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Trade Progress, Brexit News In Focus Ahead Of Earnings Season Ramp Up

As investors appear to be awaiting the ramp-up of earnings season with bank quarterly reports tomorrow, they have some incremental geopolitical news to digest.

Trade negotiations between the United States and China continue. U.S. Treasury Secretary Steven Mnuchin told CNBC that the U.S. and China have “pretty much agreed” on an enforcement mechanism, and the Wall Street Journal reported that China has sweetened an offer to open its cloud-computing sector to foreign investment.

In Brexit news, the deadline for the United Kingdom to leave the European Union has been delayed until October, averting a potentially economically messy no-deal exit that has been one of the geopolitical uncertainties hanging over Wall Street for some time. Still, the news doesn’t appear to bring the UK closer to actually figuring out a deal for the divorce.

Much like the generally unsurprising Fed minutes from yesterday, the news doesn’t appear to be moving the U.S. market too much as investors and traders are probably looking for resolutions to two of the thorny issues that have caused worries about global economic growth.

Volumes have been on the light side recently as investors and traders wait for earnings season to ramp up in earnest tomorrow with big banks reporting quarterly results. Ahead of that, it appears that market participants don’t want to commit too much either way.

In economic news, initial claims for unemployment benefits came in lower than expected at 196,000 versus the 215,000 forecast in a consensus. That marked the lowest level for initial claims since October 1969, the Labor Department said. When people are employed, that can bode well for consumer spending, which supports a huge chunk of the economy. We’ll also have to see whether strong employment trickles down to help the housing market.

Mining the Minutes

Yesterday, each of the main three U.S. indices ended in the green after the minutes of the Fed’s last meeting showed pretty much what the market was expecting and reiterated the central bank’s dovish stance. The dovish pivot has helped the market move higher this year by allaying fears that monetary policy makers would be too aggressive in cutting rates even as inflation is muted.

Now, with softer economic data coming in and the Fed having lowered its gross domestic product forecast for the United States, the central bank has stood pat on interest rates and signaled that will continue.

“A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year,” the minutes said Wednesday.

Still, the Fed appears to be willing to rely on whatever data comes in, with some central bankers striking a decidedly neutral tone saying they could go either way on interest rates.

Again, from the minutes: “Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data.”

Growth Worries are Global

The dampened outlook on the economy echoed what’s coming in from across the pond. The European Central Bank held interest rates steady Wednesday, with its president citing “slower growth momentum” amid risks that are “tilted to the downside.” But it appeared that the market paid more attention to the Fed’s more neutral stance than the ECB’s more pessimistic view.

The ECB’s statement comes after the International Monetary Fund cut its outlook for 2019 global growth on Tuesday, due in part to trade issues. The fund now sees the global economy growing by 3.3% this year compared to its previous forecast of 3.5%.

A big reason for the dour economic prognosis continues to be the ongoing trade war between the United States and China, which has affected hundreds of billions of dollars of goods from the world’s largest economies.

On Wednesday, news on that front appeared to be promising, but it was still generally in line with what the market has been expecting for some time, and it lacked the punch of a really big breakthrough.

Eye on the Banks

In corporate news, bank executives were in Washington to testify before Congress, but there didn’t seem to be too many surprises there to move the market.

JPMorgan Chase and Wells Fargo kick earnings season into higher gear Friday. Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs are all expected to report earnings next week. The Financials sector has been flagging in the face of a dovish Fed and a slowing economy.

Figure 1: Oil futures rose after U.S. government data showed a large drawdown in gasoline inventories, outweighing a larger-than-expected buildup in crude stocks. The gains in oil prices come as people are expected to be driving more during warmer months and amid support from supply cuts from OPEC and its allies and U.S. sanctions on Iran and Venezuela. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade.

Inflation Muted: It seems that inflation numbers continue to play into the Fed’s hand. Although the headline Consumer Price Index (CPI) increased 0.4% month-over-month in March – a larger than expected jump and the highest increase since January 2018 – inflation was much more tame when you take out volatile food and energy prices. The so-called core CPI, which does just that, rose only 0.1%, which was less than the 0.2% gain a consensus had expected. “The key takeaway from the report is that the core rate of inflation moderated on a year-over-year basis to 2.0% from 2.1% in February, which is a trend that should keep the Federal Reserve comfortable with its position of being on hold,” said.

Resuming Treasury Buying: While there generally wasn’t too much unexpected in the Fed minutes Wednesday, there was one point that seemed to stand out as a bit of a surprise. It turns out that some central bankers want to resume purchases of Treasury securities after the Fed’s balance sheet reduction program ends in September. While the market has cheered the dovish pivot by the Fed, it’s conceivable that the market might not welcome such a move, which would essentially be another way for the Fed to keep pressure on interest rates without an outright cut. Such a move might not be well-received because the market probably thinks the Fed needs to keep some dovish tools undeployed in case something unexpected goes wrong with the economy. After all, low growth combined with low interest rates can be challenging. Just ask Japan.

Fun and Games: One way market participants seem to have been playing the U.S.-China tariff drama has been with international industrial stocks Caterpillar and Boeing (notwithstanding Boeing’s recent crash-related travails). With significant exposure to the Chinese market, investors appear to buy and sell them according to however the trade winds are blowing. Turns out, there are other companies that also appear to have been acting as trade proxies, and they’ve perhaps not been as noticed by investors: casino stocks. MGM Resorts, Las Vegas Sands and Wynn Resorts all have exposure to the Chinese gambling mecca of Macau, and it seems that investors have been doubling down on the names in hopes that a trade deal will help boost their revenues from China. As Barron’s put it: “Many are betting that if the trade war ends, China will bounce back, taking casinos with it.”

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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