The Market Today
Removing or Postponing Tariffs Appears to Be Included in Phase One … Sending Yields Higher
by Craig Dismuke, Dudley Carter
Trade Headlines Continue to Be Focus: Investors will continue to watch for headlines coming out of trade discussions. Already this morning, the White House’s Grishman has said they they are “very optimistic” about a deal and adviser Peter Navarro has indicated a tariffs are part of a phase one deal – something that was in question overnight. The WSJ reports this morning that officials are simultaneously negotiating the trade arrangement and trying to find a location to sign the deal. According to the report, “Further complicating the picture, she [Obama administration senior negotiator Wendy Cutler] said, neither side would want to lose its negotiating leverage by agreeing to a signing location before they have come to terms on the deal itself. … Nonetheless, discussions have begun on a signing location. … Mr. Trump last week said he would like to sign the pact in Iowa, a politically important swing state where farmers have suffered due to a drop in Chinese purchases … former officials say the U.S. would likely have to make further concessions to China at the negotiating table to ‘pay’ for a U.S. signing ceremony that benefits Mr. Trump politically.”
Consumer Confidence Expected to Hold After Rebounding in September and October: At 9:00 a.m. CT, the September report on wholesale inventories will be finalized. At the same time, the University of Michigan’s preliminary November report on consumer confidence is scheduled for release. Consumer confidence remains a key metric to follow with so many cross-currents in the economic data.
Fedspeak: San Francisco Fed Bank President Daly, New York Bank President Williams, and FOMC Governor Brainard are all on the calendar today.
U.S. Official Confirms China’s Claim Phase One Deal Will Roll Back Tariffs: The S&P 500 rose 0.3% to clinch another record Thursday and Treasury yields were jolted higher by news that the U.S. and China would roll back tariffs as part of the first phase of a trade agreement. The action started just after 1 a.m. CT when a spokesman for China’s commerce ministry said the two countries had agreed to remove some tariffs as part of the initial trade agreement. Equity futures strengthened as the headline crossed the wires and Treasury yields reversed higher. The 10-year yield was up more than 6 bps as U.S. trading opened. The melt up continued early into the session, with a second push higher occurring after a U.S. official confirmed that the removal of tariffs would indeed be part of a trade agreement.
News of Tariffs Rollback Sends Treasury Yields Roaring Higher: The 2-year yield added as many as 9.9 bps to as high as 1.71% while the 10-year yield climbed as much as 15 bps to 1.97%. The rapid increase was partially pared in the afternoon following a headline from Reuters that there was some hesitation at the White House around easing tariffs and that no decisions had yet been finalized. However, yields clung to most of their gains at the close, with the 2-year yield 6.1 bps higher at 1.67%, the highest since late September, and the 10-year yield up 8.2 bps to 1.91%, its highest close since July. Since last Thursday, a day before the most recent resurgence in trade optimism began, the 10-year yield has added 23 bps from 1.69%. Fed funds futures repriced to reduce the likelihood of another Fed easing, with the December 2020 effective rate priced to yield 1.38% compared with a current effective rate of 1.55%.
Tariffs On-Again Off-Again: After hitting 1.97% yesterday, the 10-year Treasury yield pulled back to 1.89% overnight on reports from a White House trade adviser that removing tariffs was not part of a phase one deal with China. After a week of trade euphoria drove the risk-on trade, equity markets globally dipped overnight on the uncertainty. However, that news was somewhat rebutted just after 7:00 a.m. CT this morning when FoxBusiness’s Edward Lawrence tweeted, “White House Economic Advisor Peter Navarro says the US is willing to postpone Dec 15th tariffs and that is it for Phase One deal… saving other tariffs to make sure we can negotiate Phase 2 and 3 with China.”
Consumer Credit Card Balances Shrank for a Second Month in September: Consumer credit grew by less than expected in September as nonrevolving credit growth slowed and revolving levels contracted for a second month. Total credit grew $9.5B in September, or at annualized 2.8% rate, the weakest month for non-mortgage credit expansion since June 2018. Nonrevolving credit growth slowed from a 7.9% annualized rate in August to 4.2% in September. The 1.2% contraction in revolving debt, primarily made up of credit card balances, followed a 2.5% drop in August, marking the first back-to-back declines since the summer of 2012. The weakness was consistent with disappointing retail sales results in September which had raised questions about the overall health of the consumer. More recent data, however, specifically October’s payroll report and weekly data on initial jobless claims, have shown that the labor market remains solid and should continue to support the consumer.