The Market Today
White House Taking Aim at China’s 10-Year Plan
by Craig Dismuke, Dudley Carter
Busy Week Kicks Off with New Home Sales: This week’s busy economic calendar kicks off today with the May New Home Sales report. New home sales, and construction-related activity, have been the stronger side of housing as limited existing-home inventory, higher mortgage rates, rising prices, and rising construction costs have all weighed on housing activity. New housing has weathered the headwinds, perhaps even been bolstered by some of them, and is currently adding to economic output. May’s data is expected to show another 0.8% MoM increase. At 9:30 a.m. CT, the Dallas Fed Manufacturing Activity index is expected to remain strong.
Also released this morning, the Chicago Fed’s National Activity Index, an aggregation of 85 different economic metrics, disappointed expectations falling from +0.42 to -0.15. For context, when the CFNAI’s 3-month average is above +0.70 or the one-month figure is greater than 1.00 following an expansion, a period of more rapid inflation is expected to occur. The index’s 3-month average is currently +0.20.
Overnight – More Trade Uncertainty Responsible for a Sequel to Last Monday’s Malaise: For a second week in a row, investors started Monday’s global session by trimming risk positions in response to threats of additional trade restrictions between the U.S. and China. News reports Sunday said the White House was planning additional measures against China that would limit its use of U.S. technology. The two major pillars of the plan were to control what types of technologies could be exported to China and prevent Chinese firms from taking over or investing in U.S. tech firms. The plan, which is premised on national-security concerns, could be announced as early as this week (more below). China’s CSI 300 fell 1.3% to lead widespread weakness across Asia. Germany’s DAX was down 1.4% and Europe’s biggest loser. In addition to the new threats between the U.S. and China, German automakers were the biggest drag on the index after President Trump last Friday said the U.S. was considering 20% tariffs on autos imported from the EU. U.S. equity futures were weaker by 0.5% to 0.9%. Treasury yields remain lower while the downdraft on German bunds has almost completely faded. The 2-year Treasury yield was flat while the 10-year yield was down 0.9 bps.
ICYMI – June 22, 2018 Weekly Market Recap: Equities had a tough go of it last week after threats of additional tariffs on goods flows between the U.S. and China added to the list of unknowns for investors on what that future trade relationship might look like. The U.S. Senate hit back at the White House and its plan to reduce sanctions on China’s ZTE. More impactful was President Trump telling U.S. trade officials to consider a 10% tariff on an additional $200 billion of Chinese imports. China said it would fight back equally and as necessary. That spoiled risk sentiment on Tuesday and ultimately was responsible for the Dow extending its recent downturn through Thursday. A positive finish on Friday snapped the index’s eight-day losing streak, which matched its longest since 1978. Other notable market events last week were Thursday’s split-decision by the Bank of England and OPEC announcing Friday that it planned to boost supply. The U.S. economic calendar was relatively calm and primarily focused on the housing sector. Existing home sales were the weakest since January and affordability continued to be cited as a concern. The other reports offered mixed signals on the topic of affordability, with home builder confidence weighed down by higher input costs, specifically lumber, but housing starts at a new high for the cycle. Click here to view the full recap.
Newest Trade Announcement – White House Reveals Target in Trade Negotiations with China: Per a WSJ article overnight, the initiatives are “designed to prevent Beijing from moving ahead with plans outlined in its ‘Made in China 2025’ report to become a global leader in 10 broad areas of technology, including information technology, aerospace, electric vehicles and biotechnology. … The Treasury Department is crafting rules that would block firms with at least 25% Chinese ownership from buying companies involved in what the White House calls ‘industrially significant technology.’ The ceiling may end up lower than that, according to people familiar with discussions finalizing the plans. … In addition, the National Security Council and the Commerce Department are putting together plans for ‘enhanced’ export controls, designed to keep such technologies from being shipped to China, said the people familiar with the proposals.”