Wall Street was slipping and a sliding on Tuesday, weighed down by financial stocks as a deepening of the Treasury yield curve inversion raised recession concerns and uncertainty over any progress in trade negotiations between the United States and China.
The equity indexes initially advanced, building on Monday’s bounce, as Trump forecast another round of talks with Beijing. China’s foreign ministry, however, reiterated on Tuesday that nothing was going on or in the offing.
The financial shares index, which tend to weaken in lower-rate and soft economic environments, lost 0.72%, while the defensive utilities index led advancing groups, edging up 0.14%.
The S&P 500 has lost nearly 4% in August on worries over the impact of the intensifying U.S.-China trade war on the slowing global economy and corporate profits, along with uncertainty around the pace of interest rate cuts by the Fed.
With the next meeting for the Fed scheduled for mid-September, the strength of the economy is be scrutinized for clues on where rates are headed. The release next week of the government’s closely watched monthly jobs report and manufacturing data will give investors factors to consider before the policy announcement.
Johnson & Johnson rose 1.44% after an Oklahoma judge said the company is fined $572.1 million for its part in fueling the opioid epidemic, a sum that was substantially less than what investors had expected.
Philip Morris fell 7.76% on news it was in talks with Altria to combine in an all-stock merger of equals. Altria’s shares were down 3.95%.
Shares of J. M. Smucker fell 8.18% after the packaged food maker cut its full-year earnings forecast and missed estimates for quarterly profit and sales.
Approximately 6.29 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.57 billion share daily average over the past 20 trading days.
Day’s Economic News
The Conference Board said its consumer confidence index slipped to a reading of 135.1 this month from a slightly upwardly revised 135.8 in July. The index was previously reported at 135.7 in July.
The survey’s present situation measure rose to 177.2, the highest reading since November 2000, from 170.9 in July.
The Conference Board, however, cautioned that if the trade conflict persists, “it could potentially dampen consumers’ optimism regarding the short-term economic outlook.” Consumers’ expectations, based on their short-term outlook for income, business and labor market conditions, slipped to a reading of 107.0 this month from 112.4 in July.
The Conference Board survey’s findings are in stark contrast with a University of Michigan survey, which showed consumer sentiment dropping to a seven-month low in early August and a measure of current conditions hitting its lowest level since late 2016. According to the University of Michigan, monetary and trade policies had heightened consumers’ uncertainty about their future financial prospects.
The Conference Board survey places more emphasis on the labor market, while the stock market has a huge influence on the University of Michigan survey.
The Conference Board survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, jumped to 39.4 in August from 33.1 in July. That measure closely correlates to the unemployment rate in the Labor Department’s employment report.
Other data on Tuesday showed house price inflation continuing to slow, which together with lower borrowing costs could provide a jolt to the housing market, which has been mired in weakness since last year.
The S&P CoreLogic Case-Shiller house price index for 20 metro areas increased 2.1% from a year ago in June, the smallest gain since August 2012, after a 2.4% rise in May.
The moderation in house price appreciation was also corroborated by another report from the Federal Housing Finance Agency (FHFA) showing its house price index increased a seasonally adjusted 4.8% in June from a year ago, the smallest rise since January 2015, after rising 5.2% in May.
House prices increased 1.0% in the second quarter. The FHFA’s index is calculated by using purchase prices of houses financed with mortgages sold to or guaranteed by mortgage finance companies Fannie Mae and Freddie Mac.
In Defiance of Trade Worries
The largest-ever increase in the Conference Board survey’s jobs plentiful index in August suggests labor-market strength remains intact, despite trade-war escalation.
Nevertheless, consumers acknowledged marginally dimming prospects for business conditions, employment and income.
With consumer spending driving growth, it is critical that the trade uncertainty did not spread into consumers’ mindset; still, more data are needed to confirm this.
The index measuring the copiousness of job offerings was up by 5.6 index points in August, the largest advance in the series’ history, which dates to the mid-1970s.
While the present situation index hit a new cyclical high, a moderate decline in expectations across categories needs to be watched closely amid ongoing trade tensions.
Deceleration in income expectations in the survey details dovetails with a recent slowdown in wage and salary growth, and warrants scrutiny; robust income growth remains the basis for continued strength in personal consumption.
Consumer confidence edged lower in August amid consensus expectations for a larger decline. The result remained close to the cyclical peak reached in October 2018. The strength continues to be centered on present conditions, particularly in the labor market.
Present conditions hit a new cyclical high in August, while expectations declined. The wide divergence should be monitored because in the past it has preceded economic downturns.
The labor subcomponents painted a picture of significant labor-market strength. The share of respondents noting jobs were plentiful surged to a new cyclical high of 51.2 from 45.6 prior, while jobs hard-to-get fell to 11.8.
Yield Curve Inversion Continues
The yield curve inversion expanded on Tuesday to levels not seen since 2007, rekindling fears of a looming recession that spurred a sell-off on Wall Street and stoked even more safe-haven demand for government bonds. The yield curve often inverts prior to a recession but the time frame could be as much as two years.
The intense interest in Treasuries supported demand for $40 billion worth of two-year government debt for sale, part of this week’s $113 billion fixed-rate Treasury supply.
The Treasury Department sold its latest two-year, fixed rate note supply at a yield of 1.516%, which was the lowest at an auction of this maturity since September 2017.
The Treasury will sell $41 billion of five-year notes on Wednesday, followed by a $32 billion auction of seven-year debt on Thursday. It will also offer $18 billion in floating-rate notes on Wednesday.
On the open market, 10-year Treasury yields were 1.488%, down 5.60 basis points on the day. They reached a three-year low of 1.443% on Monday.
The yields on two-year notes were 1.531%, down 2.00 basis points. On Monday, they declined to 1.449%, the lowest since September 2017.
The spread on three-month T-bill rates over 10-year yields grew as wide as 52 basis points, a level not seen since March 2007, according to Refinitiv data. The deepening curve inversion reflects investors’ nervousness about a recession and uncertainties over the trade conflict between China and the United States.
A closely followed J.P. Morgan survey suggested demand for Treasuries has tapered a bit as the share of investors who said they were neutral on longer-dated U.S. government debt grew to 54% on Monday, up from 49% a week ago.
Discord at the Fed
Underscoring discord at the Fed over interest-rate policy, directors at half of the Fed’s regional banks, including those at the influential New York Fed, wanted to keep the emergency lending rate for commercial banks unchanged in July.
Directors at the other six regional banks recommended a decrease to the so-called discount rate, records from the discussions showed on Tuesday. Most of those wanted the quarter-point cut that the Fed ultimately decided on at its July 30-31 policy-setting meeting.
Minneapolis Fed directors wanted to go further, recommending a half-point cut to the rate.
Recommendations from regional Fed bank directors on the discount rate are not policy votes themselves, but often their votes reflect the view of their presidents.
Minneapolis Fed President Neel Kashkari has made public his support for a half-point interest-rate cut, exactly the recommendation from his bank.
Similarly, Cleveland Fed Bank President Loretta Mester, whose directors joined those of New York, Boston, Atlanta, Richmond and Kansas City in wanting the discount rate to be left at its then-current 3%, said earlier this month that she opposed the Fed’s July rate cut.
Boston Fed President Eric Rosengren and Kansas City Fed President Esther George dissented against the Fed’s decision July 31 to cut its benchmark policy rate a quarter of a point to a range of 2%-2.25%.
New York Fed President John Williams, a close confidante of Fed Chair Jerome Powell, voted with the majority at the Fed to reduce the policy rate.