The Market Today

U.S. Senate’s Hong Kong Bill Compounds Weekly Worries About Trade


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Decline for Overall Mortgage Applications Hides Stronger Purchase Activity: Mortgage applications slipped 2.2% in the week ended November 15 following a strong 9.6% jump the week before. A 7.7% drop in refinancing activity drove the overall decline as purchase applications actually jumped 6.7% to a 19-week high (since July 5). The weekly gain followed a similarly-solid 5.1% increase two weeks ago and left the purchases index up 7.3% from a year ago. The housing data has improved as mortgage rates have declined through 2019. The MBA’s 30-year mortgage rate data reflected a 0.04% dip in the 30-year mortgage rate last week to 3.99%, notably lower than the 5.16% rate from November 2018.

Focus of the FOMC Minutes Won’t Be on Near-Term Policy Path as Pause Has Gained Broad Support: Today’s top economic event is set for 1 p.m. CT with the Fed set to release the Minutes from their October meeting, where they cut rates for the third time this cycle but signaled a pause of their mid-cycle adjustment. The decision to lower rates to a range of 1.50% to 1.75% was agreed to by eight of the ten voters and the pause has been given support by nearly all officials in public comments since the meeting. Fed Chair Powell said “the current stance of monetary policy [is] likely to remain appropriate” absent a “material reassessment” of the outlook or a “significant” and “persistent” upshift in inflation. Considering that there appears to be broad support for holding policy steady in the near-term, the focus of the Minutes should be on discussion of the balance of risks to growth and inflation, the level of support for the thresholds that Powell laid out for any additional policy adjustments, and the decision to begin buying Treasury bills to increase the level of reserves to address volatility in the short-term funding markets.


YESTERDAY’S TRADING

Stocks Dinged by Disappointing Consumer Earnings: For a second day, ups and down in the equity market left the S&P 500 little changed near record levels while Treasury yields edged lower on broader economic uncertainties. While the Nasdaq closed up 0.2% at an all-time high, the S&P dipped less than 0.1% and the Dow trailed both with its 0.4% decline. Home Depot’s 5.4% slump had an outsized impact on the Dow and combined with collapsing shares of Kohl’s to drag the S&P 500’s consumer stocks lower. Both companies reported disappointing current-quarter results and forecasts that disappointed expectations, raising questions about the consumer heading into the holiday shopping season. Energy companies were the worst performers as oil prices declined more than 2.5%.

The Way Forward for Trade Remains Opaque: Although the response was relatively muted, U.S. markets moved on a mid-morning headline that said U.S. and China were considering tying the amount of tariffs to be rolled back to how the phase one deal compares, in size and scope, to the previous final-stage agreement that fell apart in May. Any optimism quickly faded, however, after President Trump said “If we don’t make a deal with China, I’ll just raise the tariffs even higher.” The net result of the day’s developments led the yield curve lower and flatter. The 2-year yield ended essentially unchanged at 1.60% while the 10-year yield shed 3.3 bps to 1.78%, dropped the spread between the two below 20 bps for the first time since November 4.


OVERNIGHT TRADING

Weekly Trade Tensions Ratcheted Higher By U.S. Senate’s Hong Kong Bill: Trade remained in focus Wednesday as growing uncertainties around a successful way forward toward a deal continued to weigh on global risk sentiment. Market sentiment has become more tenuous this week following a report Monday that China was “pessimistic” about the chances of a phase one deal and yesterday’s comment from President Trump about raising tariffs if no agreement is reached. Further complicating those worries, the U.S. Senate passed a bill overnight in support for protesters in Hong Kong which would require the U.S. Secretary of State to sign an annual certification confirming Hong Kong is independent from China. The Senate also voted to halt sales of certain weapons to Hong Kong police.

Markets Retreat As Tensions Flare Up: As expected, the bills’ passage agitated the Chinese government and drew a sharp response from its foreign ministry. “We urge the US to grasp the situation, stop its wrongdoing before it’s too late, and immediately take measures to prevent this act from becoming law,” an official statement read, or “the negative consequences will boomerang on itself. China will have to take strong countermeasures to defend our national sovereignty, security and development interests if the US insists on making the wrong decisions.” The flare up sent global equities sliding and sovereign yields lower. Around 7:30 a.m. CT, futures on the S&P 500 were 0.2% lower, the 2-year Treasury yield had dipped 1.8 bps, and the 10-year yield had declined 3.6 bps.


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