August 27, 2018

Stocks surged at the open after the US & Mexico announced a new trade deal. The Dow is up 263 pts and the SPX is up .8%. The cyclicals—financials, industrials, materials, technology—are up at least 1% in early trading. And overseas markets are doing very well. The EuroStoxx 50 Index is up .8%, the Nikkei rose .9% and even China’s Shanghai Composite Index rose nearly 2% last night. China’s central bank took steps to support its currency from further weakness, and that is being viewed positively. As a result, the dollar is weaker today and commodities are mostly trading higher. WTI crude oil is back up around $66.80/barrel. Bonds are selling off today as yields tick higher. Usually, when the dollar is weaker interest rates rise. The 5-year and 10-year Treasury note yields are hovering around 2.74% and 2.85%, respectively. 

Stocks want to move higher on any good news regarding trade. But many investors and economists believe trade isn’t really the driving factor. CNBC’s Josh Brown noted last week that “market activity is coinciding with economic data.” And since most of that data is pretty positive, “it’ very hard to paint the picture that we’ve seen a top.” Perhaps some more encouraging news on the trade front is allowing investors to focus more on the fundamentals. 

That said, we have noticed a modest slow-down in US manufacturing activity over the last month or two. The Chicago Federal Reserve’s National Activity Index fell to .13 in July from .48 in the prior month. The index suggests business activity has slowed to just barely above average growth. The Dallas Federal Reserve’s Manufacturing Activity Index also fell back a bit this month but remains at high levels. Last week’s PMI data from Markit Economics—which also measures business activity—registered a little lower as well. The absolute level of business activity is still very healthy, but no longer surpassing economists’ expectations. This begs the question, “is all the good news already priced into the stock market?” Or perhaps investors are beginning to process a reset of expectations for slower, but still positive economic growth in the last part of 2018.  

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