Up-Timism

Up-timism.  Traders were optimistic in the wake of Trump’s decision to drop his tariff threat to Mexico and they took stocks up for a fifth straight session.  Despite early session excitement the still-looming threat of the Chinese trade dispute dampened the rally and stocks closed off their session highs.

MY TWO CENTS

1.  On China. The trade dispute with China is still very present.  Steven Mnuchin, after his last venture to China, announced that he had very candid and frank conversations with his counterparts.  If you are unsure of how to interpret those two adjectives, I would say that, in this context, they are less than positive.  The Mexican row was a diversion causing traders to change their focus for a week.  Lest we forget, China just created its own black list of companies that are “unreliable” and guess which companies are on that list?  Some of the US’ largest and brightest companies.  Just last week it was reported that Chinese authorities called on Intel, Qualcomm, Dell, Cisco Systems, and Microsoft and threatened them with dire consequences if they complied with Administration’s moratorium.  Trump is expected to meet with Chinese Premier Xi Jinping at the G-20 later this month and traders are optimistic that a deal will be reached.  Yesterday, Trump threatened to ratchet up tariffs even further if Xi doesn’t show up to the meeting.

2.  On the Fed.  Traders seem dead-set on a Fed rate cut, but what does that really mean for the markets?  Sure an easing of financing costs can make borrowing by companies and consumers cheaper, which is good.  However, if the economy slips further and spending is suspended, lower interest rates can only temporarily soothe the pain and the decelerating economy will continue to decelerate and stocks will ultimately pull back.  Analysis conducted by JP Morgan suggests, based on past market responses, that rate cuts only have a positive effect on equities when they are pre-emtive and rate cuts to stave off weakening economic growth usually result in a low growth or losses for equities.  That means the window for the Fed is getting smaller.  As of this morning, Fed Fund Futures imply a 77.2% probability of a rate cut by July.

THE MARKETS

Stocks spent the day in the green on trade optimism after the President announced that a deal had been struck with Mexico late Friday.  An early morning rant on CNBC’s Squawk Box show gave the President a chance to shame his critics, pressure the Fed, and threaten China.  Though the market initially responded positively, the rally faded later in the session well off their highs but still in the green.  The S&P500 closed up by +0.47%, the Dow Jones Industrial climbed by +0.3%, the Russell 2000 increased by +0.61, and the NASDAQ ascended by +1.14%.  Technology led the rally climbing by +0.98% and the Auto Industry group climbed by +1.44% on relief after the Mexican deal was announced.  Bonds pulled back slightly and the ten-year treasury yield climbed by +6 basis points to 2.14%.  The still-inverted 3-month/10-year yield curve steepened by +6 basis points to -12.  This was caused by traders factoring in a rate cut, which helped bring down short maturity yields.

WHAT’S NXT

- This morning at 6:00 AM, WHILE YOU SLEPT the NFIB released its Small Business Optimism Index which came in beating expectations at 105 compared to last month’s 103.5.  Small businesses are optimistic, which is good.

- Later this morning we will get the Producer Price Index from the Bureau of Labor Statistics.  The year over year PPI is expected to have slowed to +2.0% from +2.2%.  The year over year PPI excluding food and energy is expected to be +2.3%, down from last month’s +2.4%.

- The Treasury will auction $38 billion 3-year notes at 1:00 PM EDT and bond traders will watch closely in this curve shifting environment.

- H&R Block and Nieman Marcus will announce earnings before the bell while Dave and Busters will announce after the close.

daily chartbook 2019-06-11