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Market Brief – Tuesday 9/3/19

U.S. equity futures gave up their Monday night gains on a report that the U.S. and China are having trouble agreeing to set a date. Asian manufacturing PMIs are showing a slowdown while the Eurozone manufacturing PMI came in at 47, which anything under 50 denotes a contraction over the prior month.

Inflation data out of Asia is starting to roll out with South Korea’s CPI at 0.0% its Core CPI at +0.9% on an annualized basis, while their PPI came in at -0.3% over last year. Adding to the deflationary theme, China’s PPI is down -0.3% YoY, Japan’s PPI is down -0.6% YoY and Taiwan’s PPI is down -3.4% YoY. Since most Asian countries export, their deflation will be exported to their trading partners. With the U.S. being the world’s largest importer, deflation out of Asia means lower inflation and lower bond yields.

The trade war hit home as today’s ISM Manufacturing PMI indicated a slowdown in the manufacturing sector for August. The U.S. manufacturing sector officially entered a contraction as the headline PMI fell from 51.2 to 491. Anything below 50 denotes a contraction. New Orders, Production, Employment, Prices, Backlog of Orders and New Export Orders all entered or remained in contraction.

Total Construction Spending fell from -2.26% YoY to -2.72% YoY. Given the relationship between nonfarm payrolls and construction spending, a continued contraction in construction spending foreshadows a decline in hiring.

Investors continue to be undeterred by any negative economic news as the equity Bulls fought back against this morning’s early drop. It probably helps there is approximately $2 billion of corporate share buybacks per day which is being offset by $600 million of corporate insider sales per day.

The S&P 500 started the day below its 100-day moving average but closed just under it. Crude oil started the trading day under $53 per barrel, but investors remain bullish on crude oil and the U.S. economy despite the slowdown in the global manufacturing sector.

Treasury yields rose in early trading then immediately fell following the ISM manufacturing PMIs, only to find sellers once again who believe inflation is lurking around the corner. Yet, investors are missing the point that Asian countries are exporting deflation, which is bearish for Treasury yields and gold.