The Market Today
Largest Monthly Bilateral Trade Deficits on Record with China and EU
by Craig Dismuke, Dudley Carter
Monthly Trade Deficits with China and EU Jump to Largest on Record in July: The trade deficit saw its largest monthly jump in 40 months in July, increasing $4.34 billion on a pullback in goods exports. Imports continued to climb, up $2.22 billion MoM, while exports fell $2.12 billion. The decline in exports was driven by a significant $1.57 billion drop in civilian aircraft, a volatile category that often skews the final results. Looking at the details by trading partners, the largest increase in the trade deficit came from trade with China with the bilateral deficit up $3.35 billion in July to $36.83 billion, the largest monthly trade deficit with China on record. The bilateral deficit with the European Union increased a massive $5.87 billion to its largest deficit on record. Given the sharp drop in aircraft skewing the data, we will wait until the August data to pass judgement on the initial results of the ongoing trade battles. For now, the increase in the trade deficit points to a 58% increase the trade deficit in 3Q (after one month of data) which would more than offset the positive boost from 2Q.
Mortgage applications for the week ending August 31 fell 0.1% on a 0.6% increase in purchase apps and a 1.4% decline in refi apps. On a 4w/4w moving average basis, purchase apps are now down 11.7% from their peak back in May. According to the report from the MBA, the 30-year mortgage rate rose from 4.78% to 4.80% during the reference week.
Fedspeak – Two Yield Curve Watchers / Doves on the Tape: St. Louis Fed Bank President Bullard and Minneapolis Bank President Kashkari are scheduled to speak today. Both have advocated for slowing rate hikes (if not ending them for the time being) and both have referenced concerns about the yield curve.
Yesterday – Treasury Yields Rose Despite a Day of Weakness for U.S. Equities: U.S. stocks sold off early and held in negative territory for the entirety of Tuesday’s trading session. After rising and falling a handful of times throughout the day and losing as much as 0.6%, the S&P 500 closed on an uptick to limit its Tuesday loss to just 0.2%. Utilities companies closed atop the S&P 500 while financials, likely helped by higher interest rates, finished in a close second. Energy companies closed lower after oil prices gave up overnight gains as the Dollar strengthened while telecommunication companies fell more than 1% on a downgrade of shares of Verizon. Despite the equity weakness, however, Treasury yields actually rose. Traders pointed to supply pressure from announcements of a large Dollar amount of investment-grade corporate issuances as a reason for yields’ early rise. The intraday chart also showed the stronger-than-expected ISM report (more below) added to the upward pressure. For the day, the 2-year Treasury yield rose 2.6 bps to 2.65% while the 10-year yield closed 3.8 bps higher at 2.90%. The 7-year and 30-year yields rose more than 4.0 bps.
Overnight – Recent Themes Keep Downward Pressure on Global Equities: Global equities weakened anew on Wednesday as trade talks between the U.S. and Canada get set to resume and a deadline that could lead to more U.S. tariffs on Chinese goods looms nearer on the horizon. China’s CSI 300 dropped nearly 2% overnight, a move that puts the index just 2.1% above its current bear-market bottom from early August. Losses were widespread across the rest of Asia and have moved over into Europe, where the Stoxx 600 was 0.6% lower. While every other national index was in negative territory, Italian stocks rallied more than 1% after the country’s generally hard-nosed deputy prime ministers took a more civil tone on upcoming budget negotiations with the EU. Italian sovereigns were also an outlier, with the 10-year yield rallying down 12.2 bps on the reports. Elsewhere in Europe, yields were higher despite the pressure on equities. Similar to yesterday in the U.S., a heavy dose of expected supply weighed on European prices. In addition to the worries about trade, investors are keeping an eye on emerging markets. South Africa’s rand was leading a modest overnight sell-off in emerging market currencies after data Tuesday showed the country’s economy fell into a recession in the second quarter for the first time since 2009. The MSCI Emerging Market Currency Index fell to a 16-month low on Tuesday, down more than 8% from an early April peak. In the U.S., equity futures tracked global shares lower with the Dow down the most at -0.4%. Treasury yields reversed some of yesterday’s rise with the 2-year yield 0.8 bps lower and the 10-year yield down 1.5 bps.
ISM Reinforces U.S. Economic Strength: The ISM’s August survey of U.S. manufacturing showed an unexpected rebound in activity to its highest level in more than 18 years. The headline PMI, which was expected to slip for a second month to a four-month low, rose instead to 61.3, its highest level since May 2004. The surprise 3.2-point improvement was the largest single-month gain since March 2010 and driven by gains in all five of the key underlying indicators. The new orders index jumped 4.9 points to match the third highest level of the cycle. Except for several reports from late 2017 that reflected the rebuilding effects of Hurricane Harvey, and to a lesser degree Hurricane Irma, production activity was the strongest since 2011. The employment index rose to its second strongest level of the year signaling continued gains for manufacturing payrolls. The time it took suppliers to make deliveries was the second slowest of the cycle, considered a byproduct of strong demand amid solid economic activity. The inventory index showed another month of solid improvement and is consistent with expectations that inventory growth will reflect a positive reversion in the 3Q GDP report. In the other details, prices paid slowed for a third month after a strong start to the year, indicating less inflation pressure. Likely tied to the trepidation around global trade, orders of both imports and exports slowed for a fifth time in the last six months. Overall the report showed U.S. manufacturing remained strong in August despite concerns about trade and in contrast to results in other major economies.
Kashkari Sees Several Possible Catalysts for a Slowdown: Ahead of his Wednesday evening appearance in Montana, Minneapolis Fed President Kashkari laid out several possible events that could be the catalyst for an economic slowdown in the U.S. Kashkari said, “It could be a spark in emerging markets like we’re seeing in Turkey, …that could potentially trigger a crisis of confidence, and could spill over globally into the U.S,” or maybe “something coming from the trade battles that are being taken right now.” Kashkari also showed concern that “It also could be done by us — it could be done by the Fed raising interest rates — when the economy can’t sustain it. …I’ve also been saying that we’re raising interest rates too aggressively.” Defending his position for less potent policy tightening, he noted “I don’t see any indication that we’re running above potential, so let’s let it keep running, and if we start to see signs that it’s overheating we can always raise rates then, …All these workers come off the sidelines saying, yeah, I want jobs, and this is in a modest wage growth environment. Imagine if wage growth actually picks up — maybe a lot more workers will come in off the sidelines, …In our practice, in what we actually do, we are much more worried about high inflation than we are low inflation. And I think that that is the scar from the 1970s.”
Housing Data Remained Weak in July’s Construction Spending Data: Construction spending rose a below-estimate 0.1% in July and there were offsetting revisions to activity in May and June. Total private construction slipped 0.1% as 1.0% drop in non-residential building offset a 0.6% gain in residential activity. The weakness in the non-residential categories was widespread while the strength in residential was concentrated in a 2.1% gain in home improvement spending. Spending on single family homes dropped 0.3% from June and is down in four of the last five months. Multi-family activity was weaker for a second month, down 0.4% from June. In the public sector, overall construction rose 0.7% on a 0.3% gain in residential activity and a 0.7% gain in the non-residential category.