The Market Today
U.S. and China Trade Talks to Dominate Headlines
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Inflation, Fedspeak, Corporate Earnings, China: This week’s economic calendar will bring a couple of important reports, but will likely be overshadowed by the U.S. – China trade talks on Thursday and Friday. The September producer and consumer price reports are scheduled for Tuesday and Thursday, respectively. Soft inflation continues to give the Fed room to be responsive to uncertainty. However, the CPI data have firmed recently and further firming could create a challenge for Fed officials. There is a flurry of Fedspeak this week but the focus should be on comments from Chair Powell tomorrow and Wednesday. In addition, a handful of companies will report on 3Q earnings this week; although, the calendar really kicks off next week. We will be particularly interested in the impact of global weakness on 3Q earnings, and the impact of trade uncertainty on forward guidance. While corporate earnings reports are likely to create some noise, the markets have proven to be most focused on trade headlines making Thursday and Friday’s talks paramount this week.
OVERNIGHT TRADING ACTIVITY
Focus Turns To Trade Risks: Global markets are moving in different directions Monday with two days of trade talks between top officials from the U.S. and China set to begin on Thursday. Last week’s nonfarm payroll report confirmed hiring is slowing in the U.S., but signaled the broader labor market remains stable in the face of global uncertainties with unemployment falling to a new 50-year low. Overnight, however, data showed the outlook for Europe continues to suffer from the extended period of economic uncertainty.
German Data Continues To Weigh On Europe: Factory orders in Germany fell more than expected in August, although July’s tumble was revised to be less severe, and investor confidence in the broader Eurozone weakened more than expected to its lowest level in six and a half years. Much of the weakness has been blamed on the global trade-driven slowdown and Monday’s data reinforces why investors are hoping for progress out of this week’s negotiations.
China Narrows Scope Of Trade Talks: However, anxieties remain high after Bloomberg reported Sunday that “senior Chinese officials have indicated the range of topics they’re willing to discuss has narrowed considerably” to exclude “commitments on reforming Chinese industrial policy or the government subsidies.” At 7 a.m. CT, U.S. equity futures were 0.2% lower despite European equity markets reversing losses to trade up 0.4%. Bond yields were little changed.
ICYMI – October 4, 2019 Weekly Market Recap: Yields tumbled last week after the ISM surveys for September indicated the U.S. economy could be slowing by more than expected. The manufacturing PMI slumped unexpectedly to a second consecutive contraction and its lowest level of the cycle. The non-manufacturing PMI fell more than expected to its weakest level since 2016 and near the bottom of its cycle range. The signal that the manufacturing weakness has worsened and could be spreading out into the broader economy sent the market-implied likelihood of an October rate cut later surging from roughly 40% to above 80% Thursday. While the unemployment rate dropped to a 50-year low of 3.52% in Friday’s payroll report, a sign the labor market is holding up, the pace of job growth continued to slow and average hourly earnings fell back unexpectedly to 2.9%, the slowest since July 2018. The jobs report was solid enough to calm fears of an imminent downturn but soft enough, with a slowing pace of growth and wage gains, to allow them to lower rates again to cushion the economy from continued uncertainties. Click here to view the full recap.