High Hopes

High hopes.  A bunch of talk along with hopes of a rate cut helped stocks weather a bad economic number and close in positive territory.  Yesterday, stocks started the session under pressure but Administration announcements regarding trade cleared the way for a mid session rally in the equity markets.

WHAT YOU NEED TO KNOW:

1)  Still lots of talk.  Yesterday, Stephen Mnuchin announced that trade issues with Canada and Mexico are close to being resolved.  Those “issues” involve the now-infamous steel tariffs that really marked the beginning of the “trade fear” regime that continues to stymie the markets today.  News of a potential “understanding” helped markets turn around yesterday.  Another Administration announcement that Trump was likely to delay tariffs on Auto and Auto Parts were also welcomed by stock buyers yesterday.

2) … meanwhile the battle rages on.  WHILE YOU SLEPT, President Trump signed an order restricting the sale of 5G wireless equipment by Chinese telecom giants ZTE and Huawei.  The order referred to the companies as national threats to telecom.  Immediately following the order, the commerce department blacklisted Huawei, blocking American businesses from doing business with the manufacturer.  The order is a clear shot at China as the trade war intensifies.  No longer a war of words, tariff increases that kicked in last Friday will start to really take affect soon as new shipments begin to roll off the docks.  President Trump plans to meet with Chinese Premier Xi Jinping at the G-20 summit at the end of June during which there is hope that the two will reach an agreement and end the trade spat.

3)  Retail sales slipped unexpectedly.  Yesterday’s Census Bureau’s release of Retail Sales showed an unexpected month over month slide of -0.2% versus last month’s +1.7% growth.  The pullback was likely related to the rise in gasoline prices and slower auto sales.  One of the biggest threats to the economy is consumer sentiment… as goes that, so goes the economy.  Consumer consumption represents around 70% of the GDP in the US.  Over the past few days, many of the Fed speakers have referred to the risk of the US talking itself into a recession despite a solid economy.  They are referring to business and consumer confidence.

THE MARKETS:

Markets started yesterday’s session under pressure from bad Chinese economic numbers.  Things took a turn for the worse when the Census Bureau released its lackluster Retail Sales figures.  The bad numbers gave way to hopes that the Fed might have to cut interest rates to head off the weakness.  Yes, that again.  According to futures, there is now a better than 50% chance of a 25 basis point rate cut by October.  Those odds increase to 75% by December.  Rate cut expectations combined with Mnuchin’s steal tariff positivity and Trumps possible delay in auto tariffs turned traders moods and stocks positive.  Stocks closed up on the session with the S&P500 trading up by +0.58%, the Dow Jones Industrial Average climbing by +0.45%, the Russell 2000 jumping by +0.34%, and NASDAQ 100 ascending by +1.37. Bond yields fell yesterday on the bad economic data and rate cut speculation leaving 10-year treasury yields at 2.37%, down -4 basis points.  The move in ten-year notes was enough to push the 3-month /10-year yield curve back into recession-hinting inverted territory at -2.9 basis points.

WHAT TO LOOK FOR TODAY:

This morning the US Census Bureau will release Housing Starts figures which are expected to show a month over month growth of +6.2% compared to last month’s pullback of -0.2%.  Building Permits are expected to have grown by +0.1% versus last month’s decline of -1.7%.  Fed Vice Chairman Randal Quarles will testify before the House Financial Services committee.  Minneapolis Fed President and Fed Governor Lael Brainard will also speak today.  Walmart is scheduled to release its 1Q earnings before the bell and we will hear from Nvidia, Pinterest, and Applied Materials after the bell, amongst others.

daily chartbook 2019-05-16

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