The Market Today

Wash, Rinse, Repeat – U.S. and China Continue to Talk


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Post Another Encouraging Data Point for Labor Market: Initial jobless claims for the week ending November 30 dropped once again, down 10k to 203k.  This marks the third-lowest weekly tally for new unemployment insurance claims of the cycle. Claims can be volatile in holiday weeks and Thanksgiving did occur during this report period.  However, back-to-back reports averaging 208k has assuaged any concerns created by the elevated reports in early-November.

Trade Deficit Continue to Shrink on Declining Trade with China: The October trade balance report confirmed last week’s advanced goods report, showing a $3.9 billion reduction in the monthly trade deficit.  The monthly trade deficit has now fallen from a peak of $60.8 billion in December 2018 to $47.2 billion with the majority of the drop coming from the bilateral deficit with China.  After just one month of data, the trade balance is on pace to be accretive to GDP growth once again in 4Q.

Final Revision to Strong Capital Goods Data: At 9:00 a.m. CT the final revision to the October capital goods orders and shipments data will be released.  The initial estimate showed rare strength in both categories, a positive sign for business investment.


YESTERDAY’S TRADING

Ceaseless Trade Twists Keep Investors on Their Toes: Market moves over the last two days have reinforced investors’ heightened sensitivity to any potential change in the direction of trade negotiations between the U.S. and China. Reports Tuesday that a trade deal may be delayed and that new tariffs were still planned for December 15th sent the S&P 500 down 0.7% and the 10-year Treasury yield 10.3 bps lower. Ahead of Wednesday’s U.S. trading session, however, Bloomberg reported that both sides were “moving closer” to a trade deal, despite recent developments that appear to show tensions moving higher.

Weak Data Didn’t Disrupt the Turnaround: Following the news, the S&P 500 gained 0.7%, essentially recovering all of Tuesday’s loss, while the 10-year yield added 5.5 bps to cut the prior day’s decline in half. Even more impressive, the gains held after ADP’s payroll estimate fell well short of expectations and the ISM’s services index dropped more than forecast (more below). There were notable moves made across other asset classes as well. The British Pound rallied as Conservatives maintained a lead in the latest polling ahead of the December 12th election and Canada’s Loonie strengthened following an upbeat tone in the Bank of Canada’s latest decision. Elsewhere, oil prices surged ahead of a two-day OPEC meeting on the positive turn in sentiment around trade and a larger-than-expected decline in U.S. inventories.


OVERNIGHT TRADING

Market Recovery Continues: Global markets continued to recover Thursday after Bloomberg reported Wednesday that the U.S. and China were still working toward a deal before the next round of tariffs go into effect in less than two weeks. China’s Commerce Ministry confirmed the countries remain in “close contact,” but reiterated that “if the two sides reach a phase one deal, tariffs should be lowered accordingly.” The MSCI Asia Pacific Index added 0.5% amid hopes trade negotiations won’t fall apart and Europe’s Stoxx 600 was 0.4% higher halfway through the European trading session. U.S. futures had moved up around 0.3% before 8 a.m. while Treasury yields jumped between 2 and 3 bps heading into the U.S. session. Yields across Europe had drifted higher in response to the modest improvement in sentiment over the last 24 hours.

Global Economic Data Remains Suspect: The positive trade headlines which led to the improved attitude driving global markets higher have outweighed a string of disappointing economic data released this week. After both ISM reports missed expectations and ADP’s payroll estimate fell well short of estimates, German industrial orders fell more than expected in October and retail sales across the Eurozone contracted more than anticipated and at one of the sharpest rates over the last several years.


NOTEWORTHY NEWS

ISM Services Index Missed as Cycle-Worst Current Activity Offset Modestly Firmer Orders and Employment: The ISM’s Non-manufacturing index fell more than expected in November as a sharp drop in current business activity offset modest gains for new orders and employment. The headline PMI fell from 54.7 to 53.9, its third weakest reading since the election, continuing the notable downtrend that has developed since late 2018. The trailing three-month average of 53.7 is down more than 6.5 points from the same period a year ago, the largest annual decline since 2009. Within the key underlying components, the business activity index dropped 5.4 points to 51.6 to match its weakest reading since 2009. However, softening the sting somewhat were modest improvements in the new orders (+1.5 points) and employment (+1.8 points) indexes. The monthly uptick in the forward-looking indexes partially offset the negativity of softer current activity, but continued weakness at the headline level will keep a caution about the outlook.


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