The Market Today
Questions Arise About Last Week’s Trade Deal as Corporate Earnings Season Begins
by Craig Dismuke, Dudley Carter
THIS WEEK’S ECONOMIC CALENDAR
Quiet Start: This week’s economic calendar kicks off quietly with no official reports scheduled for today. There are, however, four separate Fed officials on Tuesday’s calendar. Overnight, President Bullard from the St. Louis Fed said he won’t pre-judge what the Fed will do at its meeting later this month but did note, “We have to consider additional insurance in the meetings ahead.” Presidents Bostic (8 a.m. CT), George (11:45 a.m.), and Daly (2:30 p.m.) will speak later today.
Retail Sales and Fedspeak Will Be the Focus: There will be plenty of additional Fedspeak throughout the remainder of the week that could help determine the current level of support for another insurance cut, potentially at the October meeting. Markets opened Tuesday pricing in a roughly 70% probability the Fed will ease again on October 30. As to economic data, tomorrow’s retail sales report will be key to watch and is expected to show another solid 0.3% gain for core sales in September. Industrial production on Thursday is expected to show activity cooled after a solid August and that manufacturing output contracted amid continued uncertainty. By volume, the housing data will win out. Reports covering home builder confidence, housing starts, building permits, and existing home sales will be released.
OVERNIGHT TRADING ACTIVITY
Stocks Weakened Monday on Caution Around Friday’s Trade Announcement: Despite a firmer tone for U.S. equity futures Tuesday, Treasury yields returned from Monday’s holiday down nearly 4 bps between the 2-year and 10-year notes just before 7 a.m. CT. While the bond market was closed Monday for Columbus Day, stocks traded as usual and ended the day down 0.1%. After positive trade developments sent yields and stocks surging late last week (more below), questions arose yesterday about how much work was left to be done to achieve a signature-ready “phase one” deal. China reportedly wants to hold additional discussions about the details to be included in the recently-touted agreement.
Treasury Yields Move Lower after Ripping Higher Last Week on Trade Optimism: As part of the agreement reached last Friday, the U.S. delayed the tariff hike from 25% to 30% on $250B of Chinese imports that was set to take effect today. The uncertainty continued on Tuesday with Bloomberg reporting that China wants the U.S. to remove certain tariffs in order for China to achieve the level of agricultural purchases highlighted as a key component of last week’s deal. While equity futures remained higher on the day, they pulled back slightly on the report. Futures on the S&P 500 were up 0.3% earlier after gaining as much as 0.6%. Investors will also be focused this week on ongoing Brexit negotiations and the beginning of the corporate earnings season. JPMorgan and Citigroup both topped revenue and earnings estimate in their 3Q announcements this morning.
ICMYI – October 11, 2019 Weekly Market Recap: Last week was a tale of two halves for markets which overcame early uncertainty and gradually improved to peak optimism near Friday’s close. Trade talks were set for Thursday and Friday but expectations for progress took a hit even before U.S. markets opened for the week. Over the weekend, Bloomberg had reported that China narrowed its scope for the week’s big trade meetings. Late Monday, the U.S. blacklisted an additional 28 Chinese companies for human rights violations and China hinted it could retaliate. On Tuesday, the White House announced visa bans for certain Chinese officials also tied to human rights violations. However, things turned around Wednesday when China said the U.S. actions hadn’t deterred it from seeking a partial trade deal. Despite a flurry of conflicting trade headlines, yields shot higher Thursday and Friday into news that the U.S. and China had reached a “phase one” trade deal. Also adding to the upward pressure, Brexit negotiations took a positive turn that led the EU said it was ready to intensify negotiations with the U.K. For the week, the 10-year yield jumped 20.0 bps and the S&P 500 rose 0.6%. Drowned out by the trade news, the Fed Minutes showed an openness for additional easing but some caution about how far to go. Also on Friday, the Fed announced it will start buying roughly $60B of Treasury Bills per month through at least the second quarter of next year to ensure the financial system has ample reserves; the Fed stressed it is no way quantitative easing. Click here to view the full recap.