The Market Today
More Tariffs and, of Course, a “Firm and Forceful” Response
by Craig Dismuke, Dudley Carter
Vining Sparks Economic Outlook Webinar, Thursday July 12 – Vining Sparks will host our 3Q Economic Outlook Webinar on Thursday with a focus on 1) how strong the economy currently is, 2) the phenomenon of the flattening yield curve, and trends from previous yield curve inversions. To register, click here.
More Signs of Inflation Firming: Producer prices rose 0.3% MoM in June at both the headline and core levels, both firmer-than-expected readings. At the headline level, prices were up 3.4% YoY, the strongest rate of gain since 2011. Food and alcohol prices rose a solid 0.9% MoM while fuels rose 21.8%. Regardless of the stronger readings in these volatile categories, core prices were stronger than expected bringing the core YoY rate up from 2.4% to 2.8%. One of the most important takeaways from the producer price report each month is the impact on medical care CPI. Most measures of medical care services and goods were soft with the lone exception of outpatient care, which rose 1.0% MoM. While producer prices show a bit of inflation pressure, expectations for final consumer prices remain modest from both economists and market indicators.
Mortgage applications for the week ending July 6 rose 2.5% on a 6.5% gain in purchase apps and a 3.8% decline in refi apps. Mortgage rate have pulled back fractionally over the past two weeks with the 30-year mortgage rate falling from 4.84% to 4.76%, according to the MBA data. While this is hardly enough of a move to elicit an increase in mortgage activity, the strength in purchase activity remains apparent and points to a short-term bump of approximately 5% for home sales.
May’s wholesale trade and inventories report is scheduled for 9:00 a.m. CT. New New York Fed Bank President Williams is slated to speak to community leaders in Brooklyn today at 3:30 p.m.
Yesterday – Stocks Closed Up Before Tariff News Sent Treasury Yields Sliding into the Close: Stocks gained on Tuesday but the big news came after equity markets closed. The S&P 500 ended up 0.4% as consumer staples gained 1.3% to lead 10 of 11 sectors higher. PepsiCo was the top performer within that sector, rallying nearly 5% after posting a better-than-expected earnings result for the second quarter. However, sentiment soured in after-hours trading, evidenced by a pullback in equity futures and a notable drop in U.S. Treasury yields. A news report indicated that President Trump was preparing to release a list of $200 billion of Chinese imports that could be subjected to tariffs. The list would be in addition to the $50 billion previously announced: $34 billion were put in place last Friday and an additional $16 billion are currently being considered. The report lined up with remarks from the President three weeks ago that he was considering a 10% tariff on $200 billion of Chinese imports. While markets had recovered this week from the first round of U.S.-China tariffs which became effective last Friday, the report is likely to re-focus investors on the risk of further escalation. After rising as much as 1.7 bps earlier in the day, the 10-year yield ended down 0.7 bps at 2.96%.
Overnight – New Tariff Threats Rain on This Week’s Equity Parade: This week’s respite from fears of tariffs escalating into a trade war was shattered yesterday afternoon just after equities finished trading. The White House released the list of $200 billion in Chinese imports that it is considering for a 10% tariff, but has delayed the implementation until after an industry comment period and several days of public hearings set to begin on August 20. Combined with the $50 billion in targeted goods already announced, and a smaller amount of steel an aluminum, the new list would take the total affected amount to roughly half of the $505 billion of goods imported from China in 2017. China again responded by promising “firm and forceful measures” against the U.S. However, any response, if intended to be equal in scale, will have to reach beyond dollar-for-dollar tariffs. China imported just $130 billion of goods from the U.S. in 2017, far less than the $250 billion the U.S. is targeting. Chinese equities sold off nearly 2% Wednesday and were the day’s worst performers inside and outside of Asia. European equities were off more than 1% and U.S. futures had traded down roughly 0.7%. Still, the bid for sovereigns has been more muted. The German yield curve was less than 1 bp changed and Treasury yields were actually higher after U.S. producer price inflation data exceeded estimates.
Job Openings Remained Strong in May: Total job openings were better than expected in May but reflected a pullback from an even stronger-than-estimated April level. Job openings totaled 6.638MM in May, the second strongest in the 18-year series, and April’s all-time high was revised up from 6.698MM to 6.840MM. Even after the slight reduction, there are still not enough unemployed persons (6.065MM in May, 6.564MM in June) to fill each available position (0.99x). Other metrics also signaled the labor market continued to strengthen in May. Total hires rose 173k and pushed the hires rate up to 3.9%, a new high for the cycle. Total quits, a positive indicator for employees’ state of mind, jumped 212k to lift the quits rate to 2.4%, its second strongest level on record. And layoffs dropped 143k to their fifth lowest level on record. The JOLTS data continues to reinforce persistent labor market strength.