S&P 500 optimism fades

10-Year Treasury yields are testing support at 2.60%. Breach of support would warn of a further decline in long-term interest rates. Declining yields reflect the outflow of funds from stocks and into safer fixed-interest investments.

10-Year Treasury Yields

Volatility on the S&P 500 has fallen close to 1% but a correction from here would be likely to form a trough above the 1% level, warning of elevated risk. Breach of 2600 would indicate another test of primary support at 2350/2400.

S&P 500 & Twiggs Volatility

Average hourly wages, total private, grew at 3.4% over the last 12 months, while production & non-supervisory wages grew at 3.48%. This keeps pressure on the Fed to raise interest rates as underlying inflationary pressures grow. The dampening effect of the trade dispute with China may have bought the Fed more time but a spike above 3.5% would be difficult to ignore.

Average Hourly Wages Growth

Impact of the trade dispute is more clearly visible on the chart below, with growth in total hours worked retreating below 1.5%. Slowing growth in hours worked warns that real GDP growth for Q1 2019 is likely to disappoint.

Real GDP and Hours Worked

China Trade Talks

US-China trade talks have made little in the way of real progress.

BEIJING—The U.S. and China have yet to set a date for a summit to resolve their trade dispute, the U.S. ambassador to China said Friday, as neither side feels an agreement is imminent. (Wall St Journal)

There is opposition to concessions on both sides:

China has a secret program to support the microchip and software industries. That’s according to Wang Jiangping, Vice Minister of Industry and Information Technology. Wang was speaking to CPPCC delegates at the Two sessions on Thursday, but the comments leaked to reporters (FX678):

“Last year, the Ministry of Industry and Information Technology planned the ‘Zhengxin Zhuhun’ project under the leadership of the Party Central Committee and the State Council.”
“The state will give strong policy and funding support, because industries such as microchips and software need to be iteratively developed.”

Wang said the ministry had kept the policy under wraps. That’s presumably because of the recent international backlash to the Made in China 2025 program…..Wang’s comments have already disappeared from the Chinese internet.

Get smart: Given Xi’s self-reliance push in key technologies, nobody really thought China would give up its industrial policies for these sectors. (Trivium China)

Whoever leaked Wang’s comments was not trying to make trade negotiations any easier. Impact of the trade dispute is starting to emerge in both economies but resolution and enforcement of a trade agreement is a long and tenuous path.

Hope is an expensive commodity. It makes better sense to be prepared.

~ Thucydides (460 – 400 B.C.)