INVESTOR SENTIMENT IMPROVING ON TRADE TALKS
The major stock market averages surged in early trading following a report that the Chinese are offering trade concessions (see below). The Dow is currently up 280 pts and the SPX is up 1.2%. The materials & industrials sectors shot up 1.8%. Those groups have perhaps suffered the most from the trade war and may have the most to gain from a trade deal. As sentiment regarding a potential trade deal improves, the VIX Index continues to soften (now down to 17.6). And oil prices continue to recover (up around $53.60/barrel). Bonds are trading as you would expect on a very risk-on day. Treasuries are down in price, up in yield. The 10-year Treasury yield is back up around 2.78%, and wants to test resistance around 2.81%. Corporates, on the other hand, are at long last catching a bid. And for today, the worse the credit quality, the higher the price gain.
Bloomberg reports that during trade negotiations earlier this month, Chinese officials offered to significantly ramp up imports from the US over the next six years. In fact, the figure reported--$1 trillion in additional imports—would theoretically reduce the Chinese trade surplus to zero by 2024. Incredibly, US negotiators were skeptical of the offer, but then demanded that the trade imbalance be flattened in just two years. US negotiators are also focused on stopping China’s rampant state-sponsored theft of intellectual property but sources reported no progress on this front. The negotiations were not public so news agencies are relying on leaks to tease out whether the two sides are moving closer to a trade deal.
US industrial production slowed a bit in December, but only because utilities output fell due to warmer weather. Total production is made up of manufacturing, utilities, and mining. The most important component, manufacturing output, actually accelerated unexpectedly and I get the feeling economists are scratching their heads. Didn’t the ISM Manufacturing Index reveal weakness in December? Didn’t everyone agree that business activity is slowing due to the trade war? This report is considered “hard data” because it measures actual output, whereas ISM and Federal Reserve manufacturing indices are “soft” survey data. So this reports suggests sentiment is more pessimistic than reality.