The Market Today

TODAY’S TRADING

Trade Negotiations and Inflation Front and Center in an Otherwise Quiet Week: This week’s economic calendar is very quiet.  March job openings will be reported on Tuesday, producer price inflation and the March trade balance on Thursday, and consumer price inflation on Friday.  The CPI inflation report will be the most important to investors given the focal point inflation has once again become for Fed policy.  Whether the next policy change is a hike or a cut will likely depend on the direction of inflation over the next six to twelve months.  Also important this week will be trade negotiations between U.S. and Chinese officials, particularly given the escalation in rhetoric over the weekend (more below). 

TRADING ACTIVITY

Overnight – President’s Tariff Tweet Send Global Risk Markets Sliding: Global markets opened for the Asian session in full risk-off mode after trade tensions between the U.S. and China flared unexpectedly over the weekend. President Trump tweeted Sunday afternoon that the U.S. will raise the current 10% tariff rate on $200B of Chinese goods to 25% this Friday due to dissatisfaction with the pace of progress. “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate,” the President tweeted, adding, “325 Billions Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%.” The news unwound weeks of optimism that had been built on positive comments from both sides that significant progress had been made, with a deal potentially in reach as early as this week. Adding to the concerns, multiple news outlets subsequently reported that the team of top Chinese officials scheduled to travel to Washington this week to continue negotiations might delay their trip due to the President’s tweets. China’s CSI 300 plunged 5.8% and the yuan sank to a more than two-month low. The rest of Asia was dragged lower and Europe’s Stoxx 600 tumbled 1.4%. U.S. equity futures fell immediately at the Asian open with Nasdaq contracts earlier down almost 2% and the S&P 500 weaker by 1.6%. Treasury yields were down between 4 bps and 5 bps, leaving maturities seven years and shorter yielding less than the effective Fed Funds rate of 2.41%. The 10-year yield was down 4.1 bps to 2.48%.

NOTEWORTHY NEWS

ICYMI – May 3, 2019 Weekly Market Recap: After the busiest economic week in recent memory, stocks ended mixed but mostly unchanged and Treasury yields posted modest increases of less than 4 bps. The data last week covered every aspect of the U.S. economy. The message on the consumer remained positive. Personal spending surged 0.9% in March, the Conference Board’s Consumer Confidence Index beat estimates in April, and job growth of 263k in April beat expectations by 73k. However, a new 49-year low for the unemployment rate was set entirely on a drop in participation and a couple of measures of wage growth (ECI and AHE) remained moderate. The outlook for business spending was mixed. Both ISM reports disappointed expectations but already-strong capital goods orders in March were revised up modestly. The housing reports showed pending home sales rose more than expected and home price gains continued to cool. And importantly, the Fed’s preferred inflation measure slowed to 1.55% in March, its lowest since September 2017 and the major focus of Wednesday’s Fed decision. The Statement highlighted inflation had declined but Powell said he “suspect[s] that some transitory factors may be” holding it down. Combined with several Fedspeakers, the Committee appears comfortable with current policy and the plan for patience. Click here to view the full recap.