Markets Have Been Resilient – How Long Can it Last?
The threat of delisting was raised back in June. In a bill introduced in the U.S. Senate, Chinese companies would face delisting if they refused to provide the U.S. Public Accounting Oversight Board access to their audited reports, something China has refused to do, citing national security reasons. No doubt, part of that refusal relates to the eleven U.S. listed Chinese companies that are at least 30 percent owned by the Chinese government. And the threat of delisting may be part of the motivation of some companies, such as Alibaba, to pursue secondary listings in Hong Kong or mainland exchanges. But the threat of preventing U.S. investors from investing in China ratchets up the pressure even further. On Friday, Alibaba shares dropped 5.2 percent, along with other Chinese companies trading in the U.S.
It has been variously speculated that such discussions within the White House may be no more than a negotiating tactic ahead of the October 10 scheduled resumption of trade talks, or an attempt to deflect attention away from the impeachment inquiry. Whatever the case, and there may be elements of both, to the extent that such discussions are even being considered, they only add to the trade policy uncertainty that is contributing to the global economic slowdown and complicating the policy response of central banks.
The Trade War Continues to Weigh on Markets
For the week, the S&P 500 lost 1.0 percent, closing at 2962. There is little doubt that the trade war continues to exert its influence over the near-term direction of markets, as stocks first rallied on Wednesday after President Trump said a trade deal could happen “sooner than you think,” only to fade on Friday after the initial reports that the White House was considering China investment restrictions.
Similarly, the yield on the ten-year Treasury note rose nine basis points on Wednesday to 1.74 percent, only to slump back down to end the week at 1.68 percent (a basis point is 1/100th of a percent).
The Economy Continues to Hold Up, But Consumer Confidence is Slipping
Despite the drag from the trade war, the U.S. economy continues to chug along. Last week the Citi U.S. Economic Surprise index rose for the 13-consecutive week, although last week’s economic data was a mixed bag. Durable goods orders unexpectedly rose in August, but private sector capital goods orders ex-aircraft fell. The flash PMI (The Purchasing Managers’ Index) for manufacturing rose slightly in September after slowing precariously close to contraction in August.
The Conference Board’s consumer confidence index fell sharply in September, although that reading was offset to some extent by the relatively flat reading of consumer sentiment from the University of Michigan, which itself had fallen sharply in August. Questions about the staying power of the consumer sector, the workhorse of this expansion, were raised anew after personal consumption reportedly rose by just 0.1 percent in August, despite personal income growth of 0.4 percent. And the Fed’s preferred inflation gauge, the core PCE (personal consumption expenditures) deflator rose to 1.8 percent year-over-year, up from the upwardly revised 1.7 percent pace in July. It was the third straight monthly advance in the index since May, when it registered 1.5 percent, although it remains below the Fed’s symmetrical target of 2.0 percent.
Those economic reports will quickly take a back seat to this week’s calendar, topped by the September jobs report on Friday. The Bloomberg consensus anticipates the addition of 145,000 non-farm jobs, with the unemployment rate remaining at 3.7 percent. Earlier in the week, we will see the ISM report on manufacturing, which is expected to climb back above the contraction line below which it fell in August. And in China, the official manufacturing gauge rose fractionally in September, but remained in contraction territory for the fifth straight month. The flash reading also rose in September and remained in expansion mode for the second straight month after slipping below in June and July. Chinese markets will be closed from October 1 through October 7.
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The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The Citi Economic Surprise Index measures the pace at which economic indicators are coming in ahead of or below consensus forecasts.
The Consumer Confidence Survey® reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes and buying intentions, with data available by age, income, and region.
University of Michigan Consumer Sentiment Survey is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points.
The Institute for Supply Management (ISM) Non-Manufacturing Report compiles data from the U.S. services sector by surveying purchasing executives in over 60 different non-manufacturing industries, including construction, mining, agriculture, communications, transportation and retail trade. The personal consumption expenditure (PCE) measure is the component statistic for consumptoin in gross domestic product (GDP) collected by the United States Bureau of Economic Analysis (BEA).
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