The Market Today
Trade Deal in Focus as G-20 Kicks Off
by Craig Dismuke, Dudley Carter
Light Calendar with Focus on G-20: Today brings a light economic calendar with just the Chicago Purchasing Manager Index at 8:45 a.m. CT and a speech from New York Fed Bank President John Williams at 8:00 a.m. Regardless of the economic calendar, markets will be focused on news coming out of this weekend’s G-20 meeting.
Optimism for Small Deal Between Trump and Xi: According to reports yesterday evening and this morning, a small deal/temporary ceasefire between President Trump and China’s Xi Jinping sound possible at their G-20 meeting in Buenos Aires. According to Politico, the deal could include an agreement to postpone the tariff increase on $200 billion in Chinese imports and “set up further talks in December and early next year … addressing major issues on intellectual property theft, joint venture rules, corporate ownership and forced technology transfers.” According to the WSJ, “One offer, according to Chinese officials: in return for the suspension of U.S. tariffs, Beijing would agree to lift restrictions on China’s purchases of U.S. farm and energy products,” setting up a precedent of smaller, on-off deals.
Yesterday – Morning Trade Headlines Kept Markets Guessing, Fed Minutes Reinforced Data-Dependent Policy: U.S. stocks spent the morning session fluctuating in negative territory, ultimately closing lower after giving back gains earned after the Fed’s November Minutes were released. Markets were pushed and pulled about early by multiple headlines on U.S.-China trade. Stocks shot higher after a Bloomberg headline read “Trump says he is close to doing something with China,” but fell back quickly after the full quote was published. The president said, “I think we’re very close to doing something with China but I don’t know that I want to do it,” because of the windfall profits he said Treasury is collecting from the tariffs. Stocks began a second climb after the WSJ reported that the U.S. and China were “exploring a trade deal in which Washington would suspend further tariffs.” The major equity indices then briefly turned positive after the Fed Minutes (more below) reinforced more data-dependent policy moving forward. The Dow ultimately fell back to close down 0.1% with the S&P 500 finishing 0.2% lower. The 2-year yield ended unchanged at 2.81% while the 10-year yield slipped 2.9 bps to 3.03%. Overnight, the 10-year yield had printed a tick below 3.00% for the first time since mid-September. In other markets, the Dollar finished flat and oil prices rallied after Russia reportedly was willing to work with OPEC to reduce production.
Overnight – Trade Takes the Reins from the Fed as Markets Keep Watch on G-20: Despite scattered gains across Asia, global sentiment has struggled to support broader improvements as investors remain cautious ahead of the G-20 summit that kicks off today in Buenos Aires. Chinese shares rose more than 1% but Europe’s Stoxx 600 has traded down 0.4%. U.S. futures are moderately weaker, led by a 0.3% decline for the Nasdaq. Core sovereign yields inched below yesterday’s levels with the 10-year Treasury dipping below 3.01%. Safer currencies firmed modestly and crude prices dropped just over 1%. The major event from the summit will be the outcome of a Saturday dinner discussion between President Trump and President Xi from China. Markets hope the dinner will result in suspension of further escalation of the trade dispute in favor of a framework for a broader trade agreement. As an appetizer to the main course, data Friday showed China’s manufacturing PMI fell to an even 50 in November, a more-than-two-year low and its first non-expansionary reading since it last contracted in July 2016. Already this morning, trade-related headlines from Argentina showed leaders from the U.S., Mexico, and Canada officially signed the new USMCA trade agreement. The deal will now be voted on by each country’s legislative bodies. Oil investors will be watching G-20 news for any signs OPEC countries and their partners are moving towards trimming production. There is growing speculation the group could announce output cuts at next week’s meeting to help boost prices, which are down over 30% since October’s peak and at the lowest levels in over a year. Absent an unexpected rally Friday, November’s 22.5% decline will be the worst month for WTI since the recession.
Pending Home Sales Show October Recovery in Existing Sales Likely a Head Fake: Pending home sales fell unexpectedly in October in the latest disappointing housing report. Pending sales dropped 2.6% in October, the most since January and the second biggest monthly decline since 2013. The persistent weakness over the last couple of years has now pushed pending sales to their weakest level since the summer of 2014. The three largest regions posted fewer pending contracts with the biggest slowdown seen in the West. After spiking 4.5% in the prior report, October’s 8.9% plunge was the sharpest in the West region since 2010. Pending sales in the South, the largest-volume region slid 1.1%, a fourth consecutive contraction, while activity in the Midwest dropped 1.8%.
Fed Signals Markets Should Focus on the Data, Not the Dots: The messaging in the Fed’s November Minutes reinforced recent remarks from numerous Fed officials: after a presumed December hike, markets should focus on the data, not the dots. Considering the labor market remained strong and inflation was still near 2%, “almost all” officials expected “further gradual increases in the target range” with the next “likely to be warranted fairly soon.” While a December hike seems a done deal, the debate about 2019 and beyond is ramping up. Several expected additional rate hikes but “expressed uncertainty about the timing.” A “couple” believe rates may be near neutral and additional hikes “could unduly slow the expansion” and “put downward pressure on inflation.” The group “emphasized” that decisions “should be importantly guided by incoming data and their implications for the outlook.” The Statement may soon reflect this sentiment too. It might soon be appropriate to “begin to transition to statement language that placed greater emphasis on…incoming data in assessing the economic and policy outlook” in order to stress the Fed’s “flexible approach in responding to changing economic circumstances.” Bottom Line: Considering the uncertainties related to the economic outlook and longer-run estimates of key policy variables, policymakers’ stressed that they will increasingly rely on the “evolution of the outlook as informed by incoming data,” to determine whether to push forward with their planned path or pause somewhere along the way.