The Market Today
Markets Calmed by Better-Than-Expected Yuan Fix Beyond 7.0 as Chinese Trade Data Surprises
by Craig Dismuke, Dudley Carter
Initial Jobless Claims Fall Unexpectedly Back to Even Lower Level: Initial jobless claims, the indicator that may most quickly show signs of any trade-related disruptions to employment, fell unexpectedly last week showing the labor market is holding up amidst increased global uncertainty. Initial jobless claims dropped from a revised higher 217k to 209k, better than the 215k expected and just 16k above the best level in more than fifty years. The four-week average edged up to 212k but remains low. A stable consumer outlook is the crux of the case that the U.S. economy can weather the trade war for now. Later today at 9 a.m. CT, the Census Bureau will release June’s wholesale trade sales and revise its initial estimates for wholesale inventories.
Yesterday – Early Panic Turned Out to Be Much Ado About Nothing: Another wild day on Wall Street started with fears that recent market turmoil could be the beginning of the end, but ended with markets back where they began. China weakened its yuan fix to a more-than-decade low, German industrial production fell more steeply than expected, and three foreign central banks surprised markets with policy decisions to lower rates. The trifecta of events pressured global yields sharply lower, a force that eventually caused a sharp downward reversal in equity futures. The S&P 500 sank nearly 2% shortly after opening, bottoming about the time the 10-year Treasury yield touched 1.5931%, a 10.9-bp drop to its lowest level since October 2016. From that point, however, and despite an endless stream of fearful market-related chyrons and social media posts, sentiment slowly and steadily improved for the remainder of the session. The S&P 500 erased its early drop to close 0.1% higher, despite drags from financials and energy. While yields recovered during Wednesday’s session, fears of lower rates for longer dented bank stocks while collapsing crude prices weighed on the energy sector. U.S. WTI dropped 4% and joined Brent crude in a bear market. Yields tracked higher with equities from early in the U.S. session, actually closing up after finishing off quite the turnaround. After sinking 8.1 bps, the 2-year yield rose 2.4 bps to 1.61%. Following a weaker-than-expected $27B refunding auction, the 10-year yield settled 3.2 bps higher at 1.73%. Over the last six days, which include the Fed’s rate cut and spiraling trade tensions, the 10-year yield has traded within an average daily range of 12 bps, the most volatile six-day stretch since the week after the 2016 presidential election.
Overnight – Markets Calmed by Better-Than-Expected Yuan Fix Beyond 7.0 as Trade Data Surprises: Global markets calmed Thursday even as the PBOC’s yuan fix took the much-dreaded step over the 7-per-dollar threshold. China’s central bank weakened the yuan by less than expected, but across the key level for the first time since April 2008. Chinese stocks rose in a widespread day of gains across the continent and European markets have strengthened, pulling the Stoxx 600 up 0.8% and farther away from Tuesday’s close at the lowest level in nearly six months. Aiding the more stable sentiment, China’s July trade data was better than forecasted as exports rose unexpectedly 3.3% YoY to post their best month since March; exports to the U.S. dropped 6.5%. While imports fell for a seventh time in eight months, the 5.6% decline was smaller than the 9.0% drop expected. Oil prices benefited from the more stable global backdrop, as well as reports yesterday that Saudi Arabia was working with other producers on possible ways boost prices. Brent crude rose 1.2% from its lowest level since early January, but remained in a bear market and down 12.6% over the last six days. Despite U.S. equity futures joining the overnight recovery and higher yields across Europe, Treasury yields held lower around 7:45 a.m. CT. The 2-year yield had declined 1.2 bps to 1.60% while the 10-year yield dipped 0.3 bps to 1.73%.
Fed’s Evans Said Weak Inflation Warrants a Cut, Deteriorating Outlook May Call for More: Chicago Fed President Evans, who currently votes on monetary policy decisions, said inflation weakness alone warrants another rate cut, and that continued deterioration in trade developments could build a case for even more stimulus in the months ahead. Recent trade developments that have rocked financial markets “have perhaps created more headwinds against” just one more cut to lift inflation, adding it could “be reasonable to do more than just that. I don’t know.” He attempted to strike a balance, acknowledging the Fed could be forced to respond to growth shocks but admitting the degree of the response will ultimately depend on how they affect the data. “You have to have some judgment as to ‘do I want to take a bigger action now, or do I want to save some powder for the future?’ …There’s been a lot of good analysis that suggests that keeping your powder dry probably doesn’t pay off as much as your intuition suggests,” Evans noted. However, he cautioned that, “There are limits to how much risk management you can do until you actually see these negative events.”