The Market Today
Manufacturing Indices Drop in U.S. and China; Infrastructure Spending on the Table Again?
by Craig Dismuke, Dudley Carter
Question of the Day – Could Infrastructure Spending Be Included in a Tax Deal?: After a flurry of economic reports yesterday showing softness in manufacturing and construction, today’s calendar is decidedly less busy. The only economic data to be released will be April’s vehicle sales tally. Sales are expected to rebound from a disappointing March. Treasury Secretary Mnuchin remains at the Milken Institute Conference and may make comments on tax reform during the day. The question du jour for the politico is if Republicans (and President Trump) are open to including infrastructure spending in their tax reform package. Former director of the CBO and conservative economist Douglas Holtz Eakin said yesterday, “I don’t think you should rule it out,” according to Politico. Also according to Politico’s recount of the events, another high-level Republican staffer stated that “We are open. Congressional Republicans have not unified against those proposals. There are several things that would invite a bipartisan conversation. … You will see from our committee’s perspective a bipartisan process in the next couple of weeks. It’s important for us to engage Democrats in this conversation. … Specifically on tax reform, the president is uniquely non-ideological. … The president wants something that’s big and bold for the economy and he wants economic growth.”
Overnight Activity – Sovereign Yields Rise as Stocks Gain: European equities moved higher after a mixed start across Asia with the gains in Europe attributed to better earnings and whispers of M&A activity. However, U.S. equity futures are lower. A down day for U.S equities could knock the MSCI all-world equity index off its current level which would mark a new all-time record high close. The Yen fell to a one-month low against the Dollar as the risk aversion in financial markets wanes despite numerous global uncertainties. Another indication of traders’ lack of alarm was the VIX Index, also known as the equity fear index, falling to a 10-year low on Monday. Crude prices bounced and sovereign yields drifted higher. Treasury yields moved up 1 to 2 bps across the curve. In economic news, Caixin’s China manufacturing PMI unexpectedly dropped to its lowest level since September and the Reserve Bank of Australia left its policy rate unchanged. The unemployment rate in the Eurozone held at 9.5% in March and its April manufacturing PMI remained at a six-year high after final revisions.
Yesterday’s Trading – Treasury Yields Rise on Mnuchin Comments: The major U.S. stock indices finished mixed in Monday trading as the Dow dropped 0.1% and the S&P gained 0.2%. The tech-heavy Nasdaq index outperformed with a daily gain of 0.8%. The gains for two of the three indices materialized despite two sharp moves lower intraday. The first move was led by financial institutions after President Trump indicated he was looking into a Glass-Steagall like restriction for U.S. banks. The indices quickly recovered, however, and moved to their daily highs before a last-minute drop significantly pared Monday’s gains. Treasury yields jumped after Treasury Secretary Mnuchin disclosed Treasury had a working group exploring funding government operations with longer-dated debt. The 2-year yield rose 1.2 bps, the 10-year yield increased 3.8 bps, and the 30-year yield jumped 5.1 bps. The 30-year bond closed above 3.00% for the first time since March 31. U.S. crude fell below $49 per barrel to close at the lowest level since late March after Libya reported the highest production in years.
Construction Spending Booms in February, Pulls Back Fractionally in March: Construction spending for the month of March followed the trends seen in other weather-dependent data, a weaker-than-expected month but coming on the heels of a stronger-than-expected February. February’s construction spending was revised up from +0.8% growth to +1.8% while activity in March pulled back 0.2% MoM. The stronger cumulative activity should add a few tenths to the first revision of 1Q GDP. Importantly, while the March data showed a pullback, residential investment held up quite well. Residential construction rose 1.2% in March including a 0.3% MoM gain in single family activity, a 2.0% gain in multi-family, and a 2.2% gain in home improvement.
ISM Manufacturing Drops: The ISM manufacturing report fell-more-than expected in April, declining for a second month to the lowest level of the year. Disappointingly, the weaker headline index was driven largely by steep declines in two of the most important underlying indicators. The new orders index fell seven points to 57.5 which represented the lowest level since last November. Equally as disconcerting was the 6.9 drop that pulled the employment index from a six-year high in March to the softest level since October 2016. On a more optimistic note, the production activity improved 1 point to 58.6 and inventory indicators were directionally consistent with economists’ hopes for a 2Q rebound in inventory growth. After inventory investment subtracted 0.9% from 1Q GDP, more respondents reported their inventories had grown and a greater number believe their customers’ inventory levels are too low.