The Market Today
Relief as G-20 Yields Temporary Ceasefire
by Craig Dismuke, Dudley Carter
Construction, Autos, Manufacturing, and Fedspeak: A busy week for the economic news kicks off this morning with reports on construction spending (Oct), auto sales (Nov), and the ISM’s manufacturing report (Nov). Those reports are, collectively, expected to show a still-strong economy, but one that is decelerating. Also on the calendar today, Fed Vice Chair Quarles, Fed Governor Brainard, Dallas Fed Bank President Kaplan, and New York Fed Bank President Williams are all on the tape. Brainard’s and Williams’s comments are likely to be of most interest to the markets. Already, Fed Vice Chair Clarida said in a Bloomberg TV interview that the Fed will continue to use the dot plot in their projections, and that the economy could operate above the Fed’s 2-percent target (such comments have historically been interpreted as being dovish in that the official is expressing a willingness to not tighten policy as inflation moves above the target).
Overnight – Stocks Rally in Relief after G-20 Results in Temporary Trade Truce: Global investors applauded a temporary trade truce between the U.S and China and have pushed global risk assets up sharply to start the week. The presidents from the two countries, flanked by a list of who’s who from their respective cabinets, had dinner Saturday night at the G-20 summit in Buenos Aires and decided to freeze the ongoing trade scuffle for 90 days. The U.S. won’t raise the 10% tariff rate on $200b of goods come January 1 as planned and will table any action against the remaining imports balance. China will increase the purchase of U.S. agriculture products, allow the U.S. better access to its markets, and team up with the West to address a nuclear North Korea. A tweet from President Trump indicated China would also take down its 40% tariff on U.S. autos. While there were still major issues and questions that have yet to be solved, the detente will allow for a period of discussions aimed and hammering out a long-term trade deal. However, if no agreement is reached, the U.S. has said it will move forward with its previous tariff plans. There remain big issues to work through and these fears are likely to re-emerge front-and-center in March. Shares in China jumped first and stocks across the rest of the world have followed. The Shanghai composite was up more than 2.5% and the Stoxx Europe 600 has risen approximately 1.3%. Futures on the S&P 500 were 1.4% stronger. Commodities also rallied on prospects of a US-China deal. Oil prices spiked nearly 4%, base metals strengthened, and agricultural futures firmed up. The better risk performance has pressured Treasury yields higher, though bond yields elsewhere were less reactionary. The entire Treasury curve has moved up between 4.1 bps and 4.7 bps inside of 10-year, however the 10-year yield was still hovering just above 3%.
ICYMI – November 30, 2018 Weekly Market Recap: Yields fell last week after Fed Chair Powell changed his emphasis when describing where Fed Funds is relative to neutral. In October, yields surged after Powell said policy was a long way from neutral. Last Wednesday, yields slipped after Fed Chair Powell described Fed Funds as “just below the broad range” of neutral estimates. Markets saw the shift as intentional and a possible sign Powell would be willing to pause in 2019 if the data warranted. As a result, Fed Funds futures repriced for a December hike and just one additional move over the foreseeable future. The more cautious tone was reinforced in the Fed’s November Minutes released on Thursday. After saying they expected another hike “fairly soon”, the Fed stressed that policy would be data dependent in the new year, was not on a preset course, and that the Fed would need to be flexible. Treasury yields fell to end the week near their lowest levels since mid-September. The spread between the 2-year and 10-year noted dropped to its lowest level since mid-August. The other major focus was the weekend G-20 meeting, and specifically Saturday’s dinner discussion between Presidents Trump and Xi to discuss the ongoing trade dispute. Several headlines on the topic caused markets to move with the latest reports leaving investors heading into the weekend with hopes a deal could be reached. There were several important economic reports but none noticeably impacted the markets. Growth was unchanged for 3Q at 3.5% on net but the details showed a slightly less-strong consumer and modestly better business spending. Consumers remained confident and continued to spend in November. Housing’s woes were made worse by the weakest pace of new home sales since February and the fewest number of pending sales (future existing sales) since the summer of 2014. Click here to view the full recap.