No Surprise as ECB Cuts Rates, But Positive Trump Trade Tweet Sounds Promising

It’s a morning of surprises and non-surprises. Oracle reported early and President Trump delayed tariffs, which were both unexpected, while the ECB met expectations with a rate cut.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Skyscrapers: wild ride through Italy, China, U.K.
5 min read
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Key Takeaways

  • ECB cuts rates, announces new asset purchases in anticipated move

  • Trump delays tariffs on China in “gesture of goodwill,” helping boost stock futures

  • Headline consumer prices rise 0.1%, in line with expectations, but core a bit higher

(Thursday Market Open) A couple of surprises and one event that was anything but a surprise dominate the news early Thursday after the market came within 1% of all-time highs a day ago.

The surprises included Oracle (ORCL) announcing earnings a day early (see more below) and President Trump tweeting that new tariffs on China would be delayed two weeks in what he called a “gesture of goodwill.” Stock futures seemed to get a lift from the trade announcement, especially coming after yesterday’s news that China would exempt some U.S. products from its tariff list.

In what had to be one of the more widely anticipated moves in recent history, the European Central Bank (ECB) probably surprised few if anyone today when it lowered its deposit rate by 10 basis points and announced new quantitative easing (QE). Under the new QE, the ECB will make 20 billion euros a month of asset purchases basically for as long as it sees necessary to stimulate Europe’s tepid economy.

It’s hard to get too excited about the ECB’s announcement when you consider that past QE programs and rate cuts didn’t appear to do too much to help things over there. It’s also not necessarily the best news for U.S. multinational companies, because it could strengthen the dollar and make U.S. products more expensive overseas. The dollar index climbed back toward 99 early Thursday and the euro fell below $1.10. That’s near its low for the year. 

The news also appeared to give the U.S. bond market a boost, with 10-year yields here falling back below 1.7%. The thinking could be that as rates in Europe fall, more demand could emerge for U.S. Treasuries. 

Meanwhile, crude prices eased slightly after a Saudi official said at OPEC’s meeting that any formal decision on deeper crude production cuts would have to wait until the December meeting. This was also a bit of a surprise, because many analysts had expected deeper cuts to be announced this week.

On the list of “un-surprises” today, the U.S. Consumer Price Index (CPI) for August rose 0.1%, in line with Wall Street’s expectations. The core reading, which strips out food and energy, rose 0.3%. Headline CPI is up 1.7% year-over-year, down from 1.8% in July, but core rose slightly to 2.4% year-over-year, vs. 2.2% in July. Those core numbers for both CPI and producer prices are worth watching next month to see if they keep creeping up. It could be a sign of tariffs starting to add costs for wholesalers.

Round-Number Day

If you like nice round numbers, Wednesday was your day. The S&P 500 (SPX) finished right at 3000, climbing back there for the first time in more than a month. The index is now up more than 6% from its August low, and not far from all-time highs posted in July.

Meanwhile, the Dow Jones Industrial Average ($DJI) posted its sixth-straight higher close and finished above 27,000 for the first time since July.

The rotation into value and small-cap stocks that dominated the first part of the week continued Wednesday, with the small-cap Russell 2000 (RUT) out-performing the SPX. Volatility has been creeping into the bond market lately, and that might be helping steer some investors into what they see as more stable stocks that also have yield. This pattern could continue until we get some clarity from what is going on with interest rates.

Some analysts are saying the bond rally became a bubble last month and now it’s popped. That’s one theory, but it’s really too soon for a complete diagnosis. With rates still under water in Europe and the Fed widely expected to cut rates next week, it seems a bit hasty to say bonds couldn’t bounce back. We’ll have to wait and see.

Infrastructure Boost?

Other analysts looked at the action in stocks recently and wondered if it might reflect more than hopes of Fed easing. Monetary policy can only take the economy so far, considering rates are already quite low historically. That means some investors might be betting on fiscal stimulus of some kind. Remember all that talk about possible infrastructure spending? Well, look at some of the sub-sectors performing well lately: Steel and aluminum makers, cement makers, refiners, trucking and railroad companies. It’s like a recipe for new infrastructure, but there’s no guarantee we’ll get it.

Even Boeing (BA) shares have been on a roll lately, despite all the fundamental issues they’re having. This could speak to some investors potentially hoping for new defense-related government spending.

The move to so-called “value” stocks is even something you can observe in the Technology space, which isn’t an area usually associated with value. Stocks like Apple (AAPL), Intel (INTC), and Dell (DELL) have been on the upswing lately. These are established firms, some of which pay dividends. FAANGs, on the other hand, have kind of flat-lined lately (aside from AAPL). 

The caution areas of the market that roared in August came back to earth this week, with gold and bonds under pressure. Utilities had a nice pop Wednesday, but Real Estate was a losing sector. It was interesting to see Health Care have one of the best days of any sector yesterday, helped by strength in Merck (MRK). The rally in MRK might have been some people trying to get in at lower prices after a sell-off earlier this week. 

Health Care is one of the weaker sectors this year as worries continue to dog medical and health insurance companies about possible U.S. government action on prices. This pressure might get worse as next year’s election approaches and both parties potentially take a hard line against rising drug costs.

Oracle Arrives Early

If you look forward to the latest earnings news, it’s been kind of a dry period. That changed after Oracle (ORCL) released earnings a day early following Wednesday’s surprise announcement that co-CEO Mark Hurd is taking a health-related leave of absence. News reports didn’t go into more detail about his health.

ORCL reported earnings per share of $0.81, up from $0.71 in the prior-year period, and in line with third-party consensus expectations, on revenue of $9.2 billion. Revenue missed analysts’ average expectation of $9.29 billion, and guidance for Q2 was below the average Wall Street estimate. On the plus side, the company’s cloud ERP business grew 33%. Shares were down over 2% in pre-market trading. 

There continue to be concerns about the company’s slowing revenue growth. Research firm CFRA says it sees ORCL’s revenue falling 2% a year through fiscal 2021 before flattening in fiscal 2022. The firm also notes that ORCL is losing share to faster-growing cloud competitors. The question is arguably whether ORCL can keep squeezing out earnings per share growth amid flattening revenue. 

Oracle is part of the Technology sector, and that means overseas economic growth could be a concern for ORCL and other companies in the space. Technology has the highest international revenue exposure of all 11 sectors, according to research firm FactSet, with 57% of revenue coming from overseas. That puts companies like ORCL in the middle of the trade battles not only with China, but also potentially with Europe, Canada, and Mexico as the U.S. skirmishes with all those trading partners.

Earnings from Broadcom (AVGO) and Kroger (KR) are also today.

FIGURE 1: RALLY MAKES STRANGE BEDFELLOWS: Here’s something you don’t always see: Both semiconductor stocks (SOX-candlestick) and small-caps (RUT-purple line) are among the leaders in this week’s rally. Both had been under pressure last month. Data Sources: Nasdaq, FTSE Russell. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results. 

Celebrating at the 50-Yard Line? You know that football expression about not celebrating at the one-yard line? We’re probably at the trade equivalent of midfield when it comes to a U.S./China tariff resolution, but the way the 10-year Treasury yield shot up this week to above 1.7% from lows below 1.5% last month, you might think some investors see trade as a done deal and all that’s left is to tiptoe into the end zone. It’s hard to blame people for getting excited that talks next month could get some traction, especially when the U.S. Treasury Secretary made headlines this week about a “conceptual agreement” around intellectual property theft and President Trump talks about gestures of “goodwill.”

That said, at some point, the proof is going to have to be in the pudding, so investors are going to have to be careful about getting too excited. The trade process has taken much longer than anyone expected thus far, and it’s hard to believe things will get settled right away. Remember that back in April there was lots of optimism about an agreement getting close. Then the ball came loose.

Price War—Goods Vs. Services: Are prices rising for U.S. producers? Depends on the type of cost you’re looking at. The wholesale cost of services climbed 0.3% last month, including record increases in gambling receipts, guest room rentals, insurance and “arrangement of freight and cargo,” Marketwatch said. The wholesale costs of goods, on the other hand, fell 0.5%. Prices fell for food, liquor, gasoline, and other forms of fuel.

This disparity between goods and services has persisted for much of the past year, Marketwatch observed. Wholesale service costs have risen 2.7% in the last 12 months vs. a slight decline in the cost of goods. The question is whether this pattern can last considering U.S. tariffs going into effect on a variety of consumer goods, and the likelihood of producers passing along those price increases to their customers. Whatever happens in coming months on this front, analysts said there’s nothing in yesterday’s producer price data that would likely cause the Fed to rethink an interest rate cut next week.

Bean Barometer: China exempted some U.S. products from sanctions this week, but it’s interesting to see that two key products—soybeans and pork—didn’t make the exempted list, Briefing.com noted. A later news report said China is considering removing the restriction on U.S. farm goods. One way you might really tell if things are thawing would be increased shipments of soybeans across the Pacific to China, but let’s not get ahead of ourselves. Still, it’s a development worth watching. Maybe call it the “bean barometer.” China is the biggest consumer of soybeans in the world and accounted for 60% of U.S. soybean exports before the trade war.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • ECB cuts rates, announces new asset purchases in anticipated move

  • Trump delays tariffs on China in “gesture of goodwill,” helping boost stock futures

  • Headline consumer prices rise 0.1%, in line with expectations, but core a bit higher

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