The Market Today

Trade Deficit Widens in a Weaker Start for Fourth Quarter Activity

by Craig Dismuke, Dudley Carter

Today’s Calendar – Trade Signals Show a Weaker Start for the Fourth Quarter: The U.S. trade balance widened in October, a move that was expected based on last week’s Advance Goods Trade Balance report. That report showed a larger-than-expected drop in exports led by declines in capital goods and food products that exaggerated the effect of a modest increase in imports. In this morning’s full trade report, the monthly deficit did increase, from a revised $44.9B (previously $43.5B) in September to $48.7B in October (expected $47.5B), the largest since January. The $3.8B MoM increase was almost exclusively driven by goods activity as net services flows remained roughly in line with September. However, the dynamics of the goods flows were a bit different than the early report had indicated. It was a jump in imports, not a decline in exports, that drove the deficit wider. Imports were up $3.8B, or 1.6%,  with most of that the result of stronger goods inflows. While the stronger imports are indicative of steady domestic demand, an obvious positive for the broader economy over the medium term, the expansion of the deficit in October could pose some more immediate mathematical challenges for 4Q GDP.


Later this morning, Markit will revise its November Services and Composite PMIs and the ISM will release its November report on the non-manufacturing industries. The Non-manufacturing index is expected to drop from 60.1 in October, the highest since August 2005, to 59.0 which would match its third-best result since 2005.


Overnight Activity – Treasury Yields Rise for A Second Session Despite a Drag from Europe: Monday’s intraday reversal for U.S. equities (more below) has given global investors pause Tuesday which has stalled the weekly momentum in equity pressures. Shares in Asia moved mostly lower and a similar discouragement is being reflected on the European boards. The Stoxx Europe 600 was down 0.3% at Tuesday’s midpoint. One of the few bright spots in the region may provide a partial explanation for the Tuesday weakness. The U.K.’s FTSE 100 has inched higher and the Pound remained weaker after reversing lower Monday on news that representatives from the EU and U.K. had failed to reach an agreement. As European equities weakened, sovereign yields there moved lower with the changes more or less distributed evenly across the term structure. Declining yields in Europe has served to drag U.S. yields lower in a mostly parallel fashion. Treasury yields had risen during the Asian session, fell during European trading, but are back on an upward path of the U.S. open. The 2-year yield has added 1.6 bps to 1.82% to continue its recent impressive climb. Other maturities are up by similar amounts with the 5-year sitting at 2.16% and the 10-year yield back to just below 2.40% at 2.39%. Tech continues to lag other sectors based on Nasdaq future’s underperformance of the Dow and S&P, although all three are up on the day.


Yesterday’s Trading Activity – Stocks Erase Gains as Treasury Curve Flattens to New Cycle Low: Optimism was high ahead of U.S. trading with futures strengthening after Senate Republicans passed their tax plan in the wee hours of Saturday morning. Tech shares tumbling was too much for the major indices to absorb Monday as the rotation into other sectors failed to keep the S&P positive in Monday’s session. The Nasdaq was the day’s worst performer as the S&P edged just below Friday’s final tick. Within the S&P, technology companies fell the most while health care and real estate companies also weighed on the broader index. Tech’s 1.93% decline Monday extended recent woes that have the sector down 4.1% from last Tuesday’s all-time high. The advancement of tax reform last week started a rotation into other sectors which may be relatively cheaper and offer more upside benefit from changes to the tax code. That rotation was evident in telecommunication and financial companies finishing atop the sector ladder. Elsewhere, the Dow did manage a 0.24% gain and another record close. Looking at the Treasury market, the 2-year yield held its overnight rise that pushed the yield up 3.4 bps and above 1.80% (1.81%) for the first time since October 2008. Longer yields, however, gave up most of their overnight gains and the 10-year yield closed up just 1.1 bps at 2.37%. As a result, the curve flattened to 56.2 bps between those two points, the lowest premium since Halloween Day in 2007. In other markets, the Dollar managed to hold a rebound and crude prices fell the most in three weeks on fears the OPEC deal from last week may not go far enough to fend off increased production from the U.S. shale.


Business Investment Brightens on Positive Revisions in the Factory Orders Report: Factory orders were a bit firmer than expected in October. Total orders fell just 0.1% from September compared with expectations for a larger 0.4% pullback, and did so even as September’s activity was revised stronger. The headline loss was driven by weakness in transportation orders, an effect that flowed up from the durables categories. The initial estimates for durable goods order predicted the weakness in transports but were revised up on stronger-than-expected activity in core categories. Durable goods orders excluding transportation rose 0.9% in October compared with the initial estimate of a 0.4% gain. Equally as positive were revisions to the capital goods data which serve as leading indicators for business investment activity in the GDP calculation. Capital goods orders, which were initially estimated to have pulled back 0.5%, actually rose 0.3%. Shipments of the same were also stronger, up 1.1% versus the initial estimate of a smaller 0.4% increase. Overall, the report erased disappointing feelings around future business spending that were evoked after the early data indications last week.


Barkin Set to Become Head of Richmond Fed on January 1: As expected, based on weekend rumors, the Richmond Fed announced it was appointing Thomas Barkin to be the next full-time leader of its District Reserve Bank. Mark Mullinix, first vice president at the Richmond Fed, is currently serving in an interim capacity and has been since Jeffery Lacker resigned in April following an admission that he leaked confidential information in 2012. Mullinix will continue to lead the Richmond Fed until Barkin’s tenure officially begins on January 1. Barkin is currently the chief risk officer at McKinsey & Company, a worldwide cross-sector consulting firm. He was previously a member of the Board of Directors for the Atlanta Fed and has an undergrad in economics and advanced degrees in law and business, all from Harvard. His lack of previous involvement with monetary policy leaves open-ended the question of which way he will lean when it comes to making policy decisions. The Richmond Fed President will vote on policy in 2018.

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