This Morning’s Log Entry

5/24/19 Premarket:
Equities futures are rallying this morning on Trump’s comment that a trade deal will come quick with China because “thousands of companies are leaving their country”. China, on the other hand — while this morning China’s Ambassador to the U.S. did say that they’re open to further talks — isn’t sounding quite as optimistic a tone. The Ambassador also said that China will be responding with countermeasures to the U.S.’s blacklisting of Huawei, and the latest message from Xi (and the state media) to the Chinese people is to hunker down and look for substitutes to the U.S.-branded goods they currently enjoy.

Clearly, traders continue to trade Trump’s impulsive comments (btw thousands of companies are not presently leaving China, although that doesn’t rule out a deal in the not-too-distant future), while disregarding the evidence that tariffs are beginning to do a real number on the U.S. industrial sector; evidenced by this morning’s durable goods report showing a 2.1% decline for April.

Here’s Econoday on the all-important capital goods segment of the report, and on manufacturing in general:

“….at the bottom of expectations were orders for core capital goods which fell 0.9 percent in April. And a sharp downward revision for this category in March, to a 0.3 percent increase from an initially reported 1.3 percent rise, underscores the fundamental slowing underway in manufacturing demand.”

Ironically, while there’s no question that traders are presently trading the headlines, there is a silver lining in the weakening economic data: I.e., while the Fed is presently sticking to its no-rate-move-in-the-near-future mantra, if the data continues to wane a rate cut later in the year becomes all the more likely. And traders love Fed rate cuts! 

As for us investors, the efficacy of a rate cut all depends on economic conditions at the time: I.e., if odds favor continued expansion, a rate cut is a buy the news event. If, on the other hand, the tide has already turned toward contraction, while a stock market bounce on a rate cut is likely, it’ll be its last hurrah before it gives way to the next bear. Our current assessment is that we’re not there just yet…


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