The Market Today

Trade Talks Resume; Government Funding Talks Breakdown


by Craig Dismuke, Dudley Carter

THIS WEEK’S CALENDAR

CPI Inflation and Retail Sales: An important week for the economic news kicks off today with the four-year revisions to the CPI data and the first public comments from new Fed Governor Michelle Bowman.  She’ll be discussing community banking.  While today’s calendar is quiet, Wednesday will bring the January CPI inflation report and Thursday will bring the delayed December retail sales report.  Inflation is critical to watch given that Fed officials cited weaker-than-target inflation as justification for a pause.  Retail sales are critical because the consumer is the heart of the economy currently.  The consumer has been strong, but December saw a unique amount of market volatility which could have suppressed activity.

 

Trade Talks Resume: More important to the markets, deputy-level trade negotiations between U.S. and Chinese officials begin today.  The countries have a self-imposed March 1 deadline before U.S. tariffs on $250 billion in Chinese imports kicks up from 10% to 25%.  As tariffs currently stand, we expect them to have only a slight, 0.2% drag from GDP.  If the tariffs are escalated, the impact become a more meaningful 0.5% and the downward spiral of a trade war becomes more likely.  Given recent comments from the White House, there is a likelihood that presidents Trump and Xi do not meet before March 1, but those tariff increases could be delayed. Vining Sparks Chief Economist Craig Dismuke appeared on Fox Business this morning discussing the importance of a trade deal for the markets.

 

Funding Talks Breakdown ahead of Friday Deadline: Additionally, a new funding agreement for the government needs to be worked out before Friday.  Reports over the weekend said that the negotiations had broken down over immigration policy.  It is unlikely that any agreement comes early and Friday could bring some excitement for the markets.

 

TRADING ACTIVITY

Overnight – Big Week for Investors as Trade Talks Resume, Government Shutdown Looms: The overnight session has so far been sanguinely upbeat considering the numerous headline risks investors face this week. Stocks in Shanghai bounced 1.8% on their first day back from the Lunar New Year break. This week’s resumption of U.S.-China trade talks will be key and are scheduled to wrap up with a cabinet-level meeting later in Beijing. With President Trump’s statement last week that he won’t meet President Xi before the March 1 deadline, the importance of positive developments at this week’s meeting has increased. While the rest of Asia was more mixed, European markets are stronger across the board and U.S. futures are higher. In addition to the March 1 deadline for trade, this week includes other market-moving risks for investors. In addition to a heavy slate of top-tier U.S. economic data, multiple reports over the weekend indicated Democrats and Republicans had come to an impasse on certain aspects of border security funding, increasing the odds of a second government shutdown this Saturday. And while the Brexit deadline seems some time away (March 29), the effects of the related uncertainty continue to be evident in the data. Just a couple of days after the BoE lowered its forecast, data showed the UK economy grew a slower-than-expected 0.2% in 4Q and actually contracted in December. After sliding in four straight sessions, the 10-year Treasury yield was 1.4 bps higher at 2.65%. The 2-year yield was up 1.0 bps to 2.48%.

 

NOTEWORTHY NEWS

ICYMI – February 8, 2019 Weekly Market Recap: The positive effects of a the prior week’s strong payroll report and better-than-expected services ISM were overwhelmed last week by the return of concerns about the global economy and the U.S.’s trade relationship with China. Several Fed officials vocalized support for the Fed’s pivot to patience at their January meeting in response to increased uncertainties, including concerns about slowing global growth. Those questions remained front and center after several reports from Germany disappointed, the European Commission cut its growth forecast for the EU, and the Bank of England lowered its expected forward rate path because of the “fog of Brexit” and headwinds from abroad. In addition, the U.S. ISM services PMI was weaker than expected, capital goods data remained disappointing, and total trade flows slowed with imports leading the way (should boost 4Q GDP estimates). While top U.S. officials will be in China this week to discuss trade, White House economic advisor Kudlow said there remains a wide gap to bridge in negotiations and President Trump said he wouldn’t meet with China’s President Xi, as some had expected, before the March 1 trade deadline. While a late-Friday surge salvaged the week for the S&P 500, the 10-year Treasury yield posted its lowest weekly close since January 2018. Click here to view the full recap.

 

ICYMI – February 2019 Bloomberg Survey of Economists – Economists Project Fed Funds to Peak with One Final Rate Hike in 2019: The February Bloomberg Survey of Economists shows little change to economists’ expectations with economic growth slowing and the Fed concluding its rate-hike cycle this year. Click here to view the survey.

 

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