April 4, 2018

Stocks gapped down at the open after China announced the expected retaliatory trade tariffs on US goods. The Dow is currently down 49 pts and the SPX is flat. The Dow initially opened down 1.5% but is paring losses, probably because this headline shouldn’t come as a surprise to anyone. Don’t be surprised, therefore, if we end the session in the green. At the moment, consumer staples, consumer discretion and telecoms are faring the best. Industrials and energy sectors are performing the worst, down over .8%. The VIX Index is up to bit to trade around 22.3. VIX April futures, at 21.5, show backwardation. Oil is down a bit after a higher than expected crude inventory report from Cushing, OK. WTI crude is now trading at $63.30/barrel. Most other commodities (except gold) are down as well. Bonds are mostly unchanged today. The 5-year and 10-year Treasury yields are hovering around 2.60% and 2.78%, respectively. 

China announced $50bil (per year) in new trade tariffs on over 100 US products such as soybeans, booze, autos and chemicals from the US. These tariffs will only take affect if the US starts charging new tariffs on Chinese goods. So this seems like pre-negotiation posturing. For the sake of the stock market in 2018, let’s hope so. 

Payroll processor ADP says the US private sector generated 241,000 new jobs in March, a bit higher than expected (and higher than the 7-year average of about 200,000). In other words, the US labor market remains strong and hiring activity continues to run hot. Small and mid-size companies added the most to payrolls. Bloomberg expects the unemployment rate to fall below 4% this month for the first time in about 18 years. 

ISM’s Non-Manufacturing Index, which measures business activity, fell to 58.8 in March from 59.5 in the prior month. Bloomberg says it best: The index “eased…in a modest manner that avoids creating material concerns about reduced growth momentum.”  ISM levels between 55 and 60 are considered strong, and at 58.8 we should expect economic growth (“GDP”) between 2.5% and 3.0%.

Factory orders rose 1.2% in February, reversing January’s decline. More importantly, a subset of the index—capital goods orders excluding defense and aircraft—are up 6.8% from year-ago levels. Economists watch that measure closely because it’s a good proxy for corporate capital spending. And while capital spending growth was higher several months ago, the bottom line is that business investment is very healthy. 

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