The Market Today
U.S.-China Trade Talks Make Progress, On-Hold for Now
by Craig Dismuke, Dudley Carter
Another Regional Fed Report Pointing to Economic Strength: The only economic data released today is the Chicago Fed’s National Activity Index. The CFNAI is an aggregation of 85 different economic indicators including reports on 1) production and income, 2) the labor market, 3) personal consumption, 4) housing, and 5) sales and inventories. The index rose in April from 0.32 to 0.34, bringing the 3-month average up to 0.46. The index has strengthened recently, but remains below the thresholds typical associated with an over-heating economy. For context, when the CFNAI’s three-month average is above +0.70 following an expansion (or a one-month reading above 1.00), a period of more rapid inflation is expected to occur.
Fed News on Tap This Week: Also on the calendar today are comments from Atlanta Fed Bank President Bostic, Philadelphia Bank President Harker, and Minneapolis Bank President Kashkari. Investors are likely to pay more attention to the release of the May FOMC Meeting’s Minutes on Wednesday and then Fed Chair Powell’s comments on Friday.
Overnight – U.S.-China Trade Talks Take a Positive Step over the Weekend: Global equities are generally higher on Monday as investors refocused their attention on the trade relationship between the U.S. and China. While discussing the recent trade negotiations between the two countries, Treasury Secretary Mnuchin said on Sunday that “We’re putting the trade war on hold. So right now, we have agreed to put the tariffs on hold while we try to execute the framework.” His remarks followed a joint weekend statement from the U.S. and China that indicated an agreement to take “effective measures to substantially reduce the United States trade deficit in goods with China,” as “China will significantly increase purchases of United States goods and services.” U.S. equity futures are off their earlier highs but still notably stronger ahead of U.S. trading. Chinese equities were Asia’s top performer. Treasury yields rose reversing a portion of Friday’s rally with the 2-year and 10-year yields up around 2.5 bps. Italian yields continued to move higher on possible implications of the political union of Five Star and the League, oil prices were flat, and the Dollar hit a new five-month high.
ICYMI – May 18, 2018 Weekly Market Recap: Yields touched new multi-year highs last week as a solid retail sales report for April boosted confidence that the U.S. consumer has reawakened from a winter slumber. April’s core retail sales were up 0.4%, matching economists’ expectations, despite higher average gasoline prices on the month. Sticking with energy, oil prices touched their highest levels since 2014 as investors continued to weigh the potential impact of sanctions on Iran and violence in the Gaza Strip. The positive economic signals from the solid U.S. consumer spending report and the potential impact of higher oil prices helped push the short-end of the curve to new cycle highs and the 10-year yield to its highest level since 2011. After rising for four consecutive days, the 10-year Treasury yield touched 3.126% overnight Thursday before rallying back Friday to end the week at 3.06%. There were also several Fedspeakers during the week, some strong regional Fed reports, a bit of mixed housing data, and concerns around Italian politics that weighed on assets there. Click here to view the full recap.