Market Brief – Tuesday 10/8/19

Stocks started the day lower as low-level trade talks begin ahead of the high-level talks starting on Thursday. Vice Premier He, the head of the high-level trade team, has not been granted “special envoy” status which would allow him to negotiate on behalf of President Xi. Markets were fearful the talks could end early based on rumors that the White House may limit the ability of U.S. government retirement funds to invest in Chinese currencies and that the White House will expand its trade blacklist to include twenty Chinese public security bureaus.

The Producer Price Index (PPI) fell -0.3% in September against expectations of a +0.1% increase. Core PPI, excluding food and energy, also fell -0.3% in September against expectations of a +0.2% increase. On a year-over-year basis, PPI slowed to a +1.4% growth rate and Core PPI slowed to a +2.0% growth rate. While the markets were surprised, tighter monetary policy and contracting World Dollar Liquidity lead to lower input prices.

Overnight liquidity constraints are starting to ease as the NY Fed tended offers of $37.5 billion. Today’s 14-day repo operation only tendered offers of $38.85 billion.

Today’s 3-year $38 billion Treasury auction saw strong demand as foreign bidders took 45.8% of the auction and domestic bidders took 16.9% of the auction, leaving securities dealers with 37.3% of the auction. Treasury yields fell following the PPI report, rose slightly and rose following the auction.

Stocks rallied and Treasury yields sold off following a prepared speech by Fed Chair Jerome Powell where he mentioned the Fed will be unveiling a plan to deal with the dollar liquidity constraints. The markets interpreted his words to mean Quantitative Easing 4, even though Powell clearly stated this isn’t going to be large scale asset purchases.

Even if the Fed were to launch QE4, it would lead to lower interest rates, not higher interest rates due to the monetary lags. Inventors should appropriately translate Powell’s speech to mean the Fed will be back at the zero bound sooner than most think, which is excellent news for anyone who owns U.S. Treasury securities.

After digesting the news, stocks took a hard reversal lower as volatility shot higher. After turning positive on the day, Treasury yields closed slightly lower with bond prices slightly higher on the day. Gold and the mining stocks traded higher but remain in a topping pattern. Agricultural commodities rallied a bit but ran into stiff resistance despite reports of freezing weather hitting much of the Midwest growing region by Saturday.

The American Petroleum Institute reported crude oil inventories as Crude: +4.13mm (+1.7mm expected), Cushing: +1.24mm, Gasoline: -5.94mm, and Distillates: -3.98mm. Crude oil traded higher following the report. The official EIA crude oil inventory report is due tomorrow morning.