Choose your words carefully!

Choose your words carefully!  It was an up and down ride for stocks yesterday with US-China trade talks rekindling old anxieties.  Stocks started the session believing something good will come out of a Trump-Xi meeting this weekend, but careful examination of the facts proved otherwise.

 

MY TWO CENTS

 

1.  More word-smithing.  With some sort of near-term Fed rate cut fully priced into the market at this point, investors have turned their focus back on US-China trade negotiations.  Interestingly the tariff war between the two countries has been credited as one of the main drivers of the global economic slowdown that has driven the Fed into its current dovish mood.  The President announced a few weeks back, via Twitter, that he would be meeting Chinese President Xi at the G-20 summit after having a nice phone call with him.  Since the announcement, many Administration officials have been tempering expectations for something big to come out of the meeting.  Those officials have had to walk a tightrope in order to give the impression that while things are not good, they are not bad either.  What does that really mean??  They don’t want to spook the market by painting a grim picture but they are also fearful of setting unrealistic expectations that a substantial deal is imminent.  What that really, really means is that we don’t really know what is going to come of this mess.  Markets like to know what’s going on and traders have been doing their level best to take a glass-half-full view of the situation which puts the market in a very tight spot with more downside risk than upside potential.  Yesterday morning, Steven Mnuchin said in an interview that the two sides “were 90% done with negotiations” and markets quickly reacted positively.  As the session opened and wore on, news outlets began clarifying that the Mnuchin quote in context had him referring to an earlier state of negotiations, underscoring the word “were”, and not the current state, which appears to have stalled in recent weeks.  The market reacted by giving up much of the morning’s gains closing mixed.

 

2.  On the economy.  Yesterday morning, the Bureau of Economic Analysis released its Durable Goods Orders number which reflected a -1.3% drop in orders, surprising on the downside.  Further, last month’s figure was revised down to -2.8% from -2.1%.  While it is clear that the economy is slowing down, the top-line number may not show the full picture.  In addition to wash machines and refrigerators, Durable Goods includes civilian aircraft orders.  If you take those out, orders rose a moderate +0.3% compared to last month’s flat figure.  To be clear, the growth figures are significantly lower, on average since 2017, but a little growth is better than no growth.

 

THE MARKETS

 

Stocks were pushed around by emotions on US-Chinese trade talks coming up later this week.  A misinterpreted statement by Steve Mnuchin sent stocks up in the morning and down when the statement was clarified.  Chip stocks traded up on news that Micron found a way to resume chip sales to China through a loophole in the Trump moratorium.  The SOX Philadelphia Semiconductor Index rose by +3.21% yesterday while the broader market closed mixed with the S&P 500 trading down by -0.12%, the Dow Jones Industrial Average slipping by -0.4%, the Russell 2000 closing off by -0.21%, and the NASDAQ 100 rising by +0.47% thanks to its tech-heavy makeup.  Bonds fell yesterday with 10-year yields climbing by +6 basis points to 2.04%.

 

WHAT’S NXT

 

– This morning the Bureau of Economic Analysis will release its third GDP estimate for 1Q which is expected to show an annualized quarter over quarter growth of +3.2% up from last quarter’s +3.1%.  Personal consumption is expected to have risen by 1.3%, even with its prior reading.

– Pending Home Sales are expected to have grown by +1.0% month over month compared to last month’s decline of -1.5%.

– The Kansas City Fed Manufacturing Index is expected to have fallen to 1 from 4.

– The Fed will release bank stress test information.

– The Treasury will auction off $32 billion 7-year notes.

– Walgreens Boots Alliance, McCormick, and Conagra brands will announce earnings before the open while Nike will announce after the close.

daily chartbook 2019-06-27