The Market Today
Phase One Trade Deal Expected to Be Signed This Week in Washington
by Craig Dismuke, Dudley Carter
Home Price Reports: The final day of 2019 brings two home price reports, the FHFA HPI and the S&P CoreLogic reports, at 8:00 a.m. CT. The pace of home price gains began to slow in 2018 after mortgage rates rose and years of home price appreciation outpacing income gains negatively affected affordability. As seen in the Chart of the Day, the pace of home price growth has now leveled off in both the FHFA and CoreLogic home price reports. The NAR’s existing home sale price data shows the pace of gains accelerating.
Consumer Confidence: Also released today will be the Conference Board’s December report on consumer confidence (9:00 a.m.). Confidence has been dinged this year by all of the geopolitical headlines. Despite that, it has remained in a positive range versus historical norms.
Overnight Yield Rise Failed to Hold: Treasury yields almost came full circle Monday as an opening drop for equities slowly eroded the overnight move up in the Treasury curve. Yields had moved higher overnight amid upward pressure from an even larger increase in sovereign yields across Europe. In the absence of an obvious catalyst, the synchronized global shift higher was characterized largely as an in-range, catch-up response to the optimism that had lifted equities to records last week. Around 7:45 a.m. CT and ahead of the open of U.S. equity trading, the 2-year yield had moved up 2.4 bps while the 10-year yield had added 6.0 bps.
Stocks Pulled Back from Records, Yields Gave up Overnight Gains: The momentum reversed quickly at the open, however, as the major equity indexes turned away from record levels that were reached last week following additional developments. The S&P 500 reached its daily low point within the first hour of trading and grinded sideways from there to a daily decline of 0.6%; all 11 sectors closed lower on the day. Following a hint from President Trump last week of a “breakthrough” on trade and China’s announcement that it would roll back tariffs in 2020, the index set a record in three of the four trading days surrounding the Christmas break. Following Monday’s intraday pullback, the 2-year yield closed 1.6 bps lower at 1.57% while the 10-year yield added just 0.4 bps to 1.88%. The shifts sent the spread between the two to more than 30 bps, the widest since October 2018.
Markets Put a Quiet Cap on Solid Year of Recovery: U.S. markets will open Tuesday into a low-volume, uneventful global session as most major markets either did not open or closed early on the eve of the new year. Trading with less than full participation, the MSCI Asia Pacific Index excluding Japan (closed) fell 0.4% while Europe’s Stoxx 600 drifted 0.1% lower. The modest declines capped off a solid year of recovery for global equities which had notched double-digit declines in 2018 thanks to a surge of uncertainty in the final quarter of the year. However, the MSCI All-World Index has rallied nearly 24% in 2019 as central banks around the world pivoted towards easing policy, the U.S. and China made progress in trade negotiations, and economic data showed some signs of stabilizing.
Trade Deal Could Be Signed Soon, Mixed Data from China: On the trade front, a Chinese news outlet reported yesterday that Vice Premier Liu He is expected to the travel to Washington this week to sign the phase-one trade deal announced on December 13th. White House adviser Navarro confirmed he expects the deal to be signed soon, saying the first phase of the agreement is “in the bank.” Overnight, China’s official non-manufacturing PMI fell more than expected to 53.5, near the bottom end of a three-year range, while the manufacturing index held up better than expected at 50.2, matching its second best level of the year.
U.S. Markets Little Changed after Big Shifts in 2019: U.S. markets have moved little overnight as well and are expected to see thinner volumes in the final trading day of the year which will be abbreviated by an early close. At 7:15 a.m. CT, equity futures were essentially flat, the 2-year Treasury yield was down 0.4 bps, and the 10-year yield was 1.6 bps higher. Looking back at 2019, the S&P 500 has rallied 28.5% through Monday, the 2-year yield has dropped 92 bps in response to the Fed’s three rate cuts, and the 10-year yield responded with an 81-bp decline.
Mixed Late-Morning Data: Monday’s second wave of economic data was mixed with a stronger-than-expected Chicago PMI but softer-than-expected results for the Dallas Fed’s manufacturing index and pending home sales. Despite the pick-up in the headline Chicago business activity PMI, key underlying indexes tracking new orders and employment both weakened and continued to contract. Later, the Dallas Fed’s Manufacturing Index edged lower unexpectedly despite some firmer underlying details, signaling contraction for a third month. Recent updates to regional PMIs, including from separate Fed District banks, have been mixed but tilted towards activity remaining soft. On the housing front, pending home sales rose less than expected in November but from a better October level. New contract signings were up 1.2% in November, softer than the 1.4% gain expected, but October’s 1.7% decline was trimmed down to a smaller 1.3% drop. Looking through the monthly fluctuations, pending home sales have continued the choppy uptrend that began in 2019 as mortgage rates have declined.