The Market Today
Mixed U.S. Data; Supply Chain Disruptions Dominate for Now
by Craig Dismuke, Dudley Carter
Trade Balances Accelerate, as Does Deficit in March: The March trade balance showed a $3.9 billion increase in the monthly deficit to $74.4 billion, in-line with expectations. The results brought the 12-month deficit to its largest level on record, $764.9 billion. Imports, reflecting the U.S. economic recovery, jumped another 6.3% MoM while exports, whose recovery has lagged due to the slower rate of pandemic recovery globally, gained a positive 6.6%. Imports are now almost 7% above pre-pandemic levels while exports remain 5.4% lower.
Factory Orders and Fedspeak: The March Factory Orders report will be released at 9:00 a.m. CT, including the final revisions to March’s durable goods data. Speaking from the Fed are San Francisco Bank President Daly, Dallas’s Kaplan, and Minneapolis’s Kashkaris.
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Treasury Yields Tumble After ISM Survey Shows Manufacturing Slowing
The S&P 500 closed up 0.3% but finished near its low for the day and well off session highs. The index jumped nearly 0.7% shortly after the open as stocks had risen across Europe, but gave up most of those gains in the final hour of trading. Cyclical stocks performed well with energy’s 2.9% jump leading the way. Tech stocks, and other related names such as Tesla and Amazon, declined. The Dow rose 0.7% to start May but tech’s weakness dragged the Nasdaq down 0.5%. The Treasury curve flattened on Monday as longer yields declined after a somewhat volatile session. Yields were higher for most of overnight trading but tumbled sharply after the ISM Manufacturing Survey disappointed expectations (more below). Following a 7.6-bp drop from its intraday high of 1.65% to its intraday low of 1.58%, the 10-year Treasury yield closed 2.8 bps lower at 1.60%.
The 10-year yield was holding near that level at 7:30 a.m. CT Tuesday morning, despite a sharp tech-led drop in U.S. futures that occurred roughly an hour before. Nasdaq contracts were down around 1% while S&P 500 and Dow futures had fallen by roughly 0.5%. The 10-year yield moved to down 0.2 bps on the day as the equity weakness pulled the note’s yield down from 1.62% to 1.59%.
Coronavirus Update (VS Coronavirus Chartbook – PDF) – Pfizer Plans to Ship U.S.-Produced Vaccines to Other Countries: New cases in the U.S. last week rose at the slowest rate since March and were the fewest in number since October. A surprisingly successful vaccination rollout has been given much of the credit for the positive turns in the pandemic. With the rate of daily vaccinations leveling off at a high level in April, Pfizer has said it plans to ship some vaccines produced in the U.S. to other countries with a greater need. The White House said Monday it supports that plan.
ICYMI – April 2021 Monthly Review: Despite momentum behind the U.S. recovery strengthening, evident in many datasets in recent weeks, the Fed opted to remain patient at their April meeting and the White House proposed trillions more in spending. Click here to view the April Monthly Review.
ISM Manufacturing Survey Highlights Supply Bottlenecks Amid Strong Demand: Monday’s update from the ISM on the U.S. manufacturing sector was a market-mover. The headline index fell unexpectedly from 64.7, its highest level since 1983, to 60.7, still solid in an historical context but disappointing the 65.0 expected. Growth in new orders, production, and employment all slowed, albeit to levels still comfortably within the expansionary range. Supplier deliveries, currently a measure of strains on supply chains, did ease slightly but the prices paid index hit a more-than-twelve-year high. The comments section was full of inflationary anecdotes about materials shortages and supply struggling to keep up with strong U.S. demand, a fact pattern made worse by the global chip shortage. Inventories contracted at the quickest rate since August. The debate de jour is how strong and sustained inflationary pressures will be amid a stimulus-fueled economic re-opening that is surely to be uneven across the globe.
Residential Construction Remains a Lone Bright Spot for the Sector: Construction spending inched up 0.2% in March, weaker than the 1.6% recovery expected from a weather- related 0.6% decline in February. Except for housing, construction trends remained weak. Spending on new single family construction and remodeling of existing properties both rose 2%. Softness in private non-residential spending, or business structures, continued to be soft, dropping another 0.9%. The BEA’s first 1Q21 GDP estimate last week showed private non-residential investment dragged 0.1% from overall growth. Spending at the both the federal and state and local levels contracted for a second consecutive month.
Strongest Auto Sales Since 2005: Auto sales totaled 18.51 million annualized units in April, better than the 17.6 million expected and the strongest pace since July 2005. The 4.2% monthly gain pushed sales up 116% from the 8.58 million pace from April 2020, which marked the low point of the pandemic.
Senior Loan Officers See Easier Lending Standards Across Most Products: The April Senior Loan Officer Opinion Survey indicated that banks eased standards on C&I loans while CRE lending standards were essentially unchanged. Demand for both was reported to have weakened, on net. Banks tightened standards on construction and land development loans but reported stronger demand for those products. Related to consumers, banks reported to have eased standards across most every type of lending, including credit cards, autos, other consumer loans, and residential real estate. Demand for real estate and auto lending strengthened but was essentially unchanged for credit cards and other loan types.
New York Fed President Williams indicated that technical adjustments to the Fed’s policy rates can be made if needed to keep the effective fed funds rate well within the target range. Shorter rates have been under pressure on an increase in bank reserves that is expected to continue in the weeks ahead. He noted that pegging full employment isn’t a certain science and highlighted that low unemployment before the pandemic didn’t create inflation.
Richmond Fed President Barkin said there are inflationary pressures clearly present in the production economy, consistent with indications from April’s ISM manufacturing survey, but that those pressures haven’t yet translated into higher consumer prices. On policy moving forward, he believes the guidance the Fed has provided is relatively cut and dry and said an employment-to-population ratio around 61% (currently 57.8%) would represent good progress on the labor market recovery.
Fed Chair Powell discussed the economic outlook but didn’t veer from the message from his post-meeting press conference last week.