What’s the Deal?

What’s the deal?  Stock’s sold off yesterday as investors struggled to find another day of hope for a US trade deal with China.  Hope alone was just not enough as an opening rally quickly faded into a selloff that saw the Dow plunge more than 400 points at its session low.


WHAT YOU NEED TO KNOW:

1)  The Trump Administration is opening new fronts on the trade war.  WHILE YOU SLEPT, President Trump put India and Turkey on notice as he ended an agreement which allowed for certain goods to enter the US duty-free.  Amongst the 2000 items are auto parts which impact one of Trump’s target industries.  Recall that Trump and his EU counterparts have been on a saber-rattling stare down competition over automobile manufacturing and importing.

2)  China is attempting to stop the bleeding.  There has been a secular slowdown occurring in China which has been negatively impacted by the trade war with the US.  In response to the slowdown, officials are frantically pursuing accommodations to spur growth, or rather, maintain the already respectable growth.  China, last night decided to lower it’s GDP growth target to a range between +6% and +6.5%, slightly lower than last year’s hard target of +6.5%.  Additionally, they will institute programs to boost lending to companies in a move to spur growth.  Earlier in the day the government announced that it was cutting taxes on manufacturing concerns.

3)  A trade deal with China may be finalized as early as this month, according to the Wall Street Journal. The report should not come as a surprise to investors as the administration has been carefully leaking positive progress reports throughout the process.  Now that we are in the final stages, investors are beginning to wonder what the deal actually means for stocks and whether or not this most recent positive move in stocks, largely driven on trade hopes, is warranted.


In a recent note, I mentioned the old Wall Street adage: “Buy the rumor sell the news” and wondered if traders would sell on the news when a trade deal with China becomes imminent and yesterday saw that scenario perhaps playing out in a small way.  Traders may not be necessarily adhering to an old trading proverb but they are certainly wondering how the Fed may be interpreting the news.  If they aren’t, they should be!  The Fed started softening its language after the market rout in the final quarter of last year and they put a bow on it by shifting policy in January.  Recall that the primary reasons for the central bank’s change of heart was global economic slowdown / cross-currents (which means China), uncertainty around trade, dicy US economic numbers, and (most importantly as we now know from the most recent FOMC minutes) the stock market.  Since Chairman Powell first started sending positive vibes, markets have recovered with the S&P500 running up by +19.25% since its Dec. 24th low: CHECK.  China has been aggressively pursuing stimulus to jump start its economy: CHECK.  A signed trade deal will ensure that all if not most of the tariffs imposed throughout last year will be removed with the emergence of a new deal going forward: CHECK.  A 2.5% Fed Funds rate is still low by historical standards and does not give the policy makers a lot of dry powder to fight a recession. Investors will be wondering just how long the Fed can keep its rate hiking on hold now that at least three of the four main reasons for the policy change are about to be reversed.  Bond traders are certainly voicing their opinions as 10 year treasury yields broke out of a tight range and have risen by 10 basis points from just a week ago.


WHAT TO LOOK FOR TODAY:

This morning we will receive the Markit Services PMI which is expected to come in at 56.2, flat from last month.  The ISM non-manufacturing Index is expected to have risen to 57.4 from last month’s 56.7.  The delayed December New Home Sales figure is expected to show a pull back of -8.7% month over month versus the prior period’s +16.9% growth.  This afternoon we will hear from the US Treasury on the Federal Budget and they are expected to report a budget surplus of +$12.0 billion versus last month’s deficit of -$13.5 billion.  Boston Fed Chief Eric Rosengren will speak today.  This morning we will get earnings from Target, Kohl’s and Ciena, amongst others.  After the market, earnings will include retailer Ross Stores.

daily chartbook 2019-03-05