The Market Today
Trade and Brexit Optimism Boost Sentiment, 3M/10Y Un-Invert for First Time Since July
by Craig Dismuke, Dudley Carter
Consumer Confidence Expected to Pull Back but Remain Strong: At 9:00 a.m. CT, the preliminary October report from U.M. on consumer confidence is expected to show a small pullback after September’s bounce. Confidence remains high although there have been several sharp declines/increases in 2019 on all of the political/global/trade uncertainty. For consumers, however, the picture should still be rosy. Stocks remain within 3% of their all-time highs, largely the beneficiaries of easing monetary policy. The unemployment rate has fallen to its lowest level since 1969. The average price for a gallon of regular-grade gasoline is currently $2.65. Earnings growth is outpacing temperate inflation. And mortgage rates have fallen to within 30 bps of their 2012 lows.
Economists Likely to Revise Rate Projections Even Lower, Fedspeak: Also on today’s calendar, the October Bloomberg Survey of Economists should show another drop in economists’ interest rate projections. Boston Fed Bank President Rosengren and Dallas Bank President Kaplan are both slated to speak this afternoon.
YESTERDAY’S TRADING ACTIVITY
Sentiment Turned Positive Ahead Of Trade Talks: Treasury yields rose with equities Thursday as hopes for progress toward a trade deal, even a limited one, lifted spirits. Evidence in the Minutes that ECB officials were divided on the recent stimulus package and positive headlines on Brexit added to the upward pressure. Markets had swung wildly overnight on conflicting headlines about the status of trade negotiations. An initial equity sell-off, driven by speculation there was little chance of progress in Thursday’s negotiations, was reversed ahead of U.S. trading on reports the U.S. could delay next week’s tariff hike and offer China’s Huawei purchase exemptions for certain goods. Despite a softer-than-expected CPI inflation report, U.S. equities and yields both started the U.S. session higher.
A Host Of Factors Pushed Yields Higher Thursday: A tweet from President Trump that he would meet China’s vice premier on Friday added to the optimism and countered reports that the Chinese team might leave a day early. Just before the tweet, China’s vice premier said his team had come with “great sincerity” toward reaching an agreement. Headlines hit a couple of hours later that Ireland’s PM had met with PM Johnson from the U.K. and believed a Brexit deal could be reached in the near-term. After equities closed but before the end of Treasury trading, President Trump said Thursday’s talks went “very well” and would continue on Friday. The S&P 500 closed up 0.6% and Treasury yields jumped in lockstep with a sell-off across Europe. The 2-year yield jumped 7.7 bps to 1.54% while the 10-year yield rose 8.4 bps to 1.67%. Those moves trailed even-larger 9.9-bp and 12.7-bp increases in U.K. yields after the Brexit developments.
OVERNIGHT TRADING ACTIVITY
Optimism on Trade and Brexit Boosts Global Sentiment Friday: The upbeat tone that drove U.S. equities and yields higher Thursday has carried over and filtered out across markets globally Friday. A second day of trade talks between top U.S. and Chinese officials will begin Friday after the first round went “very, very good” according to President Trump. Following the positive meeting between prime ministers from Ireland and the U.K. on Thursday, senior negotiators from the EU and U.K. said they had a “constructive” meeting Friday discussing Brexit. With a benign daily global economic calendar, those factors should be Friday’s focus.
Markets on Pace for Strong Weekly Finish: Stocks in Hong Kong jumped more than 2% to lead a solid day across Asia while widespread gains for European indices had pushed the Stoxx 600 1.6% higher around 7 a.m. CT, its best day since early August. As a result of the global strengthening, MSCI’s All Country World Index was on pace for its first weekly gain in four weeks. The optimism around Brexit progress again boosted the British Pound and rising U.K. yields were outpacing gains elsewhere for a second day. The pound is up 3.6% over the past two days, its largest such gain since 2008. The U.K. 10-year yield has jumped 22 bps, its biggest two-day increase since 2015. Around 7:30 a.m. CT, the Treasury curve was between 3 bps and 4 bps higher and stocks futures had strengthened roughly 1%.
Fed Speak Continues to Reflect Uncertain Caution about the Outlook: Dallas Fed President Kaplan said Thursday he supported the last two cuts because “we’re in a fragile period here,” but also said “This cutting we’re doing should be limited, restrained and modest and not the start of a full-fledged cutting cycle.” He added, “We’ve got so much uncertainty, and so much policy uncertainty, I think it’d be wise for us not to over telegraph where we are in the cycle.” Separately, President Kashkari from Minneapolis believes “interest rates are roughly around neutral, maybe slightly contractionary,” adding “I’m not sure how much further we have to go.” However, he also said if the data continues along the current trend, he would support another quarter-point cut. Cleveland Fed President Mester is aware of and monitoring the elevated risks to the outlook, but did not support the Fed cutting rates in July and September. “My preferred strategy was to take action only if there were evidence of a material deterioration in the outlook and not merely on heightened risks,” Mester noted.