Despite Friday’s mixed performances, US equity markets gained ground last week, while the Dow Industrials logged their 8th consecutive daily gain. Financials provided a constructive underpinning to the week as bond yields rose across the yield curve. The widely-watched 10-year Treasury yield rose 35 bps on the week to close out Friday’s trading at 1.9030%. On Friday alone, the 10-year Treasury yield rose 6.2535%.
That move higher in Treasury yields was ignited by three factors: a reversal of an over-bought treasury market that had been fueled by concern over a trade war-induced economic slowdown/recession; easing of the heightened concern over the potential impact of that trade war domestically and globally; and indications in the most recent US economic data that the US economy continues to expand – in large part due to healthy consumer demand.
Those themes moved in concert last week to lift the myopic focus that had recently propelled market sentiment into a “risk-off” posture, and market outlook to “uptrend under pressure.”
Insofar as the status of the trade talks is concerned, there were signs of softening last week – on both sides. In a nod to the 70th anniversary of modern-day China’s establishment as a communist nation, President Trump held off for 2 weeks on the additional tariffs that had been announced just weeks previously. China followed with an announcement that allowed Chinese companies to import some previously blacklisted U.S. agricultural products. Those moves were interpreted by the street at large as a meaningfully constructive shift in tone.
The economic data released last week was constructive. PPI-FD Y/Y came in at 1.8%. Less food & energy: 2.3%. The monthly PPI-FD totals for August met Econoday consensus in both cases. The EIA Petroleum Status Report last week reflected net draws again – indicating that US demand remains strong. Crude inventories dropped 6.9M bbl, while gasoline inventories shrank 0.7M bbl, though distillate inventories rose 2.7M bbl. Remember, the previous week’s report reflected draws in all three verticals. Jobless claim totals last week came in below consensus: 204k. CPI for August M/M was 0.1%, on a Y/Y basis, 1.7%. Less food and energy, Y/Y, 2.4%. In a nod to the strength of the US consumer, retail sales figures for August were 0.4%, versus Econoday consensus of 0.2%. July’s retail sales figures were revised higher to 0.8% from the initial reading of 0.7%. To top it all off, Consumer Sentiment results for August, as measured by the University of Michigan, came in at 92, higher than Econoday consensus of 91 and July’s 89.8. In summary, last week’s economic data provided a counter-argument to those calling for an pending recession. Coupled with a softening in the tone of the US/China trade narrative, the risk-off trade that had permeated the market for much of the late summer seems to have lifted – at least temporarily. Equity prices rose, investor sentiment lifted, and treasury yields reversed higher.
All of that is, of course, subject to change this week as a result of the FOMC meeting, announcement, and Fed chair press conference. Though an interest rate cut this week is not a slam dunk, it is expected. However, many argue that near record-high U.S. equity prices, a reversal in Treasury yields that materialized last week, a near-cycle low level of unemployment, and rising wages all speak to the Fed standing pat on rates this week.
There is an argument to be made for a 25 bps cut this week. The slowing growth that appears to be well-chronicled over the past several quarters has marshaled many economists around the notion of lower rates broadly speaking and a move lower in rates this week specifically. Additionally, the ever-increasing number of sovereign bond offerings around the globe sporting negative yields has impacted the consensus directional outlook for Treasuries. According to a recent Reuters survey, over 50% of economists surveyed are expecting the Fed to cut by both 25 bps this week, and another 25 bps by year-end.
This week’s economic calendar highlights:
FOMC Meeting Begins
US Industrial production data for August is released at 9:15 am. This release, by the Federal Reserve, is key to measuring the health of the US economy. Last month’s release for July was a critical component leading to the fears of a wider slowdown in the economy. In July, the M/M production reading was 0.2%. Manufacturing M/M slipped 0.4%. Capacity utilization was a healthy 77.5%. Econoday consensus for this month’s reading is 0.1%, 0.1%, and 77.5%, respectively.
FOMC Meeting Announcement
Fed Chair Press Conference
Housing starts for August are due out at 8:30 am. Econoday consensus, Level-SAAR is 1250M. Permits, an indication of pipeline health, is expected to be 1.300M.
Weekly jobless claims are due out at 8:30. A consistently constructive data point for the market, last week’s result reflected a drop in claims to 204k, with new claims slipping by 15k. The four-week moving average stands at 212.5k.
The Philadelphia Fed Business Outlook Survey for September is out at 8:30 am. Econoday consensus is 11.3 – down from August’s 16.8.
Existing Home Sales for August are released at 10:00 am. Level-SAAR, Econoday consensus is 5.375M – down fractionally from July’s 5.420 M.
Special Tribute: Let Freedom Ring
Flickr photo: Stephen Downes
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