The Market Today

TODAY’S CALENDAR

CPI Inflation Shows No Signs of Forcing Tighter Monetary Policy: Consumer prices rose 0.3% MoM in April, pushed higher by a 5.6% increase in gasoline prices but weighed down by a 0.1% drop in food prices and a slower rate of growth in core prices.  Core prices rose 0.14% MoM, fractionally softer-than-expected despite a further firming in housing inflation (shelter prices rose 0.4% MoM) and medical care inflation (+0.3% MoM).  A third consecutive monthly decline for used car prices, down 1.3% MoM in April (third largest 3-month decline of the economic cycle), helped keep core inflation on the soft side as well as weakness in most other smaller categories.  Reflecting the broad-spread weakness in prices, core goods inflation fell 0.34% MoM, the weakest month in almost 13 years.  Because of base effects, core inflation rose from 2.0% to 2.1% YoY.  However, the measurement more indicative of recent momentum, the 3-month over 3-month annualized rate, fell to 1.6%, its weakest pace since July 2017.  While the April CPI data was, again, softer-than-expected, the underlying data point to a firmer result in the Fed’s preferred core PCE measurement.  Nonetheless, inflation, as measure by the BLS, continues to show little evidence of forcing tighter monetary policy anytime soon.  

All Eyes on Trade Negotiations: There are several Fed speakers on the tape today including Governor Brainard, Atlanta bank President Bostic, and New York bank President Williams.  While their comments could get investors’ attention, trade headlines remain the focus with Lighthizer, Mnuchin, and Liu He currently meeting in Washington.   

TRADING ACTIVITY

Yesterday – Markets Continued to Take Their Cue from Trade Twists and Turns: Thursday brought another day of whippy trading on Wall Street as stocks and Treasury yields were swung about by investors responding to continued trade uncertainty. Equities and Treasury yields both gapped lower at the open after President Trump said Wednesday night that China “broke the deal, …so they’ll be paying,” a reference to an increase in tariffs on $200B of Chinese goods expected just after midnight. Equities’ opening decline pushed the S&P 500 down 1.5% around 10:30 a.m. CT while the 10-year Treasury yield shed as many as 5.7 bps to 2.42%. However, the President later said that he had received a letter from President Xi of China and that the two may hold a phone call later in the day. He also said it was still possible that a trade deal could be done this week. Stocks moved off their lows and the Treasury curve trimmed its decline. With the two sides locked in negotiations Thursday in Washington and the markets paralyzed by an expected increase in tariffs and the President’s conflicting positive take, stocks and yields slid sideways into the close. The S&P 500 ultimately closed down 0.3% at a five-week low while the 10-year yield settled 3.7 bps lower at 2.44%, its lowest close since March 29.

Overnight – Second Day of Negotiations Begins after Tariff Increase Takes Effect: After fretting for the last four days about an increase in U.S. tariffs on China, global markets’ best weekly performance has come on Friday following the actual tariff hike taking effect. At 12:01 a.m. on Friday, the U.S. increased the tariff rate it’s charging on $200B of Chinese imports from 10% to 25%, escalating the dispute between the two countries that has persisted for more than a year. China said it would retaliate with countermeasures but didn’t divulge details of its plan. Considering its significant trade imbalance with the U.S., China isn’t able to respond with tit-for-tat tariffs and will be forced to look to non-tariff measures. Even as a list of roughly 5,700 different products became more expensive Friday and the U.S. explores plans for taxing the remaining balance, Chinese stocks rallied 3.6% and the Stoxx Europe 600 was 0.6% higher on hopes a deal was still possible. Unlike previous episodes of escalation that led to a breakdown in talks, Chinese negotiators remained in Washington Friday for continued discussions. However, U.S. equity futures fell into negative territory after an eight-tweet defense of the tariffs’ merits from President Trump began with “Talks with China continue in a very congenial manner” but “there is absolutely no need to rush” to a deal, because of the “massive payments” China is currently making to the U.S. Treasury. U.S. yields were higher for most of the overnight session but closer to unchanged ahead of this morning’s inflation report.