September 12, 2018

Stocks opened mixed (Dow +71 pts; SPX -.14%). Telecoms and consumer staples are leading the way, up more than 1%. Tech and financial sectors are lagging. A little optimism just crept in with this headline: “US Proposing New Trade Talks with China in the Near Future.” European stock markets will close up modestly but Asia was broadly negative overnight. The dollar is a bit weaker today against a basket of foreign currencies, so commodities are getting some life. Irion ore is up nearly 2% today, and WTI crude oil is up 2.8% to trade above $71/barrel, the highest in a month. Bonds are bouncing back a bit after yesterday’s beating. The 5-year and 10-year Treasury yields are hovering around 2.86% and 2.96%, respectively. That’s not much of a gap between the two, meaning that the yield curve is still very flat. The difference between the 2-year and 10-year yields is only about .22%.

We’re hearing about some loss of economic momentum in China. The auto industry, which has expanded steadily for over a decade, has begun to slow. The volume of new bank loans in the country has slowed as well. China’s economic surprise index—measuring the degree to which economic data is coming in ahead of or behind expectations—has sunk to -16. ING just published a research report noting, “China is once again using infrastructure investment to avoid an economic slowdown. Sound familiar? It doesn’t matter. We’re still downgrading our GDP growth rate for this year and next.” The risk of a trade war with the US caused the firm to lower its 2018 & 2019 economic growth rates to 6.6% and 6.3%, respectively. These rates are markedly higher than US GDP growth, but they are also lower than China is used to.

The Producer Price Index (PPI) unexpectedly slowed in August. The rate of wholesale inflation slowed to 2.8% y/y from 3.3% in July. This is odd, since the trend for wholesale inflation has been upward, and increased trade tariffs will likely raise the cost of goods. Bloomberg cites economist Ian Shepherdson, who calls the report a “blip,” and says the “trend isn’t turning down.”

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