The Market Today

TODAY’S CALENDAR

Producer Prices Softer-Than-Expected Portending Continued Disinflation Concerns: With the exceptions of higher energy and construction prices, producer prices were softer than expected in July with headline PPI rising 0.2% but core (excluding food and energy) falling 0.1%.  This brought the year-over-year rates to 1.7% (unchanged from June) and 2.1% (down from 2.3% in June), respectively. Energy prices rose 2.3% MoM while construction costs increased 0.6%.  Construction costs are now up 5.5% YoY, one of the few areas of rapidly rising production costs (see Chart of the Day).  More broadly, there continues to be no evidence of any meaningful inflation pressure coming from the production pipeline as the stronger Dollar and weaker global economy appear to be offsetting the impact of increasing inefficiencies in global trade.

TRADING ACTIVITY

Yesterday – Stocks Rallied Sharply on China Reprieve While Treasury Curve Flattened to New Cycle Low: Equity markets found reasons to rally Thursday after the PBOC stabilized the yuan, albeit just beyond a key psychological level, and China’s trade data showed an unexpected uptick in July exports. After a solid day across Asia, Europe’s Stoxx 600 added to overnight gains as U.S. equities climbed sharply from the open. The European index rose 1.7% in its strongest performance since mid-June, notably cutting into its decline since the trade situation began deteriorating late last week. After its strong opening jump, the S&P 500 climbed steadily throughout the morning and closed just below its highest tick of the day. All 11 sectors gained more than 1%, helping the broader index close up 1.9%, its best day in over two months. After three days of recovering, the index is back within 3% of its all-time high. While equities held their early momentum, Treasury yields peaked at lunch and turned lower into the close. Yields popped higher with bund yields around 8 a.m. CT on a report that Germany was considering expansionary fiscal policy to fund a climate change package, and added to gains as stocks rose throughout the morning. However, the move up reversed as a tailing auction of 30-year still reflected solid demand, and continued lower as bund futures rallied on concerns surrounding Italian politics. Matteo Salvini, Italy’s Deputy Premier, said the current coalition was no longer effective and called for “swift” elections. The 10-year yield ended 1.7 bps lower at 1.72% after climbing as high as 1.79% earlier in the day. Combined with the 2-year yield’s 1.2 bp rise, the spread between the two closed at a new cycle-low of 9.4 bps.

Overnight – Optimism Evaporates as Global Concerns Retake the Headlines: Investors have reconsidered yesterday’s optimism as global uncertainty related to growth, trade, and politics crept back into the headlines on Friday. Excepting modest gains across several smaller Asian markets, global equities are notably weaker and have kept Treasury yields and other core sovereign curves locked in at lower levels. While Japan’s Nikkei rose 0.4%, China’s CSI 300 slipped 1.0% and has now declined in five of the six sessions since the U.S. announced plans for new tariffs. Preliminary estimates overnight showed the Japanese economy grew at an annualized rate of 1.8% in 2Q, easily clearing expectations for 0.5% growth. The focus in China, however, remained on trade tensions. After the U.S. decided to pause its plans to give U.S. companies licenses to transact with China’s Huawei, a response to China cutting off U.S. agricultural product purchases, the PBOC set the yuan weaker for a seventh day in a row. Reacting to the weaker currency fix, the onshore currency slipped to 7.059, just firmer than its weakest level in a decade. A surge in Italian yields stood out while UK gilt yields dropped the most among the majors. Yesterday’s news that Italy’s governing coalition was breaking up unnerved investors, sending its 10-year yield up 25 bps Friday and the FTSE MIB to a day’s-worst 2.4% stumble. A first look at 2Q growth showed the UK’s economy shrank 0.2%, contracting for the first time since 2012 under the weight of global trade tensions and elevated Brexit uncertainty. The British pound fell to its weakest level against the Euro since 2009. S&P 500 futures were 0.7% lower at 7:15 a.m. CT and the Treasury curve dipped on softer producer price inflation. The 10-year yield fell 1.7 bps to 1.70%, which would represent the lowest close since 2016.