One Bumpy Ride

One bumpy ride.  Stocks climbed yesterday on renewed hope for a trade deal as China sent positive signals.  High hopes for high level talks which begin today drove yesterday’s rally.

 

MY TWO CENTS

 

1. A long strange trip.  Writing about the trade conflict would seem repetitive and almost a waste of ink… if it wouldn’t be the dominant force driving the markets these days.  Trade worries drove markets down on Tuesday, which rallied yesterday on trade hopes.  As reported here, yesterday’s hopes came as a Chinese official signaled that they would be willing to consider a partial trade deal.  At the same time China has been offering to purchase more soybeans.  More soybean purchases would be good for US farmers who have been on the front of the trade war.  Those purchases would also benefit China, who is struggling to meet demand without the US supply.  So today is the big day.  The day when Vice Premier Liu He arrives in the US to work out this partialdeal.  Yesterday, many wondered what a partial deal might include.  One thing seems certain: the deal will most likely not include an agreement on intellectual property theft and a curb on state subsidies.  This can get tricky going forward as both sides will attempt to get some sort of face-saving deal in order to de-escalate the fight.  Just how tricky it can get played out overnight WHILE YOU SLEPT.  Sometime around 6:30 PM last night the South China Morning Post announced that trade talks were cut short.  Stocks fall bonds climb.  About an hour later CNBC reported that the Whitehouse denied that talks were stalled.  Stocks climb bonds fall. Minutes later, Fox Business reported that Chinese sources said that talks were cut short.  Stocks fall bonds climb.  Around 11:00 PM Bloomberg reported that a partial deal would include a currency pact.  Stocks climb bonds fall.  Soon after, the New York Times reported that the US would allow some sales to Huawei.  Stocks climb bonds fall.  Some night eh?  Laying out all the cards, here is where we are this morning.  It would appear that both sides are teeing up a small agreement to ease tensions.  China looks ready to buy more much needed US soybeans and farm products.  The US may agree not to raise tariffs any further as another +5% increase is due to hit $250 million in goods on October 15th.  China may agree to follow certain guidelines with its currency, which they have allowed in recent months to devalue.  It is not clear just how far the currency agreement may go but it will most likely not be too game changing.  Finally, the US may agree to loosen the restraints on the blacklisted Chinese tech companies.  There you have it.  Markets will start the day with lots of built up tension over these talks.  Any positive outcome will be good for the market.  The more comprehensive, the better for stocks in the near term.  Seat belts fastened, please.

 

2. The Fed’s head.  The minutes from last month’s FOMC meeting were released yesterday giving us a better understanding on what went on in the closed session which resulted in the Fed’s lowering interest rates by -25 basis points.  The minutes point to a somewhat reserved strategy.  The group agreed that they were concerned that economic conditions had worsened since their prior meeting.  The Chinese trade conflict was top of mind.  Members remained concerned that the conflict would begin to impact employment and consumer behavior.  This was the primary reason for the rate cut.  HOWEVER, they were also concerned that the market was expecting too much from the Fed and were eager to quell some of the unfounded expectation.  Markets were expecting several rate cuts over the next twelve months while some Fed members were expecting less and still others were expecting none at all.  Disappointed markets are usually not a good thing for investors and the Fed knows this, so they tread lightly when dampening exuberance. You may have noticed that in Powell’s written post-meeting statement he mentioned the words “not on a preset course”.  That is him saying that the Fed is not just going to keep lowering rates without solid cause.  You will also find that message in his speech earlier this week in which he went out of his way to let the market know that any open market activity should not be perceived as stimulus.  What will they do next?  The Fed is clearly concerned about employment as it is a key economic driver and one half of its dual mandate.  Since last month’s meeting, September’s unemployment rate hit a 50 year low, which should make the Fed happy.  On the contrary, yesterday’s JOLTS Job Openings report showed that there were 7.051 million job openings, missing expectations.  The number also represented a decrease from last month, which was revised down to 7.174 million hinting a slight slowdown.  Fed funds futures predict that there is an 85% chance of a -25 basis rate cut later this month.

 

THE MARKETS

 

Stocks climbed yesterday on hopes that the US and China can come to some agreement, any agreement, just something, please.  The S&P500 advanced by +0.91%, the Dow Jones Industrial Average climbed by +0.7%, the Russel 2000 traded up by +0.47%, and the NASDAQ Composite Index jumped by +1.02%.  Bonds slipped and 10-year treasury yields climbed +6 basis points to 1.58%.  The dollar has been gaining strength and remains steady, but expect some volatility on all of the talk around a currency pact with China.

 

WHAT’S NXT

 

–  The Bureau of Labor Statistics will release its Consumer Price Index which is expected to show a year over year growth of +1.8%, up slightly from last month’s +1.7% growth rate.

–  San Francisco Fed President Mary Daly, Cleveland Fed President Loretta Mester, and Atlanta Fed Raphael Bostic will speak today.

–  The treasury will hold a 20-year bond auction today.

–  Delta will release earnings before the bell.

daily chartbook 2019-10-10