The Market Today

TODAY’S CALENDAR

Fed Chair Powell Doesn’t Discuss the Outlook: Fed Chair Powell kicked off a community development conference this morning in Washington, but didn’t comment on monetary policy or the economic outlook.

Producer Prices Fit Muted Inflation Narrative: Producer price inflation slowed to 0.2% in April, slightly softer than the 0.3% increase expected, after an energy-driven 0.6% jump in March. Stripping out a less-severe 1.8% increase in energy costs and a 0.2% tick lower in the cost of foods, core prices were up 0.1%, weaker than the 0.2% 12-month average. Core goods prices were flat in April while services slowed from 0.3% to 0.1%. Weakness in consumer trade services, generally associated with retail prices, offset a jump in airfares. Both the headline and core metrics were expected to rise 0.1% in April but were unchanged at 2.2% and 2.4%, respectively. The producer price inflation report fits the narrative of subdued inflation pressures. The Fed will give this report a look considering their sharpened focus on inflation trends, but will be more interested in tomorrow’s CPI data.

Trade Deficit with China Falls to More-Than-Two-Year Low: The trade balance widened $0.1B as expected in March, but marginal downward revision to February left the absolute level less than expected at $50B. Exports rose 1.0% in march on big increases in food and beverages and industrial supplies. Imports rose a slightly stronger 1.1% on strength in the same categories. With this week’s market focus on the trade relationship between the U.S. and China, the White House will likely take note of the deficit with China falling to $28.3B, the lowest since November 2016. The report confirms the benefit from trade in the first quarter, after the BEA previously reported traded contributed more than 1% to total growth.

Initial Jobless Claims Fell Less Than Expected: Initial jobless claims fell less than expected last week, dropping from 230k to 228k for the week ended May 4. While the level of claims remains consistent with a healthy labor market, an increase in recent weeks has pulled the four-week average up to its highest level (220.3k) since mid-March.

Later Today: At 8:45 a.m. CT, Atlanta Fed President Bostic will update the public on his views of the economic outlook. However, because Bostic doesn’t vote on policy again until 2021, the greater focus is likely to be on any new policy insights from Chicago Fed President Evans at 12:15 p.m. CT. Evans, who votes at each meeting for the remainder of 2019, has previously said muted inflation meant that the Fed could be on hold through the fall of 2020. Splitting the two Fedspeakers, the Census Bureau will release wholesale trade sales and inventory data at 9 a.m. CT.

TRADING ACTIVITY

Yesterday – Equities Ended Nearly Unchanged after Swinging on Trade Headlines; Treasury Yields Rise after 10-Year Auction Tails: U.S. stocks traveled a fair distance Wednesday but persistently incongruent headlines on trade brought the major indices back almost exactly to where they began the session. Stocks opened lower but popped into positive territory after the White House Press Secretary echoed an early-morning tweet from President Trump that China had indicated they want to make a deal on trade. Roughly thirty minutes later, stocks gave up those gains after China’s Ministry of Commerce said it would take countermeasures if the U.S. raises the current 10% tariff rate on $200B goods to 25% this Friday as previously announced. Nonetheless, the upward momentum resumed and pushed the S&P 500 back to near its peak at 0.4% for the day. But with fifteen minutes to go in the session, a headline hit traders’ Bloomberg terminals that Congress was unlikely to approve the USMCA (i.e. updated NAFTA) by the end of the year. In the final few minutes, the index fell from up 0.4% to close down 0.2%. Treasury yields responded modestly to equities’ fluctuations on the trade, but the sharpest move occurred at 12 p.m. CT after a surprisingly weak auction of 10-year notes. The awarded yield tailed the when-issued yield by 1.4 bps and the bid-to-cover ratio fell from a six-auction average of 2.48x to 2.17x as indirect bidders backed away. The 10-year yield jumped to its highs of the day following the auction results and held there despite equities late-day decline. The 2-year yield closed up 1.2 bps at 2.30% while the 10-year yield added 2.7 bps to 2.48%.

Overnight – Trump Said “They Broke the Deal” as Tariffs Look Set to Increase at Midnight: There has been no letup in the market’s fretting over this week’s unexpected uptick in trade tensions between the U.S. and China. At a rally last night in Florida, President Trump said, “you see the tariffs we’re doing? Because [China] broke the deal. They broke the deal. So they’re flying in, the vice premier tomorrow is flying in — good man — but they broke the deal. They can’t do that, so they’ll be paying.” A delegation of Chinese officials is set to be at the White House today to continue trade negotiations ahead of the tariff increase from 10% to 25% scheduled to take place just after midnight tonight. China has said they will respond with countermeasures. Stocks across Asia sold off again Thursday with China’s CSI 300 losing another 1.9%, increasing its weekly loss to 8.0% and falling to its lowest level since February. The Stoxx Europe 600 dipped another 0.7% to a new six-week low and is down 2.8% for the week. The incessant concerns that Friday’s tariff hike could undo weeks of progress has kept Treasurys bid. Around 7 a.m. CT, the 10-year yield was 3.8 bps lower at 2.44%, the lowest level since March 29 and just 0.04% above the effective Fed Funds rate. The rest of the curve was lower by similar or modestly larger amounts and the 2-year yield was trading around 2.26%. U.S. equity futures were lower by 0.7%.