The Market Today
Stocks Rebound; North Korea Wants to Talk
by Craig Dismuke, Dudley Carter
Durable Goods Revision and Fedspeak: Today’s economic calendar brings the January Factory Orders report at 9:00 a.m. CT, which will include the final revisions to the capital goods orders and shipments data (the proxy used for business investment in equipment). The initial capital goods orders and shipments data were weaker-than-expected, continuing a theme of a weak start to the 2018 data. Also on the schedule tonight is a speech on the economic outlook and monetary policy by Fed Governor Lael Brainard at 7:00 p.m. ET. Brainard has been notably quiet since last fall when she noted that the “Phillips Curve is just not very important in the overall inflation process,” and seemed to favor using price-level targeting.
Yesterday – Stocks Rebounded with Industrials as Trade Tensions Seemed to Ease Up a Bit: The initial nervousness that took Treasury yields lower ahead of Monday’s U.S. trading session faded as stocks gathered steam and began a solid daily run higher. The Dow gained more than the S&P 500 and Nasdaq but all three finished up by at least 1.00%. Based on the biggest positive contributors, investors appeared to unwind some of the worries around trade wars that had dented equity performance late last week. Double-digit tariffs on steel and aluminum, key inputs into the production process for numerous U.S. companies, rattled companies such as Boeing and Caterpillar last week. Those two companies were two of the three biggest point contributors to the Dow on Monday. Overall, industrials were the index’s best performing sector. As Monday’s stock rally ensued, Treasury yields, which had moved lower in Asian and European trading, reversed higher. For the full day, the 2-year yield fell 0.4 bps as the 10-year yield tacked on 1.6 bps.
Overnight – Global Stocks are Rallying after Monday’s U.S. Gains, Pressuring Sovereign Yields Higher: Global equities have made the most of yesterday’s strong U.S. gains with almost every major index higher on Tuesday. In addition, comments from South Korea that Kim Jong Un and the North might be willing to stop seeking a nuclear arsenal if the U.S. was willing to come to the table for talks added to the healthier risk appetite. Most Asian indexes were up over 1.00% and the Stoxx Europe 600 is currently 0.61% higher. Italy’s FTSE MIB Index is leading the region, recovering a portion of the losses related to Sunday’s election as investors await more clarity on who will try and form a coalition to govern. Looking forward to the U.S. session, equity futures are currently pointing to more positive positioning at the opening bell. With equities stronger, U.S. yields ticked up again with the Treasury curve higher by roughly 1 bp at all maturities. The 10-year yield briefly pushed back above 2.90% for the first time since last Wednesday. The Dollar is making a notable move lower this morning, tumbling below a key level of 90 on the ICE index. Fed Chair Powell’s testimony last Tuesday sent the Dollar higher and through that level, but recent concerns over trade have brought the U.S. currency back down.
ISM Posted Better-than-Expected Headline Non-Manufacturing PMI on Mixed Underlying Details: The February ISM PMI covering the non-manufacturing sector of the U.S. economy was reported stronger than expected on Monday, dropping from 59.9 to 59.5, above the 59.0 expected by economists. The buoyancy of the headline PMI was because gains in the production and new orders indexes were good enough to partially absorb a disappointing drop in the employment index. The supplier deliveries index was unchanged. The business activity and production index rose 3.0 points to 62.8, its highest level in 12 months, while the new orders index added 2.1 points to 64.8, the highest level since 2005. The employment index, which had spiked to a series high in January, pulled back to more in line with its 2017 average (but softest since July). Overall, the activity indicators point to continued stable growth in the economy similar to the manufacturing report last week. The drop in the employment index is a directional disappointment and one of the few weak spots in leading labor indicators in front of Friday’s nonfarm payroll report.
President’s National Economic Advisor Working to Reduce Tariff Policy: According to a report from Politico, “White House NEC Director Gary Cohn is putting together a high-stakes event for Thursday featuring executives from industries likely to get slammed by high steel and aluminum tariffs including automakers and beverage companies. The idea is to counter the steel and aluminum executives President Trump heard from last week when he announced tariffs. … The Thursday event combined with pressure from top Congressional Republicans and GOP donors is intended to nudge Trump toward a more measured approach not likely to ignite a damaging cycle of retaliation. Trump is outwardly saying he won’t back down but he’s also hinting at how the approach might change with some concessions from Mexico and Canada in NAFTA negotiations. … As we’ve reported, Cohn and other free-traders are using the period in which lawyers must draft actual tariff language to find a dialed down approach. If he’s successful, Cohn is likely to stay. If he’s not, he’s likely to go.”