The Market Today
U.S. Advances Part Two of Chinese Tariff Proposal
by Craig Dismuke, Dudley Carter
Another Weak Indicator for Home Sales: Mortgage applications fell 3.0% for the week ending August 3 on a 2.0% drop in purchase apps and a 4.5% decline in refi apps. On a 4w/4w moving average basis, purchase apps are now down 7.3% from their early-May peak and point to more than a 5% drop in future home sales, another weak indicator for housing activity.
Richmond Fed Bank President Barkin is slated to speak this morning from Roanoke, VA.
Yesterday – Treasury Yields Rose as the S&P 500 Inched Closer to Record Territory: U.S. stocks joined a global rally Tuesday, with the Dow gaining 0.5% and the S&P 500 and Nasdaq both adding 0.3%. The energy sector closed atop the S&P 500 despite U.S. crude pulling back from intraday highs. Brent crude rose more than 1%, however, after the U.S. re-imposed sanctions on Iran that could ultimately impact global oil supply. Industrial companies nearly matched energy’s gains at up 0.7% while financials finished 0.5% higher and in third place. Banks tilted 0.2% into positive territory, higher rates didn’t hurt, but diversified financials led with a 1% gain. The S&P 500 finished at its strongest level since January 26 and just 0.5% shy of a new all-time record. As stocks gained, Treasury yields moved higher with the trend persistent throughout the day. The 2-year yield added 2.7 bps to 2.67% and made its sharpest shift up after an auction of 3-year notes tailed. The 5-year yield added 3.9 bps to 2.84% and the 10-year yield closed 3.7 higher bps at 2.98% before Wednesday’s $26 billion auction. Even with higher rates, the Dollar pulled back Tuesday after climbing to a more than 12-month high in the previous session.
Overnight – Subdued Overnight Session as U.S. Moves Forward With Part Two of Original China Tariff Proposal: Global equities were more subdued overnight and sovereign yields steadied after moving up on Tuesday. Asian markets were mixed but Chinese stocks remained volatile. After rebounding 2.9% Tuesday, the CSI 300 slipped 1.6% and has now moved more than 1% in six straight sessions. The U.S. announced yesterday afternoon that it would move forward with a 25% tariff on another $16 billion of Chinese imports starting August 23. Tariffs on the first $34 billion of the original $50 billion proposed took effect July 6. Data overnight showed China’s trade surplus with the U.S. pulled back in July to $28 billion from a record high set in June. The Stoxx Europe 600 had recovered from an early drop and was close to unchanged and U.S. futures were mixed around Tuesday’s closing levels. In sovereign markets, most moves were modest while a drop in Italian yields stood out. Italian Prime Minister Conte told reporters that his country “must be realistic” about the timing of implementing its fiscal agenda (e.g. citizen’s income, flat tax). He added “we will have these reform projects, some to be carried out immediately, others progressively,” but the budget should be one it could deliver to the EU “with its head held high.” The U.S. Treasury curve was essentially unchanged and the Dollar was slightly stronger.
JOLTS Report Showed Worker Shortage Continued in June: Job openings rose unexpectedly in June to their second highest level since the series began back in 2000. Businesses were looking to hire 6.662MM new workers in June, up 3k from a revised May figure of 6.659MM (previously 6.638MM). The relationship between open positions and the available unemployed has become a popular metric as the labor market has continued to tighten. The total number of unemployed totaled 6.564MM in June, leaving less than one available worker (0.98x) per each job posting for a fourth consecutive month. Assuming openings hold flat in July, the monthly drop in the ranks of the unemployed would push the ratio to an even lower 0.94x. Other details within the report were mixed. Hires slowed and an increase in layoffs lifted total separations, despite fewer people voluntarily leaving their current jobs for other opportunities. Still, the message remains that the labor market has continued to tighten as most of these metrics remained near their best of the expansion.
Consumer Credit Slowed in June as Credit Card Balances Contracted: In the most recent consumer credit release from the Federal Reserve, non-mortgage related credit grew by a slower-than-expected $10.2 billion in June. Growth in the non-revolving types, which are dominated by auto and student loan borrowings, did slow to a 4.4% annualized rate but the real weakness was in the revolving line. Revolving credit, which consists primarily of credit card balances, contracted an annualized rate of 2.2%. The monthly pullback was less severe than the 12.8% contraction in March but just the second since 2013. The trend in consumer credit matches the make-up of the period’s core retail sales activity; solid April, exceptional May, and a breather in June.