Fireworks Behind, Wall Street Still Focused On Trade As Payrolls, Fed Minutes Awaited

With Fourth of July fireworks still echoing, a new trading day gets underway with a more positive feeling in the air. That’s partly due to hopes for a thaw in Europe/U.S. trade relations on the automobile front.

News reports out of Europe yesterday that the U.S. might consider a so-called 'zero tariff' solution to the current trade standoff with Europe on auto imports seems to have the market in a better mood, though there’s no resolution yet. In addition, reports that China’s ZTE Corp. has named new executives in response to U.S. pressure fueled hopes for better tidings from the U.S./China trade front.

Both of these remain developing stories, so it’s too soon to tell where they might go. However, the market appeared to be reacting to them in futures trading before the opening bell. The idea that the U.S. and Europe might reach some sort of compromise on autos appears to be helping to move things higher.

Though trade issues remain front and center, the release of Fed minutes scheduled this afternoon and tomorrow’s June payrolls report (see more below) also loom large. Fed minutes — due at 2 p.m. ET — could provide clues into policy makers’ assessment of inflation and economic growth, and the payrolls report Friday morning might be watched closely for any sign of low unemployment potentially driving wages higher.

Europe Comes Back, But China Slumps Amid Tariff Concerns

While yesterday was a holiday in the U.S., that didn’t stop Europe and Asia from trading. Markets fell pretty much across the board overseas amid simmering trade concerns. Emotions appear to still run high despite the holiday break here. Europe recovered a bit on Thursday, but Asian markets finished much lower ahead of the planned imposition of tariffs looming Friday.

The U.S. plans a 25% tariff on $34 billion in Chinese goods, while China has announced tariffs on the same value of U.S. goods. These tariffs are expected to go into effect tomorrow, and apparently the Asian markets felt their chill Thursday, according to media reports. Chinese stocks are now in a bear market, meaning the benchmark Shanghai composite is down more than 20% from recent highs. The ZTE news, however, might be a positive development. We’ll just have to wait and see.

“FAANGS” Might Have More Bite Today as Futures Trading Shows Gains

Futures trading early Thursday suggested a possible change toward more of a “risk-on” sentiment after defensive stocks posted gains Tuesday. Shares of some of the so-called “FAANG” stocks moved higher in futures trading before the open.

U.S. 10-year Treasury yields had been trading in the lower end of their recent range, in the 2.83% area, going into Thursday. It appeared that some investors might have jumped into fixed income ahead of the holiday, perhaps fearing what might happen while U.S. markets were closed. However, yields jumped to 2.86% by early Thursday, possibly a sign that investors might be willing to take on more risk, at least for the moment.

FIGURE 1:  Yield Action Slows:

The 10-year yield has seen a bit range-bound lately, trading roughly between 2.85% and 3% over most of the last month after lots of hills and valleys in April and May, as this three-month chart shows. The 2.8% area might be one to watch, as 10-year yields haven’t spent much time below that since February. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

GDP Forecast

The Federal Reserve Bank of Atlanta’s GDPNow estimate for Q2 annualized real gross domestic product is back in “four” territory. The model’s estimate for real GDP growth at a seasonally adjusted annual rate in Q2 rose to 4.1% on July 2 from 3.8% on June 29. The Atlanta Fed said that Monday’s stronger-than-expected Institute for Supply Management manufacturing data helped boost the estimate. Meanwhile, construction spending data, also from Monday, had mixed results for the model. If the estimate is born out, Q2 GDP would be substantially stronger than what we saw for Q1, when GDP rose just 2%.

FOMC Minutes

Later today, the market will get a fresh glimpse into the Fed’s thinking as it releases minutes from its last Federal Open Market Committee meeting. The Fed has been upbeat about economic growth, and the market is pricing in two more rate hikes this year. It will be interesting to see if policy makers give any clues as to their thoughts on wages and inflation and how much they think the current global trade issues could impact U.S. economic growth. In its statement accompanying its latest rate hike, the Fed sounded more hawkish. So, in the minutes, investors may be looking for any comments that might temper, or reinforce, that going forward.

Jobs Numbers

Less than 24 hours after the FOMC minutes, the market will get updated economic numbers in the form of widely watched monthly employment data. June non-farm payrolls are expected to rise by 195,000, according to a consensus of economists provided by Briefing.com. The unemployment rate is expected at 3.8%. Average hourly earnings are expected to show a rise of 0.3%. That last bit may be of particular interest as wages are a key part of inflation calculations. Keep in mind that the report may not move markets if it comes in as expected. But material deviations, either to the upside or downside, can sometimes cause a reaction in the stock market.

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