The Market Today
Trade Threats Continue to Upend Investor Confidence
by Craig Dismuke, Dudley Carter
Job Openings Expected to Rebound: At 9:00 a.m. CT, the March Job Openings and Labor Turnover Survey is expected to show job openings rebound from the disappointing February result. There have been more job openings than unemployed persons for twelve consecutive months. As that relationship between the number of unemployed persons and open jobs neared parity, earnings growth began to accelerate (see Chart of the Day). At 2:00 p.m., the March Consumer Credit report is expected to show a small uptick in monthly credit growth. Monthly credit growth accelerated from 2010 to 2016 but has leveled off in recent years.
Kaplan Does Not Believe Weak Inflation Warrants Rate Cut at This Point: Dallas Fed Bank President Kaplan spoke in Beijing early this morning saying in a Bloomberg TV interview that interest rates are “in the right place” and do not need to be immediately lowered. He also gave nod to weaker inflation but said, “We are just going to have to monitor this very carefully but I am not inclined at this point to lower the Fed funds rate to address it.”
Fed Amplifies Warnings on High-Risk Corporate Debt: The Fed amplified its warnings on corporate debt yesterday in a semi-annual report approved unanimously by the Fed board. The written report noted that “Credit standards for new leveraged loans appear to have deteriorated further over the past six months. … The historically high level of business debt and the recent concentration of debt growth among the riskiest firms could pose a risk to those firms and, potentially, their creditors.” Bloomberg News noted that “loans to firms with especially high debt now exceed earlier peaks in 2007 and 2014.”
Yesterday – U.S. Equities Reversed Early Losses on Trade Fears, Treasury Yields Tank on the Final Tick on Late Headline: U.S. stocks ended lower Monday but the losses were a fraction of the fear-based sell-off that knocked more than 1.6% off the S&P 500 on its opening tick. A Sunday tweet from President Trump that the U.S. would increase the tariff rate on $200B of Chinese goods Friday and target the remaining balance of imports soon sent Chinese stocks spiraling 5.8% knocked 0.9% off stocks in Europe. Worries that China would withdraw from this week’s negotiations in Washington added to the selling pressure. On their first ticks, the Dow dropped 1.8%, the S&P 500 slid 1.6%, and the Nasdaq sank 2.2%. But slowly and steadily stocks worked their way back as investors hoped the tweets were posturing as part of late-stage negotiations and not an unraveling of weeks of apparent progress. China also confirmed that their delegation still planned to travel to the U.S. By the close, the Dow had cut its losses to just 0.3% while the S&P 500 and Nasdaq finished 0.5% lower. Trade-sensitive sectors remained at the bottom of the sector ladder. Treasury yields also tumbled at the open of trading in Europe, partially recovered as the pressure on equities eased, but tanked on a last-minute trade headline. Treasury Secretary Mnuchin said there had been a big change of direction in the negotiations and USTR Lighthizer indicated China had reneged on certain provisions. As a result, the U.S. planned to raise the tariff rate on $200B of Chinese goods to 25% at 12:01 a.m. Friday. The 2-year yield rose as high as 2.31% after earlier falling to 2.28%, but finished down 4.3 bps at 2.29%. The 10-year yield reached as high as 2.50% after earlier printing a 2.48%, but ended down 5.6 bps at 2.47%.
Overnight – Stock Markets Remain Antsy as Trade and Growth Concerns Weigh: Chinese stocks recovered 1.0% Tuesday after sinking nearly 6% on Monday amid the renewed trade tensions with the U.S. However, sentiment elsewhere has remained shaky with Europe’s Stoxx 600 down another 0.6% halfway through the local trading session and U.S. futures down a similar amount just before 7 a.m. CT. European yields retreated as stocks in the region fell towards a five-week low, pushing Germany’s 10-year yield back into negative territory and to a four-week low of -0.02%. Economic data also showed factory orders in Germany rose less than expected in March, although the 0.6% gain ended a sharp two-month decline to start the year. Recent weakness in Germany, the Eurozone’s largest economy, has raised concerns about the trajectory of the broader economy. Overnight, the European Commission cut its 2019 growth estimate for Germany from 1.1% to 0.5% in its most recent forecasts and said “substantial downside risks” to the Eurozone’s outlook remain. Treasury yields rose and fell overnight with European yields but were moving around unchanged ahead of U.S. trading. The 2-year yield was lower by 0.6 bps at 2.28% while the 10-year yield was up 0.7 bps to 2.48%.
Harker Holds to “Transitory” Inflation Weakness, “At Most” One Hike in 2019 and 2020: Philadelphia Fed President Harker (2020 voter) pointed out the inventory and trade asterisks attached to 1Q19’s solid GDP print, but said it didn’t affect his outlook for growth “a little above 2 percent” this year. He cited the “remarkable strength” of the labor market as the reason he expects unemployment could fall to 3.5% this year. And importantly, he echoed Powell’s press conference remarks about expecting weak inflation to pass. “Inflation has softened in recent months, and it’s an area I’m focusing my attention on. I haven’t yet revised my medium-term inflation forecast, because I suspect some of the recent weakness is transitory. So I still see it running slightly above our 2 percent target for the medium term, but that projection is nowhere near written in stone; more like a dry-erase board,” Harker said. Supporting most expectations that inflation holds the key to policy in the months and quarters ahead, Harker added, “If any component of the outlook were to affect my view on the appropriate path of monetary policy, it would be inflation. However, we’re not there yet.”