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Market Brief – Tuesday 10/1/19

In overnight trading, South Korea is exporting deflation as its Consumer Price Index fell into negative territory for the first time in history by dropping -0.4% on a year-over-year basis. September exports fell -11.7% and imports fell -5.6% both over September last year. For those who believe inflation is coming to the U.S., by contracting World Dollar Liquidity, the Fed is spurring a global deflationary cycle.

With the start of a new month, Global Manufacturing PMIs are coming out to gauge the overall health of the global manufacturing sector. In expansion are Taiwan: 50.0, Vietnam: 50.5, Philippines: 51.8, India: 51.4, Thailand: 50.6, France: 50.1, Greece: 53.6, and Netherlands: 51.6. In contraction are Japan: 48.9, South Korea: 48.0, Indonesia: 49.1, Malaysia: 47.9, Association of Southeast Asian Nations: 49.1, Eurozone: 45.7, Germany: 41.7, Italy: 47.8, Spain: 47.7, Sweden: 46.3, Poland: 47.8, Russia: 46.3, Czech Rep: 44.9, and UK: 48.3.

The New York Fed’s overnight repo operation, which was expected to drop to zero with the start of a new month, saw $54.85 billion of tendered bids. The Fed has reduced its daily cap from $100 billion to $75 billion. Next week $139 billion of two-week repo operations will come due.

U.S. equity futures gapped higher during Monday night’s open pushing over a four-day resistance level. Computer algorithms like to push future prices during periods of extremely low trading to flush out those holding stop losses or to spur buying activity by breaking a resistance level. Stocks rose in early trading which sent Treasury yields higher. Thirty-year Treasury yields tagged their 50-day moving average in early trading.

The ISM Manufacturing PMI came in at 47.8, the lowest level since June 2009, signaling the U.S. manufacturing sector is contracting. New orders, production, employment, inventories, customer inventories, prices, backlog of orders, new export orders and imports all are in contraction. Three sectors of the ISM report expanded, while fifteen contracted, which is something not seen since the Great Financial Crisis.

Following the ISM report, stock prices and Treasury yields rapidly reversed direction sending a sea of red across most sectors of the stock market. The S&P 500 fell to its 50-day moving average and in a bullish move, 30-year Treasury yields were rejected against its 50-day moving average.

August Construction Spending rose +0.13% for the month but fell -1.89% on a year-over-year basis. Nonfarm payrolls follow construction spending, so when construction spending on a year-over-year basis falls, payrolls are soon to follow.

Stocks fell across the board on fears the U.S. economy is slowing down. The ISM report showed export orders are in contraction which is not related to the trade war with China since we export very little to China, to begin with. This is an indicator of a much broader slowdown in the global economy that is coming at a time where the U.S. Treasury still has a large amount of debt to issue before the of the year and markets are thin on liquidity.

Treasury yields gave back some of their drop today with 30-year yields sitting right near their June 2016 highs which are slightly below their all-time highs. Treasury bonds are setting up for a huge move higher as investors are crowded into stocks going into third-quarter earnings, which based on today’s ISM data, suggests earnings may not be as good as the market is hoping.

Gold rallied a bit and the mining stocks retested a prior level of support which is now resistance. Buyers didn’t show up. Agricultural commodities were slightly higher and Accuweather is reporting frost is coming to the Midwest by the middle of the month which will not be helpful for crops as the harvest is expected to run into November. Crude oil briefly touched $52 a barrel before closing in the mid $53 range. Oil and gas producing stocks were hammered.

The American Petroleum Institute reported crude oil inventories as Crude: -5.92mm (+2.25mm expected), Cushing: +373k, Gasoline: +2.133mm, and Distillates: -1.741mm. Crude oil traded over $54 per barrel following the report.