The Market Today
U.S. Adds Chinese Companies to No-Business List, China Says ‘Stay Tuned’
by Craig Dismuke, Dudley Carter
Small Business Confidence Remains Positive but Much Less So: Small business sentiment deteriorated in September according to the NFIB report, pulling back from 103.1 to 101.8. While overall confidence remains good relative to its 30-year average (see Chart of the Day), confidence has convincingly pulled back from its all-time peak back in 2018 (108.8). While trade uncertainty is surely a piece of the uncertainty, evidenced by the decline from net +50 expectations for a better economy to +12 (down another 8 points in the September report), the labor market is clearly a growing challenge. Finding quality labor to fill open job positions remains the single biggest obstacle, cited by 27% of respondents. Respondents planning to hire fell 3 points in September and those planning to raise compensation fell 1 point despite the persistently large outstanding stock of open positions. Adding to the disappointment in the report, those expecting better sales fell 5 points.
Producer Prices Weak but Healthcare Inputs Likely to Boost PCE Inflation: September’s producer price report was softer than expected across-the-board. Headline prices fell 0.3% MoM (exp. +0.1%) while core prices, excluding food and energy, also fell 0.3% (exp. +0.2%). However, looking at the impact to the PCE report, medical care costs were collectively stronger, led by a 0.9% MoM increase in nursing home prices and a 0.4% increase in hospital prices. This should more-than double the 12-month trend impact of medical care inflation in the PCE report.
Powell Speaks from NABE: On the tape today are Fed Chair Powell, speaking from the NABE conference at 1:30 p.m. CT, Chicago’s Evans (12:30 p.m.), and Minneapolis’ Kashkari (4:00 p.m.).
OVERNIGHT TRADING ACTIVITY
Optimism During Asian Session Evaporates: Chinese stocks returned from a week-long holiday break to post a 0.6% gain amid broader strength across the Asia continent. However, sentiment has steadily deteriorated during European trading, pulling the Stoxx 600 down more than 1% before 7 a.m. CT and weakening U.S. futures by nearly 0.7%. As the mood has soured, Treasury yields have given up an overnight gain and moved lower across the curve. While hopes for progress at this week’s trade meetings had grown in recent weeks, posturing from both sides since the weekend have weighed on that sense of optimism.
No Smooth Sailing Into Late-Week Trading Meetings: After reports Sunday said China had narrowed the scope of negotiable items to exclude government subsidies and industrial policies, the U.S. Commerce Department announced Monday that it was adding 28 Chinese companies to its Entity List that will prohibit transactions with U.S. businesses. Asked about possible retaliation, China’s foreign ministry said “stay tuned.” Other headlines out overnight included reports the Chinese negotiators could leave a day earlier than expected and that the White House was still considering limiting U.S. government pension investments into funds that include Chinese companies.
Mixed Economic Data Shows Uncertainty Continues: The developments overshadowed a rare bit of good news out of Germany and compounded concerns by the weaker-than-expected China Services PMI and U.S. small business confidence report. Germany’s industrial production beat expectations for the first time in five months, rising a modest 0.3% in August and ending a dreary two-month decline. Earlier, China’s Services PMI fell more than expected in September. Subsequently, no component of the U.S. small business confidence improved in September in a broadly-disappointing report. At 7:30 a.m. CT, the 2-year and 10-year Treasury yields were both down 3.8 bps to 1.42% and 1.52%, respectively.
YESTERDAY’S TRADING ACTIVITY
Markets Unwound A Portion Of Last Week’s Moves: U.S. equities dipped Monday but only partially unwound Friday’s big gain that followed September’s payroll data which somewhat calmed economic fears created by big misses in both ISM reports. Stocks sold off sharply last week after the manufacturing component contracted at the fastest rate since the financial crisis, and only recovered after the non-manufacturing was weak enough to strengthen expectations for the Fed to cut rates again soon. A slowing pace of hiring and weak wage gains in Friday’s labor data gives the Fed room to ease, while other metrics, including a 50-year low for unemployment, allayed fears the economy is already in recession.
Bond Yields Rose Despite Equity Weakness: While there has been some cooling of the trade rhetoric in recent weeks, a weekend report from Bloomberg said China has narrowed the scope of what it is willing to negotiate on ahead of key trade meetings later this week in Washington. The report said China is not willing to discuss government subsidies or industrial policies. After rallying 1.4% Friday, the S&P 500 pulled back 0.5% on broad sector weakness. Treasury yields nosedived last week in response to the economic developments and closed near their lows of the week. On Monday, despite the equity weakness, shorter yields pushed off their lowest levels in a couple of years to lead the Treasury curve higher and flatter. The 2-year yield added 5.8 bps to 1.46% while the 10-year yield rose 2.9 bps to 1.56%.
Kashkari Unsure About How Much More Accommodation Is Needed: Fed Chair Powell avoided the economic outlook in his Monday comments, but President Kashkari from Minneapolis said again he fully supports the Fed’s recent reductions in the overnight target funds rate. Kashkari noted, “As the economy appears to be showing more risks, business investment is slowing, the global economy is slowing, and inflation continues to come in below our target, my message is clear: We should be supporting the economy, not tapping the brakes.” He went on to say, “I’m happy that we’re cutting interest rates. I don’t think we should have been raising them, ..How much more do we have to cut? I don’t know yet.”
Consumer Credit Grows Despite Credit Card Contraction: Consumer credit, excluding mortgage-related debt tied to real estate, rose more than expected in August despite a contraction in consumer credit card balances. Total credit increased by $17.9B, or at a 5.2% annualized pace. However, revolving types, which primarily related to credit card balances, contracted 2.2% and for the second time in three months. While a contractionary trend in credit card balances could be seen as consumers pulling back, the August decline followed a 10.5% jump in July. Still, revolving balances were up 3.8% from a year ago, the slowest since March. Nonrevolving categories, consisting primarily of debt related to autos and student loans, rose 7.8%, the strongest month since November 2017.