The Market Today

TODAY’S CALENDAR

Powell Speaks from Boston, Quarles Testifies Before SBC: The only economic data on today’s calendar is the September auto sales tally.  Fed Vice Chair Quarles will testify before the Senate Banking Committee on bank regulations at 9:00a.m. CT.  Fed Chair Powell is slated to speak at the NABE conference in Boston at 11:45 a.m.  And Dallas Fed Bank President Kaplan is scheduled to speak from El Paso at 1:00 p.m.

 

TRADING ACTIVITY

Yesterday’s Trading – A Different Kind of Relief Rally for Stocks: Stocks ran higher yesterday after news that Canada joined the three-way trade accord between the U.S. and Mexico.  While the new terms of the USMCA were not remarkably different than the NAFTA terms, investors were relieved that a deal was not being inked that excluded Canada.  The Dow rose 193 points (+0.73%) to 26,651 while the S&P rose 11 points (+0.36%), the third highest closes on record for both indices. Longer Treasury yields led the way higher with the 10-year yield up 2 basis points from Friday’s close to 3.08%.  Shorter Treasury yields were mostly unchanged just above 2.82%.  WTI Crude rallied to its highest level since 2014 on global optimism, with analysts now bringing up the $100/barrel conversation for the first time in many years.

 

Overnight – Boost from USMCA Falls Flat Across the Pacific: The boost to risk sentiment from the new trade agreement aimed at governing intercountry transactions within North America, the USMCA, has been constrained within the continent’s borders. After rising strongly on Monday, U.S. equity futures have pulled back overnight and Treasury yields have moved lower. While Chinese markets are closed this week for a national holiday, every other major Asian index outside of Japan dropped. Asian markets opened weaker as the positivity resulting from the agreement did nothing to lessen trade tensions between the U.S. and China. As markets were cheering the news on North American trade on Monday, White House economic advisor Kudlow said “[The agreement] sends an important message to China…North America is together, …Nothing is imminent on China.” Over the weekend, September PMI data for China had missed estimates with one reading on the manufacturing sector falling to a 16-month low. Europe is also weaker as the Stoxx 600 has slipped 0.5%. The German 10-year yield was down 3.0 bps while the Italian 10-year was up 6.2 bps, although both moves were off their overnight extremes. One of Italy’s deputy prime ministers walked back comments from an Italian politician, the top economist for the League, about the potential benefits of Italy leaving the Eurozone. The net result of these forces has been the U.S. 10-year yield falling 1.9 bps and contracts on the S&P 500 edging 0.1% lower.

 

NOTEWORTHY NEWS

ISM Manufacturing Index Pulls Back in September, Remains Strong: September’s ISM Manufacturing index pulled back from its highest level of the cycle, dropping from 61.3 to 59.8.  Even with the 1.5-point pullback, the September result is the fourth-highest reading since 2004.  Additionally, while most of the underlying components were weaker in September, they generally remain very strong versus historical norms.  The new orders index fell 3.3 points but the index tracking new export orders rose 0.8 points.  Both indices remain at solid levels.  Additionally, the employment index rose 0.3 points, posting the fifth best result since 2011.  With the ISM’s Non-Manufacturing index still to come on Wednesday, the manufacturing part of the equation still looks solid.

 

Weak Residential Construction Weighs on August’s Construction Spending:  August’s Construction Spending report disappointed expectations, with spending rising just 0.08% MoM on weak residential and private facilities activity.  Residential construction, making up 42% of total construction activity, dropped 0.8% on declines in every category: single family construction down 0.7%, multi-family construction down 1.7%, and home improvement down 0.6%.  The year-over-year growth of residential construction is now down to +4.1% from a cycle high of +23.8% in early-2013.  On a quarterly basis, the 3Q data now points to a 5% decline in 3Q for residential construction  Private non-residential construction was weighed down by declines in commercial construction, power plants, and manufacturing facilities; now pointing to a 1% decline in non-residential structures investment in 3Q.  Public construction, making up 24% of activity, was the lone bright spot in the August report.  Up 2.0% MoM, public construction activity is now up 14.0% YoY, an increase from -7.4% YoY in early-2017.  Construction of highways/streets, sewage/waste, and water supply facilities continued to drive activity higher.  Despite August’s disappointing report, construction spending continues to be led higher by private facilities investment and public spending; housing construction continues to raise concerns.

 

Rosengren Likely Supports Three Projected Hikes in 2019: Boston Fed Bank President Rosengren spoke yesterday saying that he believes the economy is running hot, the labor market will continue to tighten, and wage growth that is already conducive to some inflation pressure.  He also cited the risk of trade negotiations yielding faster inflation.  In doing so, he laid the foundation for his view on monetary policy, that the Fed should continue to hike gradually until policy becomes “mildly restrictive.”  Rosengren’s position sounds as though he may support the three hikes the Fed is currently projecting in 2019 when he is a voting member of the FOMC.

 

Kashkari Sees Flat Curve as “Flashing Yellow” Sign that Fed Should Stop Hiking: Minneapolis Fed Bank President Kashkari continued to defend his position that the Fed should stop hiking rates in a speech yesterday. Using the flattening yield curve as evidence supporting his view, Kashkari said “The bond market is saying, ‘hey we’re not so sure that the U.S. economic growth is going to be very strong in the future years,’ so that’s a nervousness for me.”  Kashkari is not schedule to vote on policy until 2020.