Equity markets declined last week as the trade dispute between China and the U.S. flared.  Ultimately, it amounted to headline grabbing proposals and tweets, not policies, very similar to the lead up to NAFTA negotiations.  Treasury bond yields climbed last week and commodities softened.

Market Anecdotes

  • There are many considerations surrounding the current trade dispute with China and other allies.  It is important to note that nothing has been enacted but markets are grappling with the odds of something happening.  As long as markets believe POTUS may actually follow through, risk markets will face headwinds.
    • From a financial market perspective, the POTUS North Korea rhetoric tactic may not translate as well to ‘softening up’ China as a counterparty.
    • China’s President Xi Jinping effectively has an open ended political term while POTUS has midterm elections coming up quickly this fall.
    • The dollar magnitude of the proposals (not policies) thus far are very minor in the context of overall trade relationship between China and the U.S.
    • The uncertainty of outcomes for all non-exempt trading partners is not favorable for capital market volatility and should be expected to continue.
  • The technology backlash over the past two weeks surrounding privacy (Facebook), earnings (Twitter), and growth (Tesla) has presented challenges to market indices given their larger weightings.
  • Morgan Stanley noted risks of $2.5t in outstanding BBB debt, a record level and increase from $1.3t outstanding five years ago.
  • CME futures are currently pricing in a 79% likelihood of a 0.25% rate hike by the Fed at the June FOMC meetings.
  • Fed balance sheet normalization is in its third quarter, now capped at $30b/month, with Treasuries capped at $18b of that amount.  The Fed allowed $11.9b of Treasury run-off last week, the largest amount to date. Despite liquidity injections from ECB and BoJ, liquidity contraction is expected to become more noticeable next month.
  • While still near cycle lows, Libor OIS spreads and corporate bond spreads have been widening as investors have become slightly more discerning.
  • U.S. oil rig counts have climbed higher, leading to record U.S. output of 10.46mbpd.  Oil prices have not fallen due to strong domestic demand and record exports.

Economic Release Highlights

  • March ISM Manufacturing index eased off February’s 14 year high to a still outstanding level of 59.3.  New orders, backlog orders, export orders all suggest continued strength.
  • March ISM Non-Manufacturing index came in as expected at 58.8, a robust level and near the prior two months.  Strong new orders and employment were both notable factors.
  • March Consumer Confidence Index eased slightly to 127.7 from February’s level of 130.8.  Consumer sentiment hit its highest levels since 2004.
  • March unemployment remained at 4.1% and payroll growth of 103,000 missed expectations by a fairly wide margin – which might say more about BLS measurement procedures than anything else.
  • The March jobs report included annual and monthly wage growth of 2.7% and 0.3% respectively which did substantiate what has become a consensus call for upward wage pressures continuing.
  • TS Lombard noted strength in rail car loadings of cyclical cargo which suggests continued strength in capital goods, hiring, hours worked, and ultimately wages.
  • Final estimate of 4Q GDP was revised upward from 2.5% to 2.9%, driven by robust consumer spending.
  • February Chicago PMI report missed by a wide margin last week (57.4 vs 62.0).  Historically, this correlates to the more widely watched ISM Manufacturing report due this week.