The Market Today
Xi: “Working actively to try not to have a trade war”
by Craig Dismuke, Dudley Carter
Markit PMIs, Consumer Confidence Revision, and Kansas City Fed Manufacturing Report: Today’s calendar brings the Markit Services and Manufacturing PMIs for November. While the ISM indices carry more weight in the U.S., the Markit indices have increasingly gained attention. Particularly useful, Markit compiles indices for a large number of countries allowing for comparisons (see Chart of the Day). At 9:00 a.m. CT, the University of Michigan’s final revision to November’s consumer confidence report will be released. The initial read showed better confidence than the weakest reports of the year, albeit weaker than the 2018 trend. Finally, at 10:00 a.m., the Kansas City Fed Manufacturing Index will give one more regional glimpse into manufacturing activity.
Trade Remained the Key Focus: After slipping in six of the last seven sessions, Treasury yields rose Thursday after a rocky overnight start, despite equities posting a third modest daily decline. It has been an exhausting week of conflicting trade headlines that have left investors confused and concerned about the status of the trade negotiations. While the news flow slowed during the U.S. session, most of the pre-market U.S.-China trade headlines were more positive than ones earlier in the week. Notably, China’s top negotiator said overnight that he was “cautiously optimistic” about a trade deal, just days after a report indicated the mood in Beijing had become “pessimistic.”
Stocks and Bonds Diverged as Investors Opted to Wait for More Clarity: Treasury yields turned higher on that overnight headline and climbed gradually as a few subsequent others added to the daily optimism. Immediately following the open of U.S. trading, a major Chinese news outlet said the U.S. may delay the new tariffs set for December 15, even if no deal is reached by then. The 2-year yield rose 2.9 bps to 1.61% in its first increase this week to its highest level of the week. The 10-year yield added 2.7 bps to 1.77%. With recent gains having pushed the major equity indices to records on Monday, the increased level of uncertainty around trade since has given investors reason to pause near all-time highs. The S&P 500, Dow, and Nasdaq all notched losses that rounded to 0.2%.
Equities Take Kindly to China’s Xi Desire for a Deal: Since a mixed Asian session, global equities have firmed following comments from President Xi of China that he did not want a trade war. Xi reportedly said at an economic forum in Beijing that, “We want to work for a ‘phase one’ agreement on the basis of mutual respect and equality,” adding, “When necessary we will fight back, but we have been working actively to try not to have a trade war. We did not initiate this trade war and this is not something we want.” European equities and U.S. futures strengthened following the headlines. After a week of conflicting developments that has led to caution, positivity from the final decision maker in China was well received.
Yields Retreat on Weak Economic Data: Global yields, however, declined after disappointing data from Europe reminded of the damage the prolonged trade tensions have caused to the world economy. Eurozone manufacturing contracted for a tenth consecutive month in November according to preliminary Markit PMI data, albeit at a slower pace than economists expected, and a surprisingly-week services index pulled down overall activity unexpectedly. The manufacturing PMI rose from 45.9 to 46.6, better than the 46.4 expected, while the services index slipped from 52.2 to 51.5, disappointing expectations for a small gain to 52.4. The composite index inched down from 50.6 to 50.3, its second-lowest level since 2013. Additionally, PMI data from the U.K. showed an unexpected economic contraction on weakness in both sectors. Yields in the U.K. were leading broader declines on the mainland and in Treasury yields. The 2-year yield was down 1.0 bps to 1.60% around 7:30 a.m. CT and the 10-year yield was 1.9 bps lower at 1.75%.
Existing Home Sales Rebound Keeps Uptrend In Tact: Existing home sales recovered marginally less than expected in October on mixed results geographically, but 2019’s general uptrend in activity remained intact. Sales of previously-owned homes rose 1.9% while September’s 2.2% decline was revised to a slightly worse 2.5% drop. Economists had expected sales would rebound 2.0% last month. Nonetheless, October’s annualized pace of 5.46MM units is markedly better than January’s 4.93MM pace and a 4.5% improvement from a year ago. The NAR’s top economist said, “Market conditions…are very favorable,” but “supply remains very short.” Mortgage rates have moved in buyers’ favor this year as Treasury yields have declined. However, data from the NAR showed inventory dropped to 1.77MM units, a historic low for October, and remains tight, keeping upward pressure on prices. The median price was up 4.7% from a year ago, the largest annual gain since January 2018.