Temporary relief in both the Brexit and Hong Kong situations and no material change in monetary policy expectations propelled risk markets forward last week despite a mixed bag of economic releases and more running in place on the U.S.-Sino trade front.  Equity markets, commodities, and foreign currencies moved higher while treasury bonds took a breather with yields beyond 2 years moving higher.

Market Anecdotes

  • A relief valve presented itself in the Hong Kong protests as CEO Carrie Lam agreed to withdraw the extradition bill at the root of all the protests.
  • PM Boris Johnson’s tactic to fast track an October 31 Brexit failed spectacularly last week as parliament passed legislation (328-301) barring the PM from exiting the EU without a deal on October 31st.
  • China’s State Council announced lower reserve requirements (-0.5%) in the Chinese banking system, releasing approximately $126b in new lending capital to the system.  Additional initiatives in job training and infrastructure investment were announced as well.
  • FOMC Chairman Powell gave a speech on Friday that served to dampen market expectations for aggressive rate cuts by the Fed.  Fed funds futures are still pricing a 92% probability of a 25bps cut with 0% for a 50bps cut at the September 18th meeting.
  • Stock market behavior here at the beginning of September looks like a mirror image of August. Trade, Brexit, and Hong Kong are all likely playing a part.
  • The yield curve steepened slightly last week leaving 2y/10y in positive territory and 3m/10y declining from 0.51% to 0.41%.
  • The USD falling on the week combined with some anecdotal observations have some currency specialists feeling a possible pivot toward a weaker USD.
  • Technical resistance level of 2,930 was decisively broken to the upside this week and both 50- and 200day moving averages are trending higher again.
  • Bespoke’s Beige Book index has fallen three consecutive reports, now back to March 2019 levels while economic estimates have finally been ratcheted back to levels in sync with activity.
  • Atlanta Fed GDPNow is currently estimating 1.5% growth for 3Q.
  • The bilateral trade balance with China has narrowed from roughly $37b per month at the end of 2018 to $30.5b.   U.S. exports to China have fallen from $12.6b (March ‘18) to $7.8b (Dec ‘18).  Both agricultural and non-agricultural exports have fallen sharply.

Economic Release Highlights

  • The ISM Manufacturing index missed expectations (49.1 vs 51.3), a fifth consecutive monthly decline and end to a 35 month >50 streak – the longest >50 streak since February 2008.
  • The ISM non-manufacturing index registered its best reading since May and easily surpassed expectations (56.4 vs 54.0) highlighted by strong breadth and a jump in new orders.
  • The August employment report missed expectations (130,000 v 163,000) but held steady at 3.7% unemployment. Private payrolls only managed 96,000 which is 40,000 short of the low estimate while tight labor markets contributed to a healthy .4% wage growth (3.2% YoY).
  • The U.S. Markit PMI for August was less enthusiastic than ISM with composite, services, manufacturing at 50.7, 50.7, 50.3 respectively. The Global PMI of 51.3, 5.18, 49.5 showed a slight slowing in services (-.7) with a slight improvement in manufacturing (+.2).  Eurozone is showing signs of stabilization (51.9, 53.5, 47.0).
  • July factory orders rose 1.4%; 1% was expected.
  • July durable goods increased 2%; 2.1% was expected