Stocks, yields rise on trade hopes

November 12, 2019 Chatham Financial

Prior week summary

U.S. equities rose for a fifth straight week, setting new all-time highs as U.S./China trade optimism and better-than-expected corporate earnings releases boosted sentiment and dulled recession fears. Market participants have grown increasingly optimistic in the last month over the prospects of the U.S. and China completing a phase-one trade deal by year-end and this week did little to alter the mood. Stocks and yields soared on Thursday after China’s Ministry of Commerce released a statement hailing the progress of trade negotiations saying, “In the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement,” and noting, “If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement.” While the Trump administration denied reaching an agreement on the removal of tariffs, the 10-year Treasury yield ended the week just above 1.94%, the highest level since July, and Fed Funds futures imply that there is under a 10% chance for a rate cut at the December FOMC meeting. Although a location has yet to be named, reports suggest that President Trump and President Xi will move their planned signing summit to December as the two sides work toward finalizing an agreement.

In a relatively light week for economic data, the results were mixed. U.S. productivity fell well below expectations in the third quarter, contracting 0.3%, the gauge’s first decline since 2015 and significantly lower than the second quarter’s 2.5% pace. On the other hand, the ISM Non-Manufacturing Index and a consumer confidence measure surprised to the upside, and third-quarter corporate earnings continued to impress in aggregate. A number of Fed officials participated in scheduled speaking engagements throughout the week. Notably, Federal Reserve Bank of Chicago President, Charles Evans, suggested that the U.S. economy is well-positioned after the FOMC’s third rate cut of the year saying, “We’ve made a nice adjustment that takes account of risk management concerns. The setting of policy is good for the real risks that the economy is facing. It’s good for getting inflation to 2%.”

The look forward

Market participants are gearing up for a busy week of economic data with retail sales, the Consumer Price Index, the Producer Price Index, the Empire Manufacturing Index and industrial production figures all set for release. A host of Federal Reserve officials will speak, most notably, Federal Reserve Chair, Jerome Powell, who addresses the Joint Economic Committee of Congress on Wednesday and the House Budget Committee on Thursday.

Rates snapshot

 

Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial

 

Fixed income snapshot

Source: Bloomberg Finance L.P.

Disclosures

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal/notices/.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 19-0288

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