The Market Today

Trade Headlines Push Markets Up, Down, Down, Up


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

CPI Inflation Broadly Softer than Expected, More Volatility in Used Auto Prices:  Consumer price inflation showed slower price gains than expected in September with headline prices unchanged month-over-month.  Energy prices fell 1.4%, food and beverage prices rose a soft 0.1%, and core prices rose just 0.1% (exp. +0.2%).  On a year-over-year basis, headline inflation continued to grow 1.7% while core held at 2.4% growth.  Housing inflation remained firm, particularly when excluding lower prices for household fuels and utilities.  Shelter inflation rose an above-trend 0.34% MoM, boosted by a 2.1% increase in lodging prices.  Transportation inflation was very soft, even when excluding motor fuels.  Used car prices continued their string of volatile reports falling 1.6% MoM.  Medical care price inflation also slowed its growth rate, up 0.18% MoM versus the 12-month-trend rate of +0.28%, on a drop in medical care goods prices.  Apart from the big three categories, the remaining categories of core inflation were broadly softer than trend.

Initial Jobless Claims Fall Unexpectedly: After three consecutive weekly increases, initial jobless claims fell unexpectedly by 10k to 210k last week, matching the best level since the first week of September. There has been speculation the ongoing strike at General Motors could affect the overall claims data, although the results show any upward pressure has been limited. While the four-week average inched up, the claims data continue to be a positive indicator for a slowing labor market. Separately, continuing claims for the week before rose more than expected to a six-week high.

Trade Talks and Fedspeak: There are three Fed officials on the calendar today including San Francisco’s Daly, Cleveland’s Mester, and Atlanta’s Bostic.  More importantly, trade talks between U.S. and Chinese officials will be ongoing today.

 

YESTERDAY’S TRADING ACTIVITY

Fed Minutes Don’t Disrupt Trade-Related Momentum: Stocks rallied sharply Wednesday on hopes early-week trade escalation had not fully derailed chances for progress in the U.S. and China trade talks that begin today. The S&P 500 gained 0.9%, partially recovering from Tuesday’s 1.6% drop that unfolded after the U.S. blacklisted 28 additional Chinese companies and banned certain officials’ visas for human rights violations. Earlier Wednesday, sentiment recovered on reports China was still open to a partial trade deal notwithstanding those developments. While all three major indices notched solid gains, they dipped late in the session on a Reuters report that in response to U.S. moves, “Beijing has lowered expectations for significant progress.” Treasury yields rose with equities and held their gains after the Fed Minutes reinforced that officials have become divided on what to do next, despite general agreement that risks to the economy have increased (more below). The 2-year yield added 4.4 bps to 1.47% as Fed Funds futures modestly pared expectations for easing in 2020, while the 10-year yield rose 5.5 bps to 1.58%.


OVERNIGHT TRADING ACTIVITY

Sharp Volatility Sent U.S. Futures Lower Early On Negative Trade Headlines: Global markets were notably volatile at the open of Asian trading on several conflicting reports about what to expect from trade talks between the U.S. and China that get under way today in Washington. Equity futures dropped sharply and Treasury yields tumbled on a report from Chinese media that no progress had been made in deputy-level discussions ahead of today’s meeting and that China’s top negotiator would leave a day earlier than expected. Futures on the S&P 500 fell as much as 1.3% within the first thirty minutes of trading and the 10-year yield dropped nearly 4 bps.

Countering Positive Headlines Brought Markets Back Up Ahead Of Trade Talks: Things turned around quickly, however, after the White House said it was unaware of any changes to the schedule, although officials later said it has become “fluid.” Separately, a U.S. news outlet said the White House could delay next week’s tariff hike on $250B of Chinese goods as part of a currency agreement and another noted the U.S. was planning to resume certain exemptions for U.S. companies to do business with China’s Huawei. Within an hour or two, equity futures and Treasury yields had recovered back to unchanged.

U.S. Yields Diverge From European Yields Lower Ahead Of Inflation Update: Ahead of this morning’s inflation data, Treasury yields had diverged from European yields with the 2-year yield down 2.4 bps and the 10-year yield 0.7 bps lower. European yields were up around 3 bps on 10-year debt after the ECB’s minutes confirmed there was division among officials as to the need for and structure of its recent stimulus package. Despite the softer-than-expected inflation data, U.S. and European yields both moved up to new highs for the day; the 2-year Treasury yield to +0.4 bps and the 10-year yield to +3.1 bps.


NOTEWORTHY NEWS

JOLTS Data Confirm Job Market Is Slowing: While job postings continued to exceed the unemployed in August, BLS data showed total openings fell unexpectedly to their lowest level since March 2018 on weakness across most industries. Total job openings dropped to 7.051MM from 7.174MM in July (previously estimated at 7.217MM) and have cooled in three consecutive months. As economic uncertainty has increased, momentum in job postings has slowed sharply since openings reached an all-time high last November. The year-ago change has declined in nine consecutive months to -4.0% in August, the third weakest since the recession. Other details of the report echoed the slowdown, new hires and quits both slowed, but layoffs were essentially flat and remained low. The labor market is undoubtedly slowing but doesn’t appear to have yet cracked amid an elevated level of economic concern.

Fed’s Positive Baseline Premised On Accommodation: The September Minutes showed general agreement that the baseline outlook remained positive, but for most that was “premised on a somewhat more accommodative path for policy than in July.” Helping explain the caution, officials judged “that downside risks to the outlook for economic activity had increased somewhat…particularly those stemming from trade policy uncertainty and conditions abroad.” However, risk of a no-deal Brexit and tensions in Hong Kong and the Middle East enhanced the unease. Several times the Minutes noted concern that recent weakness in the business sector “could eventually lead to slower hiring.”

Drivers Of Division: Because “downside risks had become more pronounced” and inflation remained low, most supported the September rate cut as insurance against further weakening. A tight labor market was “exerting little upward pressure on inflation” and officials “saw little chance of an outsized increase in inflation” even after the cut. Those preferring to wait didn’t believe the  “uncertainties would derail the expansion” and noted policy was “already adequately accommodative.” They worry the Fed “might be taking out too much insurance.” A couple preferred 50-basis-point cut believed it “would more appropriately recognize important recent developments.”

Fed Wants Door Cracked For More Easing, But Not Swung Wide Open: While the Minutes kept the door open for additional easing, rates moved up initially after their release. A few officials pointed out that markets were currently expecting more easing than those officials expected, and that “it might become necessary for the Committee to seek a better alignment of market expectations regarding the policy rate path with policymakers’ own expectations for that path.” Additionally, several others wanted the Statement to “provide more clarity about when the recalibration of the level of the policy rate in response to trade uncertainty would likely come to an end.”


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