The Market Today
Trade Discussions Roil Markets Momentarily
by Craig Dismuke, Dudley Carter
Vining Sparks Economic Outlook Update – Thursday April 5, 10:00 a.m. CT: We will host our 2nd Quarter Economic Outlook Update later this morning during which we will discuss the significant increase in market volatility this year. We will discuss why the increased volatility is a symptom of a larger underlying challenge to economic stability. To register, click here.
Jobless Claims Tick Higher and Trade Deficit Increases: On today’s economic calendar, initial jobless claims bounced up from 218k to 242k for the week ending March 31. While this is a disappointing result, the labor market metrics continue to look very strong. There are some concerns about the recent list of retailers shuddering stores, but the overall labor market continues to look extremely strong despite some changes in delivery medium. The February Trade Balance will only inflame the tariff discussions as the deficit increased $800 million more than expected to $57.6 billion.
Focus Turns to Jobs Report and Earnings Data Specifically: However, investor attention has already turned to tomorrow’s labor market reports. Economists expect 185k new payrolls added, the unemployment rate to drop to 4.0%, and average hourly earnings to rise 0.3% MoM to 2.7% YoY. At this point in the cycle, investors have conceded that the labor market is very strong. A payroll miss is unlikely to meaningfully affect yields. Now, the focus is on when the strong labor market will result in better wage growth – the inflationary side of a strong labor market. For some perspective, there have been 14 jobs reports since the beginning of 2017. Payroll growth has disappointed 6 times and beat expectations 8 times. There has been no correlation between those misses and daily change for stock prices, the 2yr yield, nor the 10yr yield. In contrast, average hourly earnings have been stronger than expected three times and the S&P has fallen on two of those occasions (2/2/2018 and 10/6/2017). Average hourly earnings have been weaker than expected 9 times, and the S&P has risen on all 9 occasions.
Yesterday – Turnabout Took Stocks Higher as Tariff Concerns Eased: Equities made an impressive turnabout Wednesday as investors overcame, at least for now, amplified concerns about a tit-for-tat tariff battle between the U.S. and China. As futures had predicted, stocks plunged at the open with the S&P 500 down 1.6% on the opening tick. But slowly and steadily the index erased that loss, rallying back to end up 1.2%, off of a double bottom at 2,581 (February low close and this Tuesday), and back above its 200-day moving average. From its low point, the index rallied 2.8% in its biggest intraday recovery since February 9. The markets, already in recovery mode, added to gains after Larry Kudlow, Gary Cohn’s replacement as top White House economic adviser, attempted to talk down the potential tariffs as a first step in broader negotiations. Treasury yields had tumbled after China’s tariff announcement (2:45 a.m. CT) but recovered with stocks. Looking across the curve, the 2-year yield rose 1.6 bps while the 10-year yield ticked up 2.6 bps. The easing of nerves was also evident in other asset classes, with gold and the Japanese Yen giving up all of their earlier gains.
Overnight – Stocks Rebound as Investors Hope for Negotiations to Replace Tariffs: Global markets cheered the sea change in yesterday’s U.S. session that erased an opening slump and sent the major indexes on a strong intraday rebound. With hopes still for the tariff proposals between the U.S. and China to be put aside in favor of more diplomatic negotiations, major equity indices around the globe strengthened. Japan’s Nikkei closed 1.5% higher while South Korea’s KOSPI gained 1.2%. Germany’s DAX has rallied 1.9% to lead a round of solid gains across Europe that has lifted the Stoxx Europe 600 by 1.7%. U.S. equity futures are also signaling more gains at the start of trading. Sovereign yields are modestly higher with longer yields leading. Germany’s 10-year yield rose 1.4 bps while the 10-year Treasury had added 0.9 bps to 2.81%. The rise in European yields was likely capped by another round of softer data. The Eurozone’s composite PMI slipped to its lowest level in fourteen months and February’s retail sales were disappointing and included negative prior month revisions.
Fed’s Bullard Sees No Reason the Fed Should Raise Rates Further: The Fed’s Bullard spoke Wednesday saying that first quarter’s growth rate looks uncertain and acknowledging that the inflation was “somewhat” closer to the Fed’s 2% target. Still, he said it’s unnecessary for the Fed to raise its target rate any further. On his outlook for monetary policy, Bullard didn’t say anything that he hadn’t already said with his March dots. Parsing the March update, we presumed Bullard was the low dot for 2019 and 2020, calling for no additional tightening of the overnight rate. He addressed the growing concerns around trade, speculating that tariffs limited to steel and aluminum would not be disruptive but a more general application could be a more significant development.
Factory Orders Fell Short as Core Activity was Softer than Initially Estimated: Factory orders rose 1.2% in February, short of estimates for a 1.7% gain, and were boosted by a big gain from the volatile transports category. Removing the effect of the 7.0% increase in transport activity, the largest since June 2017, core factory orders rose a more modest 0.1%. Compared to initial estimates, orders of durable goods excluding the transports gain was trimmed 0.2% to +1.0% MoM, in part because capital goods activity was a bit weaker. The leading indicator for future business spending improved 1.4%, slightly weaker than the initial estimate of 1.8%. Core capital goods shipments were unchanged. Despite the slightly weaker orders increase, the capitals goods data showed a pick-up from January’s level.
ISM Non-Manufacturing Report was Softer but Still Strong: The ISM’s Non-manufacturing index fell a touch more than expected in the March release but remained at a still-strong 58.8. The March reading, the sixth strongest of the cycle, cooled on mixed moves in key subcomponents. The indexes tracking production and new orders both edged down from their February levels, with the latter showing the bigger drop off (-5.3 pts) to 59.5, just shy of its trailing 12-month average. On a more positive note, the employment index rebounded after a steep February fall and added to the optimism created by the ADP report that Friday’s nonfarm payroll report could be strong. Supplier deliveries slowed, a positive for the headline index because it’s thought to depict logistical headwinds from a bustling economy. While slower than February, the March result reflects a steady state of expansion.