The Market Today
Trade Optimism Lifts Market Sentiment
by Craig Dismuke, Dudley Carter
Trade Data As-Expected; Continues to Show Slowing Trade Volume: The final data on trade in September came largely in-line with expectations this morning with the monthly deficit decreasing from $55.0 billion to $52.5 billion. Exports fell 0.9% and 1.2% for the third quarter as trade uncertainty continues to slow overall global trade volumes. Imports fell 1.7% in September and 1.3% for the quarter. The biggest hit on trade volumes has come from bilateral trade with China. The trailing 12-month trade deficit declined 3.5% in the third quarter and is now down 6.4% for the year. Total U.S. imports are now down 2.8% year-over-year while exports are down 1.8%.
Non-Manufacturing Sector PMIs to Give More Color on Broad Strength: The Markit Services and Composite PMIs are scheduled for release at 8:45 a.m. CT, followed by the ISM Non-Manufacturing Index at 9:00 a.m. The ISM index is likely the most important data this week as it will provide another look at how much overall economic activity has slowed. The index is expected to bounce off September’s 52.6 reading which was its second-lowest level since 2012.
Job Openings Expected to Tick Higher: At 9:00 a.m. CT, the September Job Openings and Labor Turnover report is expected to show job openings tick up after falling to 7.051 million in August. At their peak, job openings totaled 7.626 million last November. Other jobs data continue to point to a solid labor market.
Yields Rise, Stocks Hit New Record Highs on Trade Optimism: Markets responded yesterday to the optimism that the first phase of a U.S.-China trade deal could be near, a sentiment that has been growing since last week. The DJIA rose 115 points to set its first record-high close since July. The S&P gained 0.4% while the NASDAQ climbed 0.6%, both setting new highs on consecutive trading days. Stocks lost momentum mid-morning after government sources told MNI that China would not agree to all U.S. demands in areas including intellectual property rights protection. However, this seems to be the reason for phase one of a deal, leaving a more comprehensive trade solution for later. The Treasury curve steepened more than 3 bps on the day. The 2-year Treasury yield increased 3.4 bps to 1.586% while the 10-year yield rose 6.7 bps to 1.779%.
China’s Services Economy Slows As Expected: Global developments continued to drive markets Tuesday after positive trade headlines pushed the Dow to its first record close since July on Monday. Data Tuesday showed activity across China’s services sector slipped as expected to an eight-month low in October, offsetting a release last week that showed an unexpected uptick in manufacturing. The disappointing services result followed a report Monday which showed EU manufacturing contracted for a ninth month in October. Investors, however, have continued to push global stocks and sovereign yields higher, despite those reminders the global economy remains weak
Some Tariffs Could Be Taken Off as Part of Phase One Deal: Headlines over the last several days have signaled the U.S. and China are making progress in their negotiations of the first phase of a trade deal. That positive momentum continued overnight after multiple media outlets reported that the U.S., as part of the phase one trade deal, could cancel the 15% tariff on $150B of Chinese imports planned for December 15. There were also reports that the U.S. could cut back some tariffs already in place. China has pushed in recent weeks for a substantial removal of tariffs already put in place in order to secure a broader trade agreement.
Global Stocks Approach Records on Hopes of a Trade Deal: Japanese stocks rose more than 1.5% Tuesday to lead all gains across Asia, while China’s CSI 300 closed up 0.6% and in second place. The recent string of positive developments has helped lift China’s CSI 300 to its highest level since April while Japan’s Nikkei 225 has climbed to its best level since October 2018. Europe’s Stoxx 600 inched up less than 0.2% but was trading at its strongest level since the summer of 2015. Ahead of the key ISM report later this morning, U.S. equity futures were signaling the major indices would open at new records. In response, Treasury yields had moved higher with the 2-year yield up 3.8 bps to 1.62% and the 10-year yield 5.7 bps higher at 1.83%.
Doves Daly and Kashkari Seem Satisfied With Monetary Policy After Three Cuts: San Francisco Fed Bank President Daly spoke yesterday afternoon at NYU saying that the recent yield curve inversion was not as concerning as previous occurrences, dismissing the idea of negative interest rates, and playing down the idea that the economy might be running hot. When asked about keeping policy too easy, Daly emphasized the second half of the Fed’s dual mandate. “With the inflation running below our target, I would like to find full employment,” she said. She also said, “In my judgement we have done a sufficient amount” of easing. Minneapolis Bank President Kashkari also expressed satisfaction with the Fed’s policy changes this year. Kashkari said on a CNBC interview, “I’m really happy with the way the committee has moved over the past year. This is a pretty substantial change in outlook for rates, from raising last December to now having three cuts, and effectively being on pause for a while.” While he still noted risks being to the downside, he stopped short of calling for additional cuts.
Quarterly Loan Officer Survey Shows Tighter Credit: The Fed’s quarterly Senior Loan Officer Survey showed tightening credit standards and less demand for credit. The net percentage of respondents from large- and medium-sized banks who saw tighter lending standards on C&I loans increased from -2.8 to +5.4. At the same time, net 23.2% of those respondents reported less demand for C&I loans, the weakest reading since 2010. Apart from C&I loans, lenders reported tighter credit conditions for every loan type except autos and GSE-eligible mortgages. Demand for commercial real estate and consumer loans was mixed. While the 4Q lender survey was generally negative, the degree of decline was modest.