The Market Today
Stocks Hit New Record Highs on Trade Talk
by Craig Dismuke, Dudley Carter
Goods Trade Deficit Shrinks Further on Still-Weaker Trade Volumes: The initial look at trade in October, the advance goods trade balance report, showed a surprisingly large, $3.9 billion, decline in the monthly trade deficit. At $66.5 billon, the October goods trade deficit is the smallest deficit in sixteen months. While the data points to trade potentially being accretive to the 4Q GDP tally, the decline in the deficit once again reflected a declining level of overall trade. Exports fell $0.95 billion while imports fell $4.97 billion.
Retail and Wholesale Inventories Disappoint: October’s preliminary read on inventories at the retail and wholesale levels showed mixed results. Retail inventories rose a stronger-than-expected 0.3% MoM but wholesale inventories rose just 0.2% from a weaker-than-expected September level. September’s negative revision to wholesale inventories, from +0.4% to -0.7%, will result in a slightly weaker 3Q GDP revision.
Heavy Day of Data Including Housing Reports, Consumer Confidence, and Fedspeak: At 8:00 a.m. CT, the FHFA and S&P CoreLogic home price reports will both be released. As a lagging indicator, the pace of home price gains has been slowing in the aftermath of 2018’s downturn in housing activity. Weaker price gains is likely to persist for several more months before gaining a bit of traction on the recent improvement in housing activity. At 9:00 a.m., the October new home sales data is expected to show a 0.6% MoM increase in activity. New sales are currently up 24% from the end of 2018. Also at 9:00 a.m., the Conference Board’s November report on consumer confidence is expected to show positive results. The Richmond Fed Manufacturing index is expected to show a slightly weaker pace of regional activity. At noon, Fed Governor Brainard is scheduled to speak on the Fed’s policy framework review.
Stocks Reached New Records on Trade Deal Optimism: Stocks closed at new all-time highs Wednesday following China’s plan over the weekend to strengthen protection for intellectual property rights. The action was seen as a possible olive branch extended to the U.S. that could potentially help push a phase-one trade deal closer to the finish line. After the announcement, a top state-run media outlet reported that the first stage of an agreement between the U.S. and China was “very close.” The Dow rose 0.68%, the S&P 500 gained 0.75%, and the Nasdaq outperformed with a 1.32% jump. Monday’s gain for the S&P 500 followed an overall decline last week that interrupted a six-week win streak.
Yields Remained Stuck in Recent Range: Despite the S&P 500 notching its 24th record close of the year, Treasury yields ticked lower on the day. Extending last week’s decline, the 10-year Treasury yield dropped 1.5 bps to 1.76%. The 2-year yield slipped 1.4 bps to 1.61%, resulting in a ninth consecutive session of the spread between the 2-year and 10-year notes tightening. The extra yield for holding a 10-year noted dipped to 14 bps, the lowest since mid-October. Analysts pointed to month-end extension bids as a partial driver of the price-bullish shifts in Treasurys, although a solid auction of 2-year Treasury notes also supported shorter maturities. The yield on the $40B auction of two-year notes stopped through and reflected the strongest demand-divide between direct and indirect bids since 2016.
Another Trade Call Falls on Deaf Ears: Markets were less enthused Tuesday by the latest recycled headline about top U.S. and Chinese officials agreeing to stay in close communication as they seek common ground for the first part of a multi-phase trade agreement. China’s Commerce Ministry said in a statement that Vice Premier Liu He had spoken to Treasury Secretary Mnuchin and USTR Lighthizer by phone about possible ways to address “core issues” currently blocking the trade agreement. Separately, China’s Global Times reported that agricultural purchases were discussed but that there continued to be disagreement on the degree of tariffs to be rolled back in the first phase of the trade deal.
Markets Little Changed Following Trade Update: Global markets have largely ignored the latest trade developments, however, with global stocks pointing in different directions and sovereign yields generally lower. Stocks were mixed across Asia and generally weaker in Europe, where the Stoxx 600 was essentially flat on the day. Yields in the U.K. were leading the broader global decline after an updated poll showed the Labour party cut into its popularity deficit to the Conservatives, although the gap remains relatively wide ahead of the December 12 elections. The U.K. 10-year yield was down 4.8 bps while Germany’s dropped just 1.4 bps. At 7:30 a.m. CT, U.S. futures were essentially flat near record levels and yields had inched lower. The 2-year yield was 1.4 bps lower with the 10-year yield down 1.9 bps.
Powell Said the “Right Policies” Can Help in “Spreading the Benefits” of Economic Expansion: Fed Chair Powell spoke Monday after markets closed, offering a consistent message that the Fed is on hold for now as it watches how the economy responds to its recent rate reductions. Against a backdrop of gradually-declining neutral estimates for the fed funds rate and unemployment, the Fed has “progressively eased the stance of monetary policy over the course of the year” to help insulate the “favorable” U.S. outlook from global and trade risks at a time when inflation has been “unexpectedly muted.” Looking ahead, he repeated that the current policy setting is “likely to remain appropriate” unless the outlook materially changes. Reinforcing the pause, Powell finished by focusing on “two areas where we have an opportunity to build on our gains.” Powell said using its tools to sustain the expansion can help foster “a sustained return of inflation to 2 percent” and assist in “spreading the benefits of employment.” Powell closed by saying he sees “the glass as much more than half full. With the right policies, we can fill it further, building on the gains so far and spreading the benefits more broadly to all Americans.”