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US stock indexes at 8:00 am ET were down -456. The 10-yr note stood at 2.42%, down -4 bps, breaking below last week’s resistance at 2.45%. Mortgage prices at 8:00 am were up +13 bps from Friday’s close. US/China trade talks dominated last week and over the weekend as expected China announced it would increase its tariffs on US goods imported into China. Last week the trade talks broke down when optimism was running high going into the week.
Trade remains the dominant concern in both stocks and bond markets as has been the situation for a couple of weeks. Last week began with President Trump threatening to increase tariffs after news over the weekend that trade discussions had broken down. This morning China did the expected, increasing their tariffs. Looks like both sides misread each other a couple of weeks ago when it was believed a deal would get done soon. Now the outlook is cloudy. Intellectual property rights and “unfair” competition in China is continuing to support state-owned businesses. China’s finance ministry said it plans to set import tariffs ranging from 5 percent to 25 percent on 5,140 U.S. products on a target list worth about $60 billion. It said the tariffs will take effect on June 1. “I say openly to President Xi and all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries,” President Trump wrote.
At 9:30 amthe DJIA opened down -454, the NASDAQ dropped -172, and the S&P was lower by -46. The 10-yr was at 2.42%.
No economic data today. This week has retail sales, housing starts and permits, and the University of Michigan consumer sentiment index as key data points. Trade, however, will continue to be the elephant in the room that dominates investors. We are surprised this morning that the markets appear to be shocked that China retaliated with its own tariffs. It was inevitable it would after Trump increased tariffs on Friday. Markets seem to be worried now that Trump will march on with his threat to increase tariffs on all of China exports to the US. A protracted trade war? Markets are chewing on it now; we doubt, however, that there will be a major lasting trade battle. In the end, both the US and China cannot sustain economic growth with tariff battles lasting too long. China to agree on the US demands will have to change its laws, which isn’t an easy or rapid progress even if it agrees to do so. China’s history on breaking deals is well documented and Trump is well aware of it.
Expect another day of volatility in the equity markets that will spill over to the bond markets, although the bond market won’t be as affected as the more emotional stock market. Technicals are looking better this morning although the momentum in these improvements has been subdued.
This Week’s Calendar:
Tuesday,
6:00 am April NFIB small business optimism index (102.0 from 101.8)
8:30 am April import and export prices (imports +0.7%, yr/yr +0.3%, export prices +0.6%)
Wednesday,
7:00 am weekly MBA mortgage applications
8:30 am April retail sales (+0.3%, ex auto sales +0.7%)
May Empire State manufacturing index (9.9 from 10.1)
9:15 am April Industrial production and capacity utilization ( production 0.0%, capacity utilization 78.8% unchanged from March)
10:00 am March business inventories (+0.1%)
Thursday,
8:30 am weekly jobless claims (219K -9K)
- April housing starts and permits (starts 1200K +5.1%, permits +2.7% +2.7%)
- May Philadelphia Fed business index (9.3 from 8.5)
Friday,
10:00 am U. of Michigan mid-month consumer sentiment index (97.6 from 97.2 in April)
- April leading economic indicators (+0.3%)
PRICES @ 10:00 AM
10 yr note: +19/32 (59 bp) 2.40% -6 bp
5 yr note: +13/32 (41 bp) 2.19% -7 bp
2 Yr note: +5/32 (15 bp) 2.19% -7 bp
30 yr bond: +29/32 (90 bp) 2.84% -5 bp
Libor Rates: 1 mo 2.449%; 3 mo 5.278%; 6 mo 2.587%; 1 yr 2.693%
30 yr FNMA 4.0: @9:30 102.78 +12 bp (+12 bp frm 9:30 Friday)
15 yr FNMA 3.5: @9:30 102.52 +11 bp (+21 bp frm 9:30 Friday)
30 yr GNMA 4.0: @9:30 103.34 +13 bp (+19 bp frm 9:30 Friday)
Dollar/Yuan: $6.8776 +$0.535
Dollar/Yen: 109.09 -0.85 yen
Dollar/Euro: $1.1259 +$0.0024
Dollar Index: 97.07 -0.24
Gold: $1298.90 +$11.70
Crude Oil: $63.13 +$1.47
DJIA: 25,380.93 -557.29
NASDAQ: 7686.18 -231.36
S&P 500: 2815.43 -65.97
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