The Market Today

Tariffs for France, Argentina, Brazil, and No Rush on China Deal


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

November Auto Sales, Excluding the Big Three, Scheduled for Release: The only quiet day for this week’s economic calendar, today, will bring only the November auto sales estimates.  The auto sales data now exclude actual sales figures for Ford, GM, and Chrysler, significantly impairing the accuracy of the results.  That being said, sales have been trending lower since late-2015 and 90-plus-day delinquencies have been rising (see Chart of the Day). However, sales remain well above 16 million units (annualized) which should keep the automakers profitable.


YESTERDAY’S TRADING

Global PMI Data Sent Mixed Signals about the Outlook: Stocks held on to a positive open for just fifteen minutes Monday as concerns about trade tensions and weaker U.S. data ultimately dragged the S&P 500 to its largest decline in two months. Sentiment initially strengthened overnight after PMI data from China and Europe beat expectations, offering hopes the bottom for the global economy has already been put in. However, global stocks slipped after President Trump tweeted that he was reinstating metals tariffs on Argentina and Brazil for “massive devaluation of their currencies.” While the major U.S. equity indexes opened positively, they quickly reversed and reached new lows after ISM data printed surprisingly weak (more below) and construction spending missed expectations (more below).

Longer Treasury Yields Rose Despite U.S. Equities Retreating on Weak Data: The S&P 500 ended the day down 0.9%, its largest decline since October 8, and near its lowest tick of the day. Treasury yields also slipped following the weaker U.S. economic data, but longer yields remained higher by the close. Steepening the curve back to above 20 bps, the 2-year yield fell 1.2 bps to 1.60% while the 10-year yield rose 4.3 bps. Applying additional upward pressure on U.S. yields, longer yields rose across Europe Monday in response to renewed political uncertainty. A change in SPD leadership in Germany was seen as a potential threat to the current governing coalition and the country’s current focus on avoiding budget deficits. Germany’s 10-year yield jumped 8.0 bps to -0.28%.


OVERNIGHT TRADING

President Trump Has No Deadline for Making a Deal with China: President Trump added to speculation that a trade deal could be pushed into next year, sending global equities and bond yields tumbling just after 4 a.m. CT. “In some ways, I like the idea of waiting until after the election for the China deal,” the president told a group of reporters gathered at a NATO meeting in London, adding “I have no deadline” on striking a deal. U.S. stock futures and Treasury yields both gave up overnight gains immediately following his remarks. The S&P 500 unwound a 0.2% gain and dropped to trade down 0.5% around 7 a.m. CT, while Treasury yields moved down more than 3 bps across the curve. The Stoxx Europe 600 erased a 0.4% gain and moved down 0.2% on the day.

Global Trade Tensions Have Dented Market Sentiment this Week: The renewed anxieties surrounding the U.S. and China trade negotiations come less than twenty-four hours after the U.S. announced it was restoring tariffs on Argentina and Brazil and threatened certain French products with tariffs up to 100% in response to the country’s new digital services tax. Trade tensions remain the biggest overhang affecting the economic outlook, evidenced by comments in the weaker-than-expected ISM report yesterday (more below).


NOTEWORTHY NEWS

ISM Manufacturing Index Remained Weak in November: The ISM’s headline manufacturing index edged lower unexpectedly in November to 48.1, its third-weakest reading since the Great Recession. Last month’s 0.2-point decline disappointed expectations for a modest gain to 49.2. Behind the main index’s decline were weaker readings for new orders, employment, and inventories that offset improvement in production and slower supplier deliveries’ times. The new orders index fell 1.9 points to 47.2, matching the weakest reading of the cycle, while employment slipped 1.1 points to its second weakest level since early 2016. And while the production index did improve 2.9 points, it pointed to a fourth month of contraction and remained near its weakest levels of the cycle. The ISM data have slowed sharply since the middle of 2018 as global growth has slowed amid rising elevated trade tensions. The Chairman of the ISM said in the report that, “Global trade remains the most significant cross-industry issue.”

Construction Spending Missed in October but Was Cushioned Somewhat by August Revision: Construction spending slowed unexpectedly in October but there was a net positive revision to the prior two months, resulting from a surprisingly strong August result, that partially offset the impact on the broader trend. Within the details, many of the current-year trends were repeated. Spending on new single family homes continued to improve, rising 1.6% in the biggest monthly gain for spending since early in 2018. The improvement in single family construction was offset by a drop in home improvement outlays and another weak month for multi-family projects. Outside of the residential categories, private business spending on structures dropped again and the broader trend remained weaker. In the government sector, federal spending rose while state and local outlays moderated after a large gain in September.


ICYMI – November 2019 Monthly Review: With the Fed on hold following its October rate cut, stocks set a string of records in November on renewed hopes for a U.S.-China trade deal. Treasury yields also moved higher early, but closed well off their peaks after mid-month developments reminded investors how difficult tying up the loose ends of an agreement could be. The 2-year yield settled up 8.8 bps for the month at 1.61% and the 10-year yield added 8.5 bps to 1.78%. After notching eleven new all-time highs throughout the month, the S&P 500 gained 3.4% in November, increasing its year-to-date gain for 2019 to 25%. Click here to view the full monthly review.


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