The Market Today
Trade Policy Continues to Roil Markets; U.S. Data Remains Strong
by Craig Dismuke, Dudley Carter
Home Prices and Consumer Confidence: At 8:00 a.m. CT, April’s S&P CoreLogic Home Price Index is expected to show home prices continuing to grow at close to 7% YoY. Rising prices continue to add to the challenge of affordability, which the National Association of Realtors’ Chief Economist said last week was “becoming a crisis”. At 9:00 a.m., the Conference Board’s report on Consumer Confidence is expected to hold steady near its highest level since 2000. The Richmond Fed Manufacturing Activity index is also scheduled, which will give analysts another look at expectations for capex. The Fed’s Kaplan and Bostic are both on the schedule to speak today. The Congressional Budget Office is scheduled to release its most recent long-term budget outlook at 9:00 a.m. CT.
Mixed Messages on Trade from White House as Dollar Strength Hurting the Cause: Despite the fairly busy economic calendar, investor focus is likely to remain on the White House’s mixed messaging on the trade policy announcement slated for Friday. Treasury Secretary Mnuchin and White House trade adviser Navarro (more below) gave somewhat conflicting accounts yesterday of what to expect. Incidentally, as the U.S. economy continues to roar sending the Dollar higher, the impact of Dollar appreciation (+7.6% trade-weighted since March) would likely have a bigger impact on the trade deficit than all of the thus-far approved tariffs. According to JP Morgan’s Chief Economist, the Dollar’s increase could eventually add $200 billion to the trade deficit.
Yesterday – Stocks Tanked on Technology Trade Threats as Dow Closed: U.S. stocks quickly joined a global risk sell-off that had dented global sentiment earlier in the overnight session. An announcement from the White House on Sunday indicated it would target China’s involvement with U.S. technology and became the latest entry on a long list of items creating concerns about a possible trade war. The big three U.S. indexes tumbled at the open, exacerbating weakness for European stocks and helping bourses across the Atlantic close at their lows of the day. By the finish, the Stoxx Europe 600 had fallen more than 2% in its biggest daily decline since March. In the U.S., the Dow dropped 1.3% and closed below its 200-day moving average for the first time since June 2016. However, the index moved up off the lows late in the session following remarks from White House trade adviser Navarro on CNBC that, “There’s no plans to impose investment restrictions on any countries that are interfering in any way with our country. This is not the plan.” Tech companies were dealt a bigger blow with the Nasdaq falling more than 2.0% in its biggest single-day drop since April 6. An initial flight into Treasurys pushed down yields, and while the initial bid had moderated by the close, the curve ended the day lower and flatter. The 2-year yield finished 0.8 bps lower at 2.53% while the 10-year yield dropped 1.5 bps to 2.88%. The spread between the two closed at 0.345%, a new low for the cycle.
Overnight – Chinese Stocks Enter Bear Market on Trade War Angst: Asian markets remained under pressure overnight while the tone across Europe turned more sanguine and U.S. futures were mixed but mostly unchanged. Shares in China continued to be the weak spot within the global equity space. The country’s Shanghai Composite Index, similar to the U.S. Dow, fell 0.5% and moved into official bear market territory, down more than 20% from its late-January peak. Chinese equities have been hit harder than their U.S. peers as the trade spat between the two countries has rumbled on although, to be sure, the underlying economic fundamentals had already diverged in favor of the U.S. before the trade tensions reached their peak. In Europe, the Stoxx 600 was 0.3% higher while futures in the U.S. had moved in opposite directions but were close to unchanged. Treasurys remained firm and the 10-year yield had moved lower for an eighth day in the last nine sessions, dropping a modest 0.9 bps to 2.87%. The 2-year yield was down an even smaller 0.6 bps to 2.53%, nudging the related spread to just under yesterday’s cycle-low of 34.5 bps.
New Homes Sold at the Second Strongest Pace of the Cycle: New homes sold at their second fastest pace of the cycle in May on a flurry of contract signings in the South. Sales totaled 689k annualized units last month, second only to last November’s 712k-unit pace. While the pace was surprisingly strong, a regional concentration of activity reflected a more narrow improvement. Sales in the Northeast (5% of volume) dropped 10.0% while activity in the West (23% of volume) fell 8.7% and contract signings in the Midwest (13% of volume) were unchanged. But those disappointments were overwhelmed by a 17.9% surge in the South (59% of volume), the largest monthly gain since December 2014. The brisk sales pace dropped months’ supply on hand to 5.2 months, the lowest since last November. But encouragingly for potential buyers, pricing cooled. The median sales price fell on a year-over-year basis for the first time since April 2017 to its lowest level ($313k) since that same month. New home sales have been the bright spot for the sector as existing home sales have languished, and other metrics within the May report showed this may continue to be so. New homes sold but not started rose to the second strongest level since 2007.