Daily Market Color August 16, 2018Trade Talks Set to Resume Between US and China Time Apart is Good Sometimes After an impasse of nearly two months, today the US and China managed to make minor progress in ending the existing trade war between the world’s two largest economies. This morning it was confirmed that a Chinese vice minister would be travelling to the US on August 22nd and 23rd to hold lower-level trade talks with the Treasury Department. While the announcement drew skepticism from several analysts given the lack of key decision makers to be involved in the meeting, White House economic advisor Larry Kudlow offered a hint of optimism in stating “Sometimes talks can produce better outcomes than expected”. Kudlow also cautioned that “the Chinese government, in its totality, must not underestimate President Trump’s toughness and willingness to continue this battle to eliminate tariffs and nontariff barriers and quotas, to stop the theft of intellectual property and to stop the forced transfer of technology”. Although the crisis in Turkey has served as a leading catalyst in the recent flight to safe haven assets, the trade war with China ultimately represents the much larger global economic roadblock, as bilateral tariffs on hundreds of billions of dollars in exports remain in limbo. Today’s news provided a much needed boost to equity markets, generating a rally straight from the opening bell. All three major US indices closed in the black, with the DJIA posting its largest one-day gain (+1.60%) since April and all 11 main sectors in the S&P 500 finishing higher. US Treasurys maintained a steady selloff throughout the trading session, with yields/swap rates rising 1-3bps across the curve. In commodity markets, crude oil futures managed to stem yesterday’s losses which resulted in part from a surprise build in US inventories last week. WTI crude settled 0.7% higher for the session at $65.45/barrel. In FX markets, the US dollar held within a tight range against major currencies and ended its two-day losing streak vs. the Turkish lira (+1.9%). Jobless Claims Remain Strong, Homebuilding Struggles Key domestic economic data releases on the day began with a report from the Labor Department which showed initial jobless claims in the US holding near historically low levels amid the backdrop of a strong economy and tight labor market. The number of new claims for the week ended August 11th decreased 2,000 from the previous weeks revised level to a seasonally adjusted 212,000 (215,000 estimated). The four-week moving average of claims rose by 1,000 to 215,500 remaining near 50 year lows. Also detailed in the report, the number of continuing claims decreased by 39,000 to 1.721 million for the week ended August 4th. For the month of July, overall housing starts were up, but less than estimated. Starts were up 0.9% MoM to 1.168 million on an annualized basis, well below the expectation of 1.260 million starts. The prior month was also revised downward by 13k from 1.173 million to 1.600 million annualized. Single family home starts fell by 8k to 862k, while multi-family starts were up about 0.7%, rising to 306k. Home affordability remains a challenge with both property values and borrowing costs continue to rise at faster rates than income levels. However, the strength of the labor market along with lower taxes continue to provide support for strong demand for housing.
