The Market Today
U.S. Teams Up with Japan and EU on Trade Ahead of Expected Phase One Signing
by Craig Dismuke, Dudley Carter
Mortgage Applications Fully Rebound from Weak December Reports: Mortgage applications for the week ending January 10 rose 30.2%, the largest weekly gain since the week ending January 9, 2015. The unusually strong report appears to be, in part, the result of the seasonal volatility as the 2015 report was also preceded by several weeks of much softer-than-trend application data. Applications fell 22% in the final three weeks of December (2019) before rebounding 48% in the first two reports of 2020. In the current report, purchase applications rose 15.5% while refinance apps jumps 42.7%. According to the MBA report, the 30-year mortgage rate inched down from 3.91% to 3.87%, a four-month low, during the reference week.
New York Fed Index Ticks Higher: The New York Fed’s report on regional manufacturing activity rose more than expected in January, up from 3.3 to 4.8. The details of the report were mixed. The forward-looking new orders index fell from 8.1 to 6.3 and the backlog of unfilled orders fell from -0.7 to -7.6. On a positive note, the shipment index increased pointing to better current activity. Additionally, the indices covering the number of employees and the average workweek both increased.
Producer Prices Remain Tame: The December Producer Price index showed still-mild inflation pressure from the production pipeline. Headline and core producer prices both rose 0.1% during the month, both softer than the expected 0.2% increases. The year-over-year growth rate for core producer prices fell from 1.3% to 1.5%.
Fed News – Three Speakers and Beige Book: At 10:00 a.m. CT, Philadelphia Fed Bank President Harker is scheduled to speak at the Harvard Club in New York on monetary policy and the new era of lower rates. Dallas Bank President Kaplan will follow Harker at the New York Economic Club at 11:00 a.m. San Francisco Bank President Daly will speak at 10:00 a.m. Perhaps most telling in Fed news today will be the 1:00 p.m. release of the Beige Book. The qualitative report will cover activity during the holiday shopping period.
Stocks Slipped from Records on Tariffs Headline: Despite several solid pre-market earnings reports Tuesday, including a couple of major U.S. banks, stocks finished mixed amid a couple of trade headlines that fueled uncertainty ahead of the expected signing of the phase one trade agreement. The Dow rose 0.11% while the S&P 500 settled 0.15% lower, both pulling back after briefly breaching their respective all-time highs around lunch. The steady uptrend that had pushed those indexes to new intraday peaks was ended by a headline just after 12:30 p.m. CT that the U.S. would keep tariffs on Chinese goods until after the November election, even with a signed agreement.
Trade Negotiations Remain Complex Despite Phase One Deal: The Bloomberg news report that backed the headline said the understanding between the U.S. and China didn’t affect the reduction in tariffs on $120B to 7.5% from 15%. However, it implied any further reductions will take place no sooner than mid-November, giving the U.S. continued leverage to ensure China complies with the details of the agreement. Adding additional complexity to the next round of talks which are expected to start soon after the phase one agreement is finalized, reports earlier in the morning said the U.S. had joined with the EU and Japan in lobbying for stronger WTO rules addressing government-provided industrial subsidies.
Treasury Yields Dipped on Inflation and Tariff Uncertainty: Treasury yields fell further after the afternoon tariff headline, adding to an earlier decline that was spurred by a soft core inflation report for December. For the day, the 2-year yield dropped 1.4 bps to 1.57% while the 10-year yield pulled back 3.5 bps to 1.81%, sending the spread between the two to 24 bps, the lowest in a month.
Stocks Trade Tepidly in Front of Trade Deal Signing: The bit of caution created by the couple of trade developments yesterday has pressured global equities lower Wednesday as investors await the official signing of the phase one trading agreement announced roughly a month ago. Stocks were down across most of Asia and Europe and U.S. futures had inched lower, signaling the major indexes will struggle to recover from the negative afternoon momentum that knocked the major indexes from record levels on Tuesday. As equities turned back, global bond yields have moved lower with another sharp decline in the U.K. Gilt curve again outpacing declines in other countries’ borrowing costs.
U.K. Curve Leads Bond Yields Lower Again on Growing Speculation of a Rate Cut: Germany’s 10-year yield had pulled back 3.6 bps around 7 a.m. CT while the U.K.’s 10-year yield tumbled by twice that amount, dropping 7.3 bps to a two-and-a-half-month low of 0.65%. Recent signs of some economic weakness have led a growing number of policymakers from the Bank of England to call for a possible reduction in interest rates. One of the loudest in that chorus again called for “relatively prompt and aggressive” action overnight to prevent further softening of the outlook and in response to the extended period of below-target inflation. His remarks came less than an hour before a host of U.K. inflation reports for December printed weaker than expected, including an unexpected decline in consumer inflation from 1.7% to 1.4%, a three-year low.
George Waiting, But Seems Willing to Move Rates in Either Direction: Consistent with the mindset of most of her colleagues, Kansas City Fed President George said it makes sense for the Fed to sit back “for now” and watch how the economy responds to last year’s rate cuts. However, she veered from the consensus in her willingness to consider possibly reversing that 2019 policy easing. George said, “it could be the case that downside risks and uncertainties persist in a way that keeps investment spending weak and spills over to the consumer, altering the modal outlook and requiring further policy easing.” But the passage of time and allowing for more incoming data could also confirm that last year’s rate cuts were “’insurance cuts’ that will need to be reversed if headwinds fade.”