The Market Today
Mixed Trade Headlines
by Craig Dismuke, Dudley Carter
Philly Fed Index Rises but Details Less Favorable: The Philadelphia Fed Bank index of manufacturing conditions in its area rose more-than-expected from 5.6 to 10.4. However, the underlying metrics all turned lower including an 11.4-point decline in the volatile employment index and a 17.8-point drop in the critical new orders index. On a positive note, the outlook for activity six months ahead showed better results with the new orders and employment indices both rising. The New York Fed index’s results combined with the Philadelphia Fed’s results point to another pullback in the ISM Manufacturing Index.
Initial Jobless Claims Repeat Elevated Results: Initial jobless claims for the week ending November 16 held steady at 227k, a second consecutive week of elevated claims. The past two reports have bracketed the Veterans Day Holiday which has a tendency to temporarily skew claims results. Moreover, even with the increase, claims remain at a low level from an historical perspective. However, now having two weeks of higher claims will add more uncertainty to the stability of the labor market.
Leading Index and Existing Home Sales: At 9:00 a.m. CT, the October Leading Index is expected to remain negative while October’s Existing Home Sales report is expected to rebound 2.0% from September’s 2.2% decline.
Another Trade Headline Weighed on Markets Midday: Stocks opened weaker Wednesday and Treasury yields declined after global markets had retreated overnight on President Trump’s threat to raise tariffs if no deal is reached and China’s harsh response to the U.S. Senate passing a bill supporting protestors in Hong Kong. However, both stocks and yields sank to new lows around lunch following the latest negative development on trade. Just before noon central time, a Reuters headline cited sources in the White House and others who said a phase one trade deal with China may not get done this year. The S&P 500 slumped from down 0.2% on the day to as low as -0.9%. The 10-year yield, which was 2.2 bps lower immediately before the Reuters headline, fell to down 5.7 bps from Tuesday’s close.
An Afternoon Recovery Lifted Sentiment from Its Lows: A couple of hours after the initial headline, Reuters updated the same news story to include a quote from a White House spokesman’s emailed statement that, “Negotiations are continuing and progress is being made on the text of the phase-one agreement.” Stocks ticked up on the news and climbed back to erase a large portion of the negative knee-jerk reaction, leaving the S&P 500 down just under 0.4%. Treasury yields also trimmed their tumble before the close with the 10-year yield ultimately slipping 3.8 bps to 1.75%. After markets closed, the House passed the Senate’s bill in support of Hong Kong, sending the legislation to President Trump’s desk and likely increasing the anger of the Chinese government.
Daily Flux in Trade Headlines Brightens a Bit: Global equities have weakened across the board Thursday following developments this week which have raised concerns that progress toward a phase one trade deal has taken a step backward. Overnight, China’s top negotiator reportedly told guests at a closed-door dinner that he was “cautiously optimistic” about reaching a deal with the U.S. A spokesman for China’s Commerce Ministry later said trade teams would remain in close communications. Following those headlines, Dow Jones reported that China had invited top U.S. trade officials to Beijing for more discussions.
Caution Continues to Overhang Global Markets: The positive tone behind those headlines, however, didn’t fully offset anxieties created by yesterday’s trifecta of troubling trade headlines and Monday’s report that the mood in Beijing around a trade deal had turned “pessimistic.” Hong Kong’s Hang Seng and South Korea’s KOSPI led widespread weakness across the continent which dragged the MSCI Asia Pacific index down 0.7%. Europe’s Stoxx 600 was 0.5% lower around 7 a.m. CT. U.S. futures had been weaker, but turned positive after a Chinese newspaper reported the U.S. may delay the new tariffs set to take effect on December 15, even if no deal is reached by then. At 7:30 a.m. CT, the 2-year yield was 1.7 bps higher and the 10-year yield had risen 1.2 bp.
Fed’s Brainard Wants “to Wait for a Little Bit”: Fed Governor Brainard said in a CNBC interview that “the committee has made a pretty substantial adjustment in the path of rates over the last few meetings” as insurance against downside risks, adding that “It will take us time to see that work through the economy.” From here, she said “I want to monitor, I want to wait for a little bit, as I assess how the outlook is adjusting.” She echoed Powell’s sentiment that it would take a “set of factors that calls for a material change in the outlook,” to warrant additional adjustments to interest rates. However, Brainard cautioned that “the balance of risks has been tilted to the downside for some time,” going further to say that “as we assess potential upside risks to the economy, they just seem to be somewhat less prominent.”
The Fed Minutes’ Take on the Near-Term Policy Outlook: The 80-20 split between voting officials who supported the October rate cut and those who dissented, seemed consistent with the dynamics across the full committee based on a reading of the meeting’s Minutes. The summary of the discussion showed “Participants generally viewed the economic outlook as positive,” in large part because the consumer-related economy continued to avoid the weakness in the business sector, but “the risk that a global growth slowdown would further weigh on the domestic economy remained prominent” and “tilted to the downside.” This risk assessment, along with a desire to return inflation back near 2%, supported the Fed’s decision to lower rates for a third time since the summer. As for the pause that was signaled in the Statement’s altered forward guidance and Chair Powell’s post-meeting press conference, most officials did believe that the current level of rates “likely would remain” appropriate absent a “material reassessment of the economic outlook.” “Most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well calibrated to support the outlook,” the Minutes said.
The Fed Minutes’ Take on the Possible Future Policy Approach: Away from the near-term outlook, the discussion around the ongoing framework review continued and covered a range of topics. The Committee remains comfortable that forward guidance and large scale asset purchases were effective tools and likely to be used again, although they debated possible tweaks to each considering the effective lower bound is likely to be a major factor in the next easing cycle. In addition to tools they have tried before, there was also discussion of possibly capping long-term rates or potentially using negative rates. Many officials had concerns with the former and, notably, “all participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States.” As for addressing reserve levels on an ongoing basis, there continued to be discussion about the possible implementation of a standing repo facility.