SOME OPTIMISM CREEPING IN

Stocks opened higher this morning (Dow +57 pts; SPX +.3%) on optimism regarding central bank easing and upcoming trade negotiations with China. Of note, China offered a trade concession by announcing that some goods imported from the US will be exempted from 25% tariffs put in place last year. Cyclical sectors like tech and energy are leading the way in early trading, whereas defensive sectors like consumer staples and real estate are flat to down. We’re seeing a very rapid rotation among stock traders away from defensives and toward cyclicals. Financials (i.e. banks) seem to the be the lone exception, failing to participate. Commodities are mixed. Gold is higher on the day (and up 16% so far this year). Copper is down; WTI crude oil is unchanged around $57.30/barrel. Bonds are trading roughly unchanged today. There is some sense that unless economic data continue to deteriorate it will be tough for the bond market to continue its massive year-to-date rally. Said another way, unless you believe recession is around the corner you probably can’t expect bonds to move much higher in the near term. The 10-year Treasury yield is holding steady at 1.73%.

The European Central Bank (ECB) meets tomorrow to consider options to ease financial conditions in Europe. An interest rate cut is expected, as well as discussion about quantitative easing (QE). You may remember QE is essentially a massive bond buying program aimed at keeping interest rates very low. In addition, The US Federal Reserve meeting on September 18th is expected to produce another interest rate cut. So among traders there is the expectation that policy will support asset prices (i.e. the stock market).

Wholesale inflation firmed a bit in August. The Producer Price Index (PPI) accelerated to 1.8% y/y growth vs. 1.7% in the prior month. Core PPI—excluding food & energy—accelerated to 2.3% y/y. These are Goldilocks numbers—not too hot, not too cold. Inflation (and economic growth) have been decelerating for the better part of 2019. So because this report implies stabilizing inflation it comes as welcome news. However, remember that one key negative affect of trade tariffs is that they drive up the cost of doing business and thus hurt corporate profit margins. As an example, the report revealed a 4.8% spike in the cost of arranging freight/cargo shipments. So economists will be closely watching PPI over the next several months to gauge that impact.

Citigroup’s US Economic Surprise Index recently jumped to its highest level since February and investors are taking notice. The index measures the degree to which economic data are coming in better or worse than expected. The current reading of +7 (vs. -68 three months ago) suggests economists are now underestimating the strength of the economy.


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