The futures market is showing nice gains this morning for the major indices, which is setting up the cash market for a positive start. The S&P 500 futures are up 17 points and are trading 0.7% above fair value. The Nasdaq 100 futures are up 66 points and are trading 1.0% above fair value. The Dow Jones Industrial Average futures are up 140 points and are trading 0.6% above fair value.
Why does the futures market have its happy face on? Ostensibly, it's because China introduced a plan to boost the issuance of special local government bonds in an effort to stimulate growth through infrastructure projects and increased bank lending. The Shanghai Composite surged 2.9% in direct response to the initiative.
This reported catalyst for the upbeat bias in the futures market is flawed on the surface of things. Why?
Because the U.S. stock market is anxious to see a trade deal get worked out between the U.S. and China, but if China can successfully stimulate its economy, and its stock market, at a time when the U.S. is threatening more tariff action, China can presumably gain some leverage to wait things out or at least not cave soon to U.S. demands in trade negotiations.
Effectively, then, the futures market is whistling past the trade deal graveyard this morning -- if one accepts the premise that it has been energized by China's stimulus plan.
Granted the futures market, and the cash market, could be sniffing the possibility of some tariff forbearance on the other side of the G-20 meeting if Presidents Trump and Xi first manage to meet and then agree to suspend new tariff actions for 90 days (or something like that) after the meeting to allow time for new negotiations to unfold.
Right now, there is still no confirmation that the leaders will meet beyond the official greeting line.
Commerce Secretary Wilbur Ross said he thinks a trade deal will get done eventually, yet that view of matters isn't any surprise since it parrots the view held by President Trump.
Anyhow, the reported basis for the positive bias this morning seems a little thin to us. It probably has more to do with trading (note: not trade) momentum.
This stock market has been on a tear since the June 3 close, having run with the self-prescribed optimism that the Fed will be cutting rates soon in order to sustain the economic expansion (the Fed's basis for an eventual policy move) and to support the stock market (the market's basis for the V-shaped rally).
The Producer Price Index for May should jump out in the market's mind as another data point validating an eventual rate cut. That's the key takeaway anyway from today's report.
The index for final demand increased 0.1% (Briefing.com consensus +0.1%) while the index for final demand, less food and energy, increased 0.2% (Briefing.com consensus +0.2%). The expected readings left the yr/yr changes at 1.8% and 2.3%, respectively, versus 2.2% and 2.4% in April.
The moderation in producer price inflation had mostly to do with weakening energy prices; nevertheless, the report in aggregate reinforces the notion that inflation pressures are fairly muted at the producer level.
The Treasury market, which was on the defensive ahead of the report, pared some of its losses after the report, but remains a bit weaker this morning as it suffers some continued unwinding from its short-term overbought condition. The 2-yr note yield is up two basis points to 1.92% while the 10-yr note yield is up two basis points to 2.16%.