Investors focused on Trade Before Rates

Credit: The Street
Published on September 13, 2019 - Duration: 01:11s

Investors focused on Trade Before Rates

The market seems completely positive on Friday, but the big trade-related development out Friday may have an ever-so-slightly negative implication for stocks.

Friday, news broke that China said it will U.S. soybeans and pork from its round of tariffs against the U.S. President Trump also said he may consider a partial trade agreement with China as part of the goodwill the two sides have shared regarding trade in the past two weeks or so.

Trump and Chinese leader Xi Jinping will meet in October and U.S. stock investors have grown considerably more optimistic there will be a comprehensive trade deal.

Friday morning, the S&P 500 rose 0.3% and is up 20% year-to-date.

Meanwhile, the 10 year treasury yield rose to as much as 1.8%.

Not only is Friday's market a classic "risk-on" market, but the move out of treasuries bringing the yield higher signifies investors are pricing in an incrementally lower likelihood of two interest rate cuts from the Federal Reserve, as hope has been restored that a trade deal is a reality, which would remove a significant drag on a U.S. economy that has already been decelerating independent of tariffs.

The probability of two cuts stands at 88%, according to CME data, down slightly from a few weeks ago.

Expectations of rate cuts have served as a boon to equities of late.

Many on Wall Street have said recently that if all threatened tariffs go into effect, the economic drag from such events would outweigh the positive impact of lower interest rates, which means rate cuts would be "supportive," rather than necessarily stimulative to stock prices.

The 10-year treasury had dropped to 1.55% in anticipation of rate cuts, but is of course back on the rise.

Conceivably, stocks could tumble should the Fed signal it won't cut rates twice in 2019.

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