The Market Today
Quiet Economic Week Should Leave Focus on Concerns About U.S.-China Trade Escalation
by Craig Dismuke, Dudley Carter
Empire Manufacturing Dropped to Five-Month Low: The U.S. Empire Manufacturing Survey dropped more than expected from 25.6 in August, an 11-month high, to 19.0 in September, a five-month low. Slower shipment activity was the biggest driver of the recoil although less pressure in suppliers’ delivery times also weighed on the headline. New orders and employment were essentially flat from August while inventories moved up to a four-month. Applying an ISM-weighting to the key subcomponents, the report points to a modestly softer, but still solid, manufacturing PMI. Looking ahead, the metrics for what respondents expect six months from now were less positive.
The Rest of the Week: This week’s calendar will be quiet on the economic front, with a handful of housing reports set to be the major focus. With the housing data in recent months signaling a slowing of activity, investors will be interested in the update to see if there are any signs of momentum perking up. The NAHB’s home builder sentiment index (Tuesday) is expected to edge down to a 12-month low but housing starts (Wednesday), building permits (Wednesday), and existing home sales (Thursday) are all expected to have improved in August.
While there are several other secondary U.S. reports scattered amongst the housing data, the Bank of Japan’s monetary policy decision ahead of Wednesday’s U.S. session could be more meaningful for markets. Also likely to capture some headlines, ECB President Draghi is slated to make remarks on Tuesday and Wednesday. Last week, the ECB said they planned to shut down net asset purchases after December and revised slightly lower its near-term growth estimate. Trade should be a major focus for investors this week, as there were signs over the weekend that the ongoing dispute between the U.S. and China could be escalated as soon as today (more below).
Overnight – U.S. May Move Forward with Tariffs on $200B, China May Move Back from Negotiating Table: Anticipation of further escalation of the U.S.-China trade dispute has weighed unevenly on global investors’ risk appetite so far Monday. Stocks in China were again amongst the worst global performers, with the CSI 300 down over 1%. European equities were mixed at the national level leaving the Stoxx Europe 600 around the flatline. U.S. futures had dipped into negative territory with tech leading the losses. The S&P 500 was down 0.1% while the Nasdaq slipped 0.2%. Last Friday around midday, it was reported that President Trump was planning to tack tariffs onto the proposed $200B of Chinese imports, even as earlier reports indicated the U.S. was open to restarting negotiations. Over the weekend, reports said those tariffs could be put in place as early as today but potentially at a lower-than-expected 10% rate; the original proposal included a 25% charge. Chinese officials were said to be considering last Wednesday’s invitation from the U.S. for reengaging in dialogue before the reports that the U.S. could move forward with its tariff proposal. Subsequently, Chinese officials were quoted as saying “China is not going to negotiate with a gun pointed to its head,” signaling it could scrap the trip to Washington. Despite the risk of trade escalation, other asset classes were less affected. U.S. Treasury yields were up ahead of U.S. trading with the 2-year yield +0.4 bps to 2.78% (new cycle high) and the 10-year yield +1.5 bps to 3.01% (highest since May 22.)
ICYMI – September 14, 2018 Weekly Market Recap: Treasury yields rose last week amid solid economic data, albeit still modest inflation pressures, and a call from Fed officials to continue gradually raising rates. The 10-year yield closed just below an even 3.00%, the highest since August 1, while the 2-year yield ended at a new cycle high of 2.78%. Most of the net move came Tuesday after Small Business Optimism set a series high going back to the early 1970s and job openings reached a new 18-year peak. For a fifth month in a row, there was less than one unemployed person per open position. August’s retail sales were a miss but in part because July’s activity was revised even stronger than initially estimated. In addition, the University of Michigan’s September consumer sentiment index jumped more than expected to the second highest level since 2004. Still, inflation remained modest. A string of weak inflation indications was capped off by the softest CPI inflation print since March 2017. While rents remained firm, medical care and apparel were unusually weak and helped drag the core YoY rate down to 2.2%. But a September rate increase remains a near certainty after another round of Fed comments. Most notable, an infrequent appearance from Fed Governor Brainard sounded unusually hawkish for the previously outspoken dove. She expects gradual rate hikes to continue and became the latest official to hint that they believe the historical relationship between curve inversion and recession may be less meaningful now. Click here to view the full recap.