Monday Focus: New NAFTA Deal, With Payrolls Report, Fed Speech, Auto Sales On Tap

Finally some good news on the trade front.

A last-minute deal to revise the North American Free Trade Agreement (NAFTA) helped deliver a huge positive shock early Monday, at least judging from pre-market futures trading. This news might help improve sentiment, easing trade concerns that have weighed on investors’ minds the last few months.

The deal with both Canada and Mexico, reached at the last minute Sunday, is designed to allow U.S. dairy farmers more access to Canada’s market and address Canadian concerns about U.S. auto tariffs, news media reported. Stock futures rallied in the pre-dawn hours, with the S&P 500 (SPX) rising nearly 0.6 percent. Though this deal doesn’t necessarily end all the intrigue, it does perhaps give investors reason to think the U.S. might be able to resolve other trade issues as well. China looms large, naturally, but maybe the deal on NAFTA can signal better chances of the U.S. and China also finding a way out of their long-standing issues.

The NAFTA news wasn’t the only weekend excitement. Tesla Inc. TSLA shares rose sharply in pre-market trading, up 16 percent, after news that its CEO Elon Musk had reached a settlement with the Securities and Exchange Commision (SEC) over fraud charges. The settlement allows Musk to pay a fine and keep his position as CEO of the electric car maker, but he has to surrender his chairmanship. Investors appeared to embrace the news because there had been thought that Musk might lose his entire leadership authority at the company.

Payrolls In Spotlight As Week Advances

Looking more closely at the week ahead, September payrolls this Friday stand tall as the biggest data point. In August, jobs growth reached 201,000 while year-over-year wages rose 2.9 percent. That wages number was the biggest yearly climb since the days of the recession, but unlike earlier this year, the market didn’t have a defensive reaction. Inflation just doesn’t seem to be a big worry right now, perhaps because the Fed has moved so aggressively to raise rates this year. Last week’s Personal Consumption Expenditure (PCE) price report looked vanilla (see more below), and nothing really stood out in a big way from last month’s consumer or producer price index reports.

That said, if wages tick up in a big way—say 3 percent or more—some eyebrows might rise. With unemployment of 3.9 percent at two-decade lows, there’s not a lot of traction in the economy for businesses to hire without paying up for talent. Workers seem aware of this, as a few strikes began in recent weeks.

The Roundup: Italy, Powell Speech, Dollar, Crude and More

Away from the U.S., there’s still the potential for international issues to shake up the market in coming days, especially without any earnings reports yet to compete for headlines. Italy came into the news Friday as the government in Rome widened its budget deficit target for next year, something likely to raise tensions with other European Union countries. 

The Fed meeting last week is history, but Fed Chair Jerome Powell isn’t going on vacation. He’s scheduled to speak Tuesday at the National Association for Business Economics’ annual meeting. It could be interesting to hear if he has any further comments on inflation and economic growth with the new quarter underway. Generally, the market seems to have shaken off last week’s rate hike. 

Powell will likely draw more headlines, but several Fed speakers are also scheduled today, so investors might want to keep an eye out for any possible developments.

The 10-year Treasury note yield, which had climbed to a four-month high of 3.1 percent, retreated to 3.04 percent by midday Friday as investors for the most part gave the Fed’s “dot plot” of expected future rates a dovish read. However, yields bounced back early Monday to 3.07 percent.

At the same time, the dollar index climbed slightly on Friday to above 95. That’s below summer highs above 96, but might remain a factor to consider in coming days. Any climb in the dollar could put pressure on stocks as investors consider the potential impact on earnings.

Company news, aside from the TSLA settlement, is a little thin going into the new week. The major auto companies might get some attention Tuesday as they report September sales. 

Crude oil is another factor that might bear watching. U.S. futures prices are nearing their yearly highs, climbing above $73 a barrel Monday. Much of the rally appears related to Iran sanctions, with speculative long positions on the rise as some investors anticipate tighter supplies if Iranian oil exits the market. The question is whether Saudi Arabia and Russia can make up for those missing barrels. Consider keeping an eye on the transport sector to see if higher energy costs start to weigh.

Figure 1: Crude Approaches Highs: As concern grows about the possible impact of sanctions on Iran’s oil, U.S. crude prices last week approached their highest levels of the year. Higher energy costs could start becoming an issue for some companies if these prices persist. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

First Things First

Though the market for now seems focused on the trade situation heating up, there may be a slight delay while investors absorb earnings news starting later this month. Earnings might provide more than a distraction from the constant background noise of trade battles. They might also provide some insight into trade’s possible impact on the economy. This coming quarter’s earnings calls are a good time for investors to consider paying close attention to what CEOs have to say about how the tariffs already in place are affecting their companies both now and potentially moving forward. Already, some executives have cited higher input costs due to tariffs.

What Are CEO’s Saying?

Trade could already be having an impact on business leader confidence. The Business Roundtable CEO Economic Outlook Index—which measures company plans for capital investment, hiring and sales—declined to 109.3 from 111.1 in Q2. Close to two-thirds of surveyed CEOs said recently enacted tariffs and pending trade policies will have a “moderate or significant negative effect” on their capital spending decisions in the coming months, The Wall Street Journal reported last week. In Q3, the share of firms planning to increase capital investment over the next six months decreased to 55 percent from 61 percent in the second quarter, while the share planning to expand hiring fell to 56 percent from 58 percent. However, business leaders surveyed said the recent tax reform continues to provide a boost.

Inflation Corner

There’s no sign of a real budge on the inflation front, according to the Personal Consumption Expenditure (PCE) price data released Friday. The core number, which strips out volatile energy and food prices, delivered a big fat goose egg in August with no change recorded from the prior month. For the year, core PCE rose 2 percent, the same as a month earlier. While there’s nothing in the report that would seem to indicate any need for the Fed to veer from its path of gradual rate hikes, there’s arguably no alarm bell ringing either on prices. The next inflation gauge to look for is September wage growth in this coming Friday’s monthly payrolls report. 

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