Wheelin’ and Dealin’

Wheelin’ and Dealin’.  Stocks rose on Friday as optimism for a trade deal ruled the day.  Core inflation ticked up slightly along with personal income, while spending was down slightly, but traders focused on the trade talks.

 

MY TWO CENTS

 

1.  The international diplomacy reality show. Markets have been building up hope that the President would make positive progress in his planned meeting with President Xi over the weekend and they got a bit of what they were hoping for.  But what, actually, did we get?  Let’s take a step back and define what it is that we are dealing with.  The row between the US and China is way more than a simple trade war which is typically characterized by tit-for-tat tariffs until one side concedes.  While the dispute between the world’s two largest economies may have started out that way, the conflict has become far more complex.  The differences now include human rights, national security, anti-competitive behavior, intellectual property rights, and South Sea land grabbing.  The trade dispute has brought to the surface a myriad of systemic issues that have been building for years if not decades.  Solving all of the problems will surely take a massive diplomatic effort.  WHILE YOU SLEPT, the administration announced that Trump and Xi agreed to resume negotiations and that the US will temporarily hold off on imposing further sanctions on China as well as ease up on some of the recent restrictions imposed on Huawei.  While Asian and US futures markets have applauded the symbolic detente, the conflict is far from over and we can expect the effects of the the global trade slowdown to continue to have impacts on the domestic economy.  Not quite sure about how the President’s surprise visit to North Korea will impact the economy, but it certainly made for a good photo op.

 

2.  Confidence makes the economy.  Friday’s University of Michigan final Consumer Sentiment Indicator for June came in at 98.2, down from May’s 100.0 reading.  The slip in confidence coincided with the Conference Board’s Consumer Confidence Indicator from earlier last week which also registered a drop.  Many economists are beginning to have some concern that confidence may have peaked late last year which bears some ominous signs for the economy and markets, based on history.  The Michigan indicator, while still holding up, peaked in March of 2017.  These numbers bear watching not only because of the anecdotal fact that consumers make up the majority of the economy but also because breakdowns in sentiment have preceded recessions and stock market pull-backs in prior cycles.

 

THE MARKETS

 

Stock traders weathered mixed economic numbers on Friday choosing instead to focus on a potential positive outcome to trade talks with China.  The Fed also came out with its second bank stress test results indicating that the nations largest banking institutions were healthier than expected.  The positive outcomes will allow the banks to ramp up lending in a time in which lower interest rates are eating into profit spreads.  Additionally banks will ramp up share buybacks, helping them appear to be growing earnings by lowering outstanding shares.  Financials led stocks higher climbing by +1.4% while the S&P 500 traded up by +0.58%, the Dow Jones Industrial Average ticked up by +0.28%, the Russell 2000 rose by +1.29%, and the NASDAQ 100 ascended by +0.18%.  Bonds traded up slightly and 10 year treasury yields slid by -1 basis points to 2.0%.

 

WHAT’S NXT

 

–  Markit Manufacturing PMI is expected to come in at 50.1 in line with prior estimates but slightly lower than May’s 50.5 reading.  A similar number released by the Institute for Supply Management is expected to come in at 51.0 compared to May’s 52.1 read.

–  Construction Spending is expected to be flat once again month over month.

–  Markets will close early on Wednesday and remain closed on Thursday for the Independence Day holiday.

–  Fed Vice Chairman Richard Clarida is speaking today.

– The week ahead will bring services PMI’s, Factory Orders, Final Durable Goods Orders, and the monthly employment situation on Friday.  Please refer to the attached weekly economic release calendar for details.  There are no major earnings releases this week.

daily chartbook 2019-07-01

econ numbers 7_01