Boeing, Caterpillar, Other Trade-Sensitive Stocks Get Boost Amid Market Optimism

Although it’s now fall, apparently hope springs eternal on Wall Street. 

Investors seem to be taking heart this morning amid increased optimism on the trade front. Bloomberg reported that China has given waivers to several companies to buy at least two million tons of U.S. soybeans tariff-free. Meanwhile, Treasury Secretary Steven Mnuchin said that high-level talks will take place next month and the recent cancelation of farm visits by Chinese officials came at the request of the United States.

That seems to help defuse some of the worries that China had canceled the visits because the two-day deputy-level negotiations didn’t go well or some other problem arose to sour relations between the world’s two largest economies. 

Trade-sensitive Stocks Gain Ground

This morning, the fresh hope from the news flow seems to be helping the market some, boosting trade-sensitive stocks like Boeing Co BA, Caterpillar Inc CAT and chipmakers including Advanced Micro Devices, Inc. AMD. But equities may still find it hard to push through to new highs while the trade dispute remains unresolved.

The trade fight between the world’s two biggest economies has dragged on for more than a year. As it has escalated to affect billions of dollars in U.S. and Chinese goods the dispute has become the biggest headwind holding back stocks and is arguably the main reason equities haven’t been able to reach above their record highs despite an accommodative Federal Reserve and signs of strength in the U.S. economy.  

The bottom line: Real progress could be a boon to the market. Stalling and setbacks may continue to be a drag on economic growth. Until we see a meaningful breakthrough, the current holding pattern could continue. 

PMI Data From Europe, U.S. Not Spectacular 

Yesterday was a light day for economic news, but a purchasing managers index from IHS Markit painted a picture of a eurozone economy that was “close to stalling” at the end of Q3 as “demand for goods and services fell at the fastest rate in over six year.”

Meanwhile, data from the company showed that the United States saw a “muted upturn” in business activity during September. But that didn’t give investors too much to get excited about because the 51 reading for a measure of manufacturing and services output was weaker than the average of 55 seen over the past decade. 

Both reports on the U.S. and eurozone economies cited the trade situation as cause for concern. (See more about manufacturing in the U.S. and eurozone below.) 

In economic data today, investors are scheduled to see a report on U.S. consumer confidence a little later this morning. A Briefing.com consensus expects the headline figure for September to come in at 134, down from the prior reading of 135.1. The report can have high trading impact given how much of the economy – not to mention corporate profit – is driven by the consumer. The number could move the market if it’s much higher or lower than expected.

After the market closes, Nike Inc NKE is expected to report its quarterly results. While the consumer confidence figures are for the United States, NKE can be viewed as a bellwether for consumer discretionary spending domestically and abroad. Investors will also probably be paying close attention to language accompanying the release for any clues about the trade situation as China is a key area of sales for NKE, which also manufactures apparel and footwear in the Asian nation. 

U.S. Factory Sector Expands ... Fresh data yesterday painted a more optimistic picture of the U.S. manufacturing sector than we’ve seen recently. The initial reading of the IHS Markit U.S. manufacturing purchasing managers’ index for this month hit 51, the highest reading since April. It was a welcome contrast to the August Institute for Supply Management manufacturing index which fell to 49.1 from just above 50 a month earlier and factored in to St. Louis Fed President James Bullard saying the U.S. manufacturing sector “already appears in recession.” The IHS Markit data may be indicating that the contractionary dip below 50 in the ISM data is just a blip. We’re scheduled to see the next ISM manufacturing index on Oct. 1, the same day that the final IHS Markit reading is due out.

… While Europe’s Contracts: That said, all is not well in the world of manufacturing. In the U.S., IHS Markit said September’s initial reading represented “a modest overall improvement,” but manufacturers remained cautious about buying inputs, further reducing their purchasing activity. Pre-production inventory and stocks of finished goods were both lower as well. Things were worse abroad. In Germany, Europe’s biggest economy, the initial manufacturing PMI fell to 41.4 from 43.5 in August, marking “the sharpest decline in business conditions across the goods-producing sector since the depths of the global financial crisis in mid-2009.” For the eurozone as a whole, the initial manufacturing PMI dipped to 45.6 from 47 in August, hitting an 83-month low. “The goods-producing sector is going from bad to worse, suffering its steepest downturn since 2012, but a further worrying trend is the broadening-out of the malaise to the service sector, where the rate of growth has now slowed to one of the weakest since 2014,” IHS Markit said of the eurozone economy. 

The Big Picture: So what does all this mean for the U.S. economy, especially in light of the ongoing trade war with China? For one, it seems like U.S. factories remain a bastion as investors fret more about other parts of the world where manufacturing isn’t doing as well, including China, where the factory sector has been stuttering. While that might be a good sign for U.S. manufacturing, it’s also a double-edged sword. If U.S. factories continue to outperform other parts of the world and the U.S. consumer continues to remain resilient, that would likely help keep upward pressure on the U.S. dollar. That would make U.S. manufactured goods less competitive on the world market, but it might put a damper on commodity prices, perhaps decreasing input costs for factories. Whether one factor or the other would end up helping or hurting manufacturers, or whether they would be a wash, remains to be seen.

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