower at 2.43% and S&P 500 futures were lower by 0.5%.
Job Openings Jump 346k in March: Job openings jumped more than expected in March, rising 346k from 7.14 million to 7.49 million. March saw the fourth best month for openings of the cycle while the number of unemployed persons fell to 6.21 million. The ratio of unemployed persons to job openings has now dropped to 0.83, and is poised to potentially drop to a cycle-low in April (based on the already-released April unemployment report). Jobs quits fell 38k in March but layoffs fell a more-convincing 84k. Compared to the 2007 economic peak, the labor market continues to be much tighter today although wage pressure remains modest (see Chart of the Day).
Consumer Credit Slowed in March: Consumer credit expanded a smaller-than-expected $10.281B in March as consumers’ aggregate credit card borrowings declined for a second time in the last four months. Total credit grew at a 3.1% annualized rate, the weakest pace in nine months, as a second month of 5% growth in non-revolving borrowings offset a 2.5% annualized decline in the revolving categories, primarily made up of credit card balances. Retail sales and personal spending were both strong in March but Tuesday’s credit data showed it wasn’t fueled by an increase in credit. The BEA reported a couple of weeks ago that the jump in personal spending had pushed the savings rate to a four-month low of 6.5%.