The Market Today

Inversion Deepens As Bond Market Remains Wary Amid Clamoring Confusion About A Phone Call


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Slower Price Appreciation Expected To Have Continued In June: At 8 a.m. CT, the S&P CoreLogic home price report is expected to YoY price gains slowed from 2.39% to 2.30% across 20 major metro areas, and from 3.43% to 3.30% nationally. Both annual rates of gain would be the weakest since 2012.

Richmond Fed Manufacturing And An Update On Consumer Confidence: Tuesday’s final two reports will be released at 9 a.m. CT. The Richmond Fed’s manufacturing index is expected to recover from its second-weakest reading of the expansion, but point to a second month of contraction for August. The Conference Board’s August update for consumer confidence is expected to show a 6.7-point drop to 129, a still-strong level for the cycle. The cyclical high for the index is 137.9, hit in October of last year, and the average for all of 2018 was 130.1.

 

YESTERDAY’S TRADING ACTIVITY

Fervently Fluid Trade Situation Takes Markets For A Ride: Stocks rose more than 1% Monday after an eventful weekend for trade headlines caused wild swings in global markets Monday. The fluid trade situation between the U.S. and China sent Treasury yields on equally as interesting of a ride, with most maturities trading within a double-digit daily range. Trade tensions spiraled last Friday after China announced new tariffs on $75B of U.S. goods, and the U.S. responded by saying it would raise the current (25%) and planned (10%) tariffs rate by 5%. Stock futures had weakened overnight amid a broad sell-off in Asia as China urged the U.S. not to “misjudge the situation” or “bear all the consequences,” and the White House said the president regretted not raising tariffs even higher.

Markets Forgive, But Will They Forget: Sentiment swung back up, however, after China’s Vice Premier called for “calm” negotiations and President Trump said China had rang top U.S. officials and were ready to talk. All 11 sectors of the S&P 500 closed up with tech companies topping all gains. After tumbling during the Asian session, the Treasury curve recovered to end little changed. The 2-year yield moved within an 11.3-bps daily range Monday, ultimately adding 0.6 bps to close at 1.55%. Since the Fed cut rates on July 31, and as trade tensions have seemed to unravel, the 2-year yield has averaged a 9.9-bps daily trading range, the most volatile 19-day period since 2009 (see Chart of the Day below). The 10-year yield moved within a 10.6-bps intraday range, but finished flat at Friday’s close of 1.54%. Over the same 19-day stretch, the 10-year yield has averaged a 10.6-bps daily range, the most volatile since 2015.

 

OVERNIGHT TRADING ACTIVITY

Bond Market Remains Less Sanguine: Despite a stable bid for global equities Tuesday, Treasury yields ticked lower and the curve between the 2-year and 10-year yields edged down into its deepest inversion since 2007. While the news flow has slowed overnight, a flood of trade-related headlines over the last several days has dented risk valuations and pushed investors into the safety of sovereign bonds. Equities recovered Monday on hopes of cooler tensions, but the bond market was less impressed by conflicting messages about whether China and the U.S. would return to the negotiating table.

Called Me Maybe?: President Trump’s statement that China had phoned top U.S. trade officials to restart trade talks was disputed by China’s Foreign Ministry on Monday. The confusion continued Tuesday, as the Ministry’s spokesman again said he was unaware of any such phone calls having taken place. While the new tariffs have been the main event in the recent escalation, China’s yuan has continued to weaken in the background. The onshore yuan weakened to 7.16 per Dollar overnight, its weakest level since February 2018.

Markets Hold Amid Uncertainty: Around 7 a.m. CT, U.S. equity futures were higher by around 0.1% after a mostly upbeat day of gains globally, led by more-than-1.3% gains for China’s major indices. Global sovereign yields were lower and flatter, led by drops in Italian yields. Italy’s 10-year yield fell 10.5 bps overnight to 1.21%, a new low since 2016, as talks are ongoing between two parties attempting to form a new coalition and avoid general elections. The 2-year Treasury yield was down 1.1 bps to 1.53% and the 10-year yield had dipped 2.5 bps to 1.51%.

 

NOTEWORTHY NEWS

Dallas Fed’s Manufacturing Index Perked Up, But Still Paled in Comparison To 2018: Despite the renewed uncertainty in recent weeks caused by a deteriorating trade outlook, the Dallas Fed’s manufacturing index recovered more than expected in August. The index turned positive for the first time in four months and registered its best reading since March. Indices tracking activity, new orders, shipments, and wages all improved, while those gauging employment, hours worked, and capital spending all slowed. The current month’s recovery was a positive sign for stability, but at 2.7 the headline index remains well below last year’s average of 25.8. Still, the details that correlate with the ISM index were firmer on balance.

 

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