The Market Today

TODAY’S CALENDAR

Small Business Confidence Rebounds Before Newest Round of Tariffs: The April Small Business Optimism report from NFIB showed a better-than-expected bounce in confidence which included an improved outlook for sales, better plans to hire, and an increase in expectations for future capital expenditures.  However, the recent unwinding of trade momentum will not show up in the NFIB data until May.  Overall, confidence jumped 1.7 points to the highest level of the year although it remains well below the 2018 trend. Trade is likely to continue weighing on businesses, curtailing investment, as there is very little certainty for importers regarding input costs. According to NFIB’s Chief Economist, Bill Dunkelberg, “The ‘real’ economy is doing very well versus what we see in financial market volatility. Many jobs are being created, and GDP produced with no substantive inflation pressure. The pace of economic growth has accelerated …”.

Import Prices Surprisingly Weak: Import prices rose less than expected in April with headline prices up just 0.2% MoM and core prices (ex-petroleum) falling 0.2%.  Building material prices dropped 1.4%, capital goods prices fell 0.4%, and autos/parts prices dropped 0.1%.  Overall, there is no evidence in the April import price report of cost-push inflation.  

New York Fed Bank President Williams Sees Economy Withstanding Impact of Trade Battles: New York Fed Bank President John Williams said overnight that his concerns and uncertainty about the U.S. economy have lessened recently, saying the economy has “rebounded pretty strongly after a soft patch late last year.”  As it relates to the escalating trade battle with China, Williams warned, “If there were a further escalation in terms of tariffs those effects would get even larger. This starts to affect consumer prices as these tariffs are applied more broadly. The consumer sees it in prices paid in stores. That’s a significant effect.”  However, he has confidence in the economy’s ability to withstand some uncertainty, “The economy is well positioned to deal with whatever events happen in the future.”

Fedspeak: Kansas City Fed Bank President George is scheduled to speak today at 11:45 a.m. CT to the Economic Club of Minnesota. San Francisco Bank President Daly is scheduled for comments at 5:00 p.m. at Northwestern University. Neither are voting FOMC members in 2019.

TRADING ACTIVITY

Overnight Trading – Asian Stocks Drop, EU Stocks Rally, President Trump Says a Deal Will Happen “Faster”: China’s CSI 300 and Japan’s Nikkei both dropped 0.6% overnight as trade uncertainty continues to plague investor sentiment.  However, Eurozone stocks turned positive right out of the gates as sovereign yields turned lower during the session.  The Euro Stoxx 50 is up 0.8% this morning as the French, German, and U.K. 10-year yields are all down about 1 basis point.  The German 10-year yield remains in negative territory at -0.08%.  The calendar was full of Eurozone economic data including softer U.K. employment figures, mixed German business confidence reports, and as-expected inflation data from Germany (1.8% YoY core), Spain (0.9% YoY core), and Sweden (1.6% YoY ex-energy).  U.S. stock futures turned higher along with EU stocks; Dow futures are up 0.3% after yesterday’s 2.4% decline. Trade comments resumed early this morning. President Trump tweeted at 6:17 a.m. CT, “when the time is right, we will make a deal with China,” lauded his respect and friendship with Chinese President Xi, and said “It will happen, and much faster than people think!”  The tweets have had little discernible effect on the markets.

Yesterday – Monday’s Market Mayhem Showed Investors Fear the Worst in the U.S.-China Trade Fight: U.S. equities sold off precipitously Monday and Treasury yields dropped sharply as last week’s re-escalation of trade tensions worsened to start the week. China responded to last Friday’s U.S. tariff increase by announcing varied tariff increases on a list of roughly $60B of U.S. imports. During Monday’s session, Treasury Secretary Mnuchin attempted to calm the waters by indicating that negotiations were still ongoing and President Trump told reporters he would meet with President Xi at the late-June G-20 meeting. However, those remarks failed to hold back the flood of negativity that sank the Dow and S&P 500 2.4%, the largest daily decline since January 3. The double whammy for tech shares of the trade tensions and a large 6% decline in shares of Apple following an unfavorable Supreme Court ruling pushed the Nasdaq down a day’s worst 3.4%. Treasury yields tumbled amid the flight from equities, sending the 2-year yield down 7.8 bps to 2.19%, its lowest level since February 2018, as Fed Funds futures repriced aggressively. The implied effective rate for January 2020 dropped to 2.085%, the lowest since 2017. The 10-year yield closed 6.6 bps lower to 2.40%, the fifth lowest level since 2017. After both the equity and Treasury markets closed for trading, the USTR posted 142 pages worth of details describing “a proposed modification…to take further action in the form of an additional ad valorem duty of up to 25 percent on products of China with an annual trade value of approximately $300 billion.” It has planned a public hearing on the proposal for June 17.

NOTEWORTHY NEWS

Fed Officials Discuss Current Hot Topics: Fed Governor Clarida gave a speech Monday that was heavy on Fed buzz words but light on new and informative insight. Minneapolis Fed President Kashkari said “it will take more time before any of us know where these trade negotiations ultimately are going to end.” He reiterated his belief that the labor market isn’t as tight as the unemployment rate would imply and noted “I’m not so much in the transitory camp [on inflation weakness] because it’s been pretty consistent for the past 10 years.” Nonetheless, because the Fed is “now paused, I feel pretty good about where we are. I think we have rates roughly at neutral.” President Rosengren from Boston said “The U.S. economy is strong enough to withstand the trade issue coming up now.” But he added that, “If the impact of the tariffs – and whatever financial market reaction to those tariffs is – causes more of a slowdown, then we do have the tools available to us, including lower interest rates, not that I’m necessarily expecting this will generate the need to do that.” Dallas Fed President Kaplan referred to the tariffs as “sand in the gears” of companies that rely on affected goods. When asked about the possibility of trade uncertainty causing a recession, he answered “it depends on how long these things persist. Will the tariffs last for weeks or months or longer? …We’ll have to see how it unfolds. We just don’t know yet.” For the time being, the Fed should “move off to the side and be patient.”