Rates flat after US and China reach trade truce. Now what?

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Published Date 12/3/2018

Stock indexes looked better this morning. The rate market prices were slightly weaker. The much-anticipated meeting over the weekend between President Trump and China’s President Xi is seen as progress by the majority, but naysayers still have doubts. Investors are encouraged with the DJIA at 8:00 am ET up +430 points. Trump tweeted a claim that China agreed to “reduce and remove” tariffs on imported American-made cars, raising more questions about the outcome of his meeting. So far it is a one way street with no comments coming from China officials. The president’s tweet: “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.” Meanwhile, what we are reading from the White House reports is that his optimism may exceed what China will actually do. It’s a step forward, but a long way to travel for any major breakthroughs. His bold remarks likely reflect the fact that he's under pressure from American businesses to resolve the trade fight.

The meeting ended with a truce in the trade war — stocks rallying, the rate markets increasing and crude oil improving. It is unclear now on what will occur next. The truce likely will stave off the president’s recent threats to increase tariffs and add $200B more tariffs. 90 days of backing away, it’s all a breath of fresh air for now, but huge hurdles await. China likely will be hard pressed on is intellectual piracy and hurdles for US companies operating in China. China’s yuan climbed with emerging-market assets. Gold and copper rallied, as did most other commodities.

At 9:30 am the DJIA opened up +403, the NASDAQ added +134, and S&P was up +37. The 10-yr at 9:30 am stood at 3.20%, up +2 bp.

At 10:00 am November’s ISM index rose to 59.3 from 57.7 the previous month. The new orders index rose to 62.1 in November from 57.4 a month earlier. The employment index increased to 58.4 last month from the prior 56.8. The prices paid index decreased to 60.7 in November, from the previous reading of 71.6. Analysts had forecast the reading to fall to 70.0. Economists had predicted a drop to 56.5 for the overall index.

October construction spending, expected to add +0.4%, declined 0.1%; yr/yr spending +4.9% down from 7.2% in September.

Markets are going to close on Wednesday in remembrance of George H W Bush. The New York Stock Exchange, NASDAQ Inc.’s U.S. equities and options markets and CME Group Inc.’s U.S.-based equity markets will shut, the companies said. They will also observe a moment of silence on Monday. The Securities Industry and Financial Markets Association has also recommended that fixed-income cash markets close on Wednesday, according to a statement. A National Day of Mourning is always followed when a former President dies.

This is employment week; unemployment is expected to be unchanged, and job gains are forecast about 185K. The markets will be closed on Wednesday but there is a major speech scheduled. Jerome Powell’s testimony to the Congress's Joint Economic Committee will be re-scheduled. Also Wednesday there are a number of key data points scheduled.

The meeting between Trump and Xi is hopefully a start but moving forward any concrete trade pact is not likely for months as China isn’t likely to roll over without a protracted series of negotiations. Already after 30 minutes, the stock indexes have backed off the opening levels.

3.00% for the 10-yr note is a stone wall. Last Friday it briefly dipped below 3.00% to 2.996%, but there isn’t anything significant to it other than a test that failed. As previously noted, the push below 3.00% will likely take a major change in sentiment and global economic outlooks; at the present there isn’t anything out there that has the momentum to change the outlook for US and global interest rates.

This Week’s Calendar:

Monday,

10:00 am Nov ISM index (57.2 expected, as reported

Oct construction spending (expected +0.4%, as reported

Tuesday,

No Time November auto and truck sales

Wednesday,

7:00 am weekly MBA mortgage applications

8:15 am Nov ADP jobs (+175K)

8:30 am Q3 productivity and unit labor costs (productivity +2.3%, unit labor costs +1.1%)

10:00 am Nov ISM non-manufacturing index (59.0 from 60.3)

2:00 pm Fed Beige Book

Thursday,

8:30 am weekly jobless claims (225K -9K)

October US trade deficit (-$54.7B)

10:00 am Oct factory orders (-2.0%)

Friday,

8:30 am November employment data (unemployed 3.7%, NFP jobs +189K, private jobs 185K, average hourly earnings +0.3%, labor participation rate 62.8% from 62.9% in October)

10:00 am University of Michigan consumer sentiment index (97.5 unchanged)

October wholesale inventories (+0.6%)

3:00 pm October consumer credit (+$15.3B)

Source: TBWS

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