The Rattling of Sabers

The rattling of sabers.  Stock traders were treated to a healthy dose of whipsaw yesterday as an early session rally turned into a late session selloff.  An upbeat Trump tweet to start the day caused early buying which quickly faded as news that China was preparing countermeasures to tariffs scheduled to hit on Friday.

WHAT YOU NEED TO KNOW:

1)  Posturing continues.  US trade reps declare that they are close to a deal perhaps as early as this Friday (stocks up), Trump tweets about raising tariffs on Friday (stocks down), US trade reps declare that China is backing off some earlier commitments (stocks down), Vice Premier Liu does not call off his US trip (stocks up), economists debate the impact of tariffs (stocks down), Trump tweets that Liu is coming to the US to “make a deal” (stocks up), China threatens to retaliate if tariffs kick in (stocks down)… This abridged timeline describes the roller coaster ride suffered by stock holders beginning late last week through yesterday’s close.  But alas there is an epilogue to the saga.  Last night WHILE YOU SLEPT, President Trump in a rally declared that China “broke the deal” and that there is “nothing wrong with taking in $100 billion a year” in tariffs… (stock futures down).

2)  Investors are starting to notice low yields.  Yesterday, the US Treasury sold $27 Billion in ten-year notes and the auction was weak.  The bid-to-cover ratio is the ratio of total bid amount to the amount being auctioned.  Yesterday’s auction ratio was 2.17, which was the lowest in 10 years, indicating weak demand.  The auction was awarded at 1 basis point cheaper than the market, also indicating weak demand.  Historically low rates have left investors clamoring for fixed income securities that provide higher yield causing riskier securities to trade at historically low spreads, which means that they are paying up for the risk.  On the other end of the equation, corporations have benefited from the prevailing low yields as they continue to issue debt at a record pace.  Record corporate debt has left the credit markets vulnerable to some real pain if a recession sets in and the Fed has been carefully warning us about it.  Is anyone listening?

THE MARKETS:

It was another day of low volume volatility for stocks as they watched the news feeds for trade headlines.  The President gave traders a reason to cheer in the morning and Beijing’s Ministry of Commerce threw cold water on their bullish aspirations in the afternoon.  The aftermath caused a mixed close with the S&P500 closing down by -0.16%, the Dow Jones Industrial Average closing up slightly by +0.1%, the Russell 2000 slipping by -0.46%, and the NASDAQ 1000 falling by -0.3%. Bonds traded off in yesterday’s session and the ten year treasury yield closed up by +3 basis points at 2.48%.  The 10 year was trading mostly unchanged until the weak auction caused a small sell off.

WHAT TO LOOK FOR TODAY:

This morning, the Bureau of Labor Statistics will release its Producer Price Index which measures the change in prices received by producers.  Economists are expecting a year over year PPI growth of +2.3% versus last month’s +2.2%.  The PPI excluding volatile food and energy is expected to be +2.5% year over year versus last month’s +2.4%.  Also this morning, the US Census Bureau will release the US Trade Balance which is expected to have widened to a -$50.1 Billion deficit from -$49.4 Billion deficit.  This morning’s pre-bell earnings announcements will include Cardinal Health, Duke Energy, AMC Entertainment,  Norwegian Cruise Lines, and Kraft Heinz.  After the market closes, we will hear from Zillow, Symantec, Guardant Health, and YELP, amongst others.  Tonight, we will also get a read on tomorrow’s IPO price for the hotly debated Uber offering.  The latest news indicates that underwriters are aiming for the mid to low end of the expected range.  Today’s Fed speakers include Chairman Powell, Bostic, and Evans spread out through the morning.  The Treasury will auction off $19 Billion in 30-year bonds which will be closely watched after yesterday’s weak 10-year auction.

daily chartbook 2019-05-09

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