The Market Today
Government Stimulus Talk Boosts Equities Globally
by Craig Dismuke, Dudley Carter
Quiet Calendar Ahead of Jackson Hole: There are no economic reports on today’s economic calendar. Two Fed officials will speak today, San Francisco Bank President Daly and Vice Chair Quarles. Daly speaks as part of an online session while Quarles will discuss community development.
Yesterday – Stimulus Hopes Spur Stocks and Yields Higher: Ninety-three percent of U.S. companies within the S&P 500 closed higher Monday as global risk assets responded positively to signs policymakers in key world economies are willing to support activity in the face of worries of a global recession. China’s central bank announced over the weekend that it was reforming the way Chinese banks should determine borrowing rates for their best customers, which would presumably filter out across the credit spectrum. The change in how the Loan Prime Rate is determined is also intended to improve the transmission of policy changes into market rates. Chinese stocks were top performers Monday, rallying more than 2% ahead of U.S. trading. In Germany, the 10-year bund yield rose 3.7 bps on reports the government was preparing stimulus measures after the economy contracted in the second quarter and the Bundesbank said it expects the slowing could continue. Those developments, combined with an early-morning announcement from the U.S. Commerce Department that it was extending Huawei’s temporary license for buying U.S. goods, kept the positive momentum going during U.S. trading. The S&P 500 gained 1.2% while the 2-year Treasury yield rose 6.9 bps to 1.55%. The 10-year yield added 5.2 bps to 1.61%. Yields had leveled off around lunch, but restarted their climb after President Rosengren from the Boston Fed, one of two officials who dissented to the rate cut in July, noted, “I’m not saying there are not circumstances in which I’d be willing to ease. I just want to see evidence we are going into something that is more a slowdown.’’ His comments followed a tweet from President Trump earlier in the day that the Fed’s “horrendous lack of vision” was holding back a “very strong” U.S. economy, adding in a call for them to cut rates by “at least 100 basis points.” Likely to the chagrin of the president, the Dollar tracked yields higher and closed just below its strongest level since May 2017.
Overnight – Markets Give Back a Portion of Monday’s Improvement: U.S. assets unwound a portion of Monday’s moves overnight, with U.S. equity futures dipping into negative territory around 6:30 a.m. CT and Treasury yields sliding back in a synchronized global move in core sovereign bonds. The absence of meaningful headlines overnight left investors stuck between weekend reports of global stimulus and key Fed developments on Wednesday (Fed Minutes) and Friday (Jackson Hole Symposium). China’s Loan Prime Rate fell 0.06% to 4.25% in its first release under the newly-reformed calculation method. Reflecting areas of angst in Europe, Italian yields were higher despite declines elsewhere on the continent and the British pound weakened. Italian Prime Minister Conte will go before parliament today, an appearance that could be the formal finish of the current coalition government and a possible step towards new elections. Britain’s pound weakened as back and forth between the PM Johnson and EU officials highlighted the uncertainty that remains as the UK walks toward the October 31 Brexit deadline. The toughest battle in the Brexit saga continues to be around how the border between Ireland and Northern Ireland should be addressed after the breakup. Although it has had little impact on the markets thus far, the Washington Post reported Monday that the White House was looking at various ways it could give the U.S. economy a boost to stave off a slowdown, potentially through a reduction in the payroll tax. Just before 7 a.m. CT, the 2-year Treasury yield was 2.1 bps lower at 1.53% and the 10-year yield had pulled back 3.2 bps to 1.57%.