The Philly Fed Non-Manufacturing Activity index dropped to 7.50

Highlights:

Market Recap: Stocks dropped yesterday. Interest rates dropped more than 5 basis points and the U.S. Dollar was stronger by 0.22%. The S&P 500 finished lower by -0.78%. Copper dropped -0.90% on the day. Long-term treasuries and gold acted as safe-haven assets, closing higher by 1.03% and 0.78% respectively.

Economic Activity: The Philly Fed Non-Manufacturing Activity index dropped to 7.50, signaling a continued slowdown in the regional report.

Home Builders: Home building stocks were strong yesterday despite the market pullback. XHB finished the day higher by 0.46% in quite the positive divergence from the overall market. If home builders can stage an impressive rally relative to the broad market, this could signal a potential bottom in economic growth and housing. Housing has been weak since the second quarter of 2018. As a leading economic indicator, we would welcome a robust uptick in housing. XHB is in a positive trend, above the 200-day moving average, however it remains below the all-time high it set it early 2018.

Regional banking: Unlike home builders, regional banking stocks (KRE) do not like the drop in interest rates and the continued economic slowdown. KRE dropped -1.41% and is below its 200-day moving average. In fact, KRE has broken key support and looks set to challenge the low it made in late 2018.

Hong Kong: With the protests and continued turmoil in Hong Kong, we thought we would take a look at that market through the ETF that tracks Hong Kong equities (EWH). EWH has been one of the leading indicators for global markets over the last several years. It peaked in June of 2018 and bottomed in November of 2018, prior to the S&P 500 in both cases. It is not good news if that relationship continues to play out. EWH failed to make new highs in confirmation of the S&P 500 and Dow Jones and instead has dropped below the 200-day moving average and switched to a negative trend. Is this noise, or is the Hong Kong market sending a warning signal?

 

Futures Summary:

 

News from Bloomberg:

Fed watchers want to know what would push the Fed to keep cutting rates, other than President Trump's demands, and turn a "mid-cycle adjustment" into a full easing cycle. Boston's Eric Rosengren, who dissented in July, is still pushing back against easing, but San Francisco's Mary Daly said she's worried "fear of recession becomes a self-fulfilling prophecy." Next up: Jerome Powell's Jackson Hole speech on Friday.

The trade war may continue until the 2020 election, according to Michael Pompeo. The Secretary of State told a private lunch of around 40 execs he thinks "we can get a deal before the election" in November next year, CNBC reported, citing economics writer Stephen Moore, who attended the function. Moore quoted Pompeo as saying hurdles remain to an immediate agreement.

Wealthy buyers are pulling back from some of the most expensive housing markets in the U.S. Toll Brothers posted a 3% drop in third-quarter orders, missing estimates and underscoring the shift to more affordable homes. Shares slipped in late trading. Lowe's will give more insight into the home improvement market today after Home Depot's better-than-expected results yesterday.

Huawei's CFO allegedly told a Canadian border agent that the company has an office in Iran, court documents showed. Meng Wanzhou, on bail in Canada as she fights extradition to the U.S., made the admission during a three-hour detention at Vancouver airport in December. It may bolster the U.S. case that Huawei engaged in activities that violated sanctions on Iran, a charge the company denies.

Investors largely returned to risk assets, as U.S. stock-index futures rallied with European equities. Asian shares bucked gains. Treasuries fell with gold and the yen, sending the 10-year yield edging up toward 1.60%. The dollar and oil nudged up. Industrial metals rose with the exception of tin.