The Market Today
U.S. – China Trade Headlines; China Cuts Taxes and Possibly Reserve Requirements
by Craig Dismuke, Dudley Carter
Key Report at 9:00 A.M. to Show If Economy Rebounding Yet: At 9:00 a.m. CT, the ISM Non-Manufacturing index is expected to show service-sector activity picked up in February. The index is expected to rise from 56.7 to 57.4 after dropping from its cyclical high of 60.8 in September. Despite the significant drop, the index remains in positive territory. The average for the ISM index during this recovery/expansion has been 55.8 (January 2010 to current). However, economists will be looking at today’s report for any signs of a rebound from the year-end downturn. Also worth noting, at 8:45 a.m., the Markit U.S. Services and Composite PMI will be released. However, the ISM report dominates the headlines in the U.S.
December Home Sales Expected to Come Back to Earth: Also at 9:00 a.m., the December New Home Sales report is expected to mean-revert after a monstrous 16.9% gain in November. In that November data, the median new home price fell to -11.9% YoY. Lower prices and lower mortgage rates could be positive catalysts to spur on more housing activity, if they persist.
Rosengren – Fed Should Pause for “Several Meetings”; and More Fedspeak: Boston Fed Bank President Rosengren spoke this morning saying the Fed pause should last for at least “several meetings” to give the economy time to prove a rebound from recently weak data. According to Rosengren, “It remains to be seen whether the few signs of weakness at the turn of the year reflect an underlying slowdown in the economy, or a response to a variety of temporary concerns that may fade. … It may be several meetings … before Fed policy makers have a clearer read.” At 8:30 a.m. CT, Minneapolis Bank President Kashkari will speak before the Minnesota Senate Finance Panel. Kashkari’s advocated pausing rate hikes until inflation showed more traction when he last spoke in January. Richmond Fed Bank President Barkin is slated to speak at 10:30 a.m. He last commented publicly in January, echoing other officials’ concerns about growing uncertainty from trade and market volatility.
Yesterday – U.S. Markets Rained on Global Trade Parade: U.S. equities jumped at Monday’s open after a WSJ report that the U.S. and China were “in the final stage of completing a trade deal” boosted global stock prices overnight. But the Dow’s first tick was its best and the major indices pulled back throughout the morning. The Dow swung from up 0.5% to down as much as 1.6% around lunch, before ultimately closing 0.8% lower. The S&P 500 and Nasdaq took similar paths to end off 0.4% and 0.2%, respectively. The Fed’s policy pivot and report after report of progress on trade negotiations in recent weeks had lifted the S&P 500 19.3% from its Christmas Eve low. Monday’s reversal may have well reflected a sell-the-news mentality that was made more convincing by the technical charts. Friday’s close at 2,803 was its first above 2,800 since November, with the 2,800 level seen as a key technical resistance level. Treasury yields gapped higher at the open of the Asian session but had already reversed lower before equities stumbled. That move intensified as the stock sell-off gained steamed and yields closed near their lows. The 2-year yield ended 1.2 bps lower at 2.54% while the 10-year yield fell 3.1 bps to 2.72%. The 10-year Treasury yield had risen nearly 12 bps over the last three sessions.
Overnight – China Announces Tax Cuts and Other Stimulus In Response to Lower 2019 Growth Forecast: Monday’s Wall Street weakness has helped keep global equities in check during Tuesday’s overnight trading. After solid gains yesterday on hopes a trade deal was nearer, equities across Asia and Europe are generally weaker. China’s Caixin Composite PMI slipped back to a four-month low on weaker services, but the bigger news came from China’s annual meeting of the National People’s Congress. China’s Premier Li Keqiang kicked off the event, which runs through March 15, by officially lowering the 2019 growth target to a range of 6.0% to 6.5%. Growth slowed to 6.6% in 2018, the weakest in almost 30 years, amid ongoing trade tensions with the U.S. The Premier said, “We will face a graver and more complicated environment, …We must be fully prepared for a tough struggle.” However, China’s CSI 300 was up 0.6% Tuesday and one of the day’s only positive performers. In addition to lowering growth expectations, Premier Li announced tax cuts of roughly 2 trillion yuan (primarily through the VAT system) and said additional cuts to reserve requirements were planned for smaller Chinese banks; both were seen as intended to boost the private sector. Treasury yields dipped during Asian trading but reversed higher as German yields moved up on positive revisions to February PMIs. The 2- and 10-year Treasury yields were up around 1 bp. European stocks, however, recently touched session lows while U.S. futures tilted 0.1% into positive territory.
Construction Spending Contracted Unexpectedly on Weaker Residential Results: The housing slowdown hurt overall construction spending in December, with the total value spent on new construction projects down 0.6% (expected +0.1%) in the final month of 2018. Private residential spending dropped 1.4% in December while public outlays for housing were down 5.1%. The weaker residential activity in the private sector was the result of a 3.2% pullback in single family homes activity and a modest 0.4% dip in home improvement spending. The decline in home improvement activity followed a 12.7% surge in November, the largest since 1998. Away from housing, private spending on non-residential buildings was up 0.4% (strong month for lodging, restaurants, health care, communication, and manufacturing) while related spending in the public sector dipped 0.6% (weak month for transportation-related categories). The disappointment in December’s construction spending falls in line with a long list of economic reports that reflect a slowdown at the end of 2018 amid heightened uncertainty.