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Good morning! Today we look at rising bond yields and company profit warnings, Trump’s outreach to China, French President Macron’s visit to Washington, the European Central Bank’s meeting this week, and corporate response to consumer demand for milk that’s missing a protein.
YIELD SIGN
The yield on the 10-year U.S. Treasury note hit 3% for the first time since 2014. Investors took that as a vote of confidence for the economic expansion. But large companies warned that profits were peaking. That helped send the Dow industrials to their fifth straight decline.
First, the bonds: The rise in yields was a signal that the Federal Reserve might have to raise interest rates more rapidly to respond to economic growth and the prospect of more inflation. That could add fuel to the long stock rally, Daniel Kruger and Akane Otani report. Next, the corporate outlook: A handful of large companies said it might not get much better than it is now. The Dow Jones Industrial Average tumbled, leaving it 9.7% below its Jan. 26 record close.
THE CULPRITS
Caterpillar—a bellwether for industrial America—tumbled 6.2% after company officials cautioned first-quarter results could mark a “high-water mark for the year,” while multinational conglomerate 3M shed 6.8% after the company trimmed the top end of its fiscal-year earnings guidance.
“If you’ve got production costs going up and interest costs going up, you’re saying, wait a minute—is this as good as it’s going to get?” said Michael Farr, president of Farr, Miller & Washington, a money-management firm.
But don’t get too carried away with the pessimism. Just a few months ago investors were hailing the tax cut’s boost to profits and economic growth this year. Has the fundamental story really changed that much?
Comments or suggestions for Real Time Economics? Write to Jeffrey Sparshott at realtimeeconomics@wsj.com, tweet to @WSJecon and visit wsj.com/economy for the latest.
WHAT TO WATCH TODAY
It’s a really slow day on the economic indicator front, unless you’re into U.S. crude oil inventories. Stock and bond markets bear watching. And of course politics has swayed stock, bond and commodity markets in recent months, so another likely highlight:
French President Emmanuel Macron addresses a joint meeting of Congress at 10:30 a.m. ET.
Also, an interesting nugget on the White House’s daily press schedule: President Trump is meeting with Apple CEO Tim Cook at 1:45 p.m. ET.
TOP STORIES
LET’S MAKE A DEAL
President Donald Trump said he was sending a delegation of his top economic advisers to Beijing next week to try to settle trade disputes that have upset U.S.-China relations and rattled markets world-wide.
“I think we’ve got a very good chance of making a deal,” said Mr. Trump, who called China’s leader Xi Jinping “a friend of mine,” but noted that there remained significant obstacles to a deal. “They trade with us,” the president said. “We can’t trade with them.” The team is likely to be in Beijing around May 3 and May 4.
FRANCE, IRAN AND OIL PRICES
How has French President Emmanuel Macron’s visit to Washington affected oil prices? Well, it’s all about Iran. Market participants parsed statements about the prospects for the Iran deal throughout the day Tuesday. Mr. Trump offered tough rhetoric, describing it as “insane” and saying “it should have never been made.” But later in the day the two leaders indicated that they were closer to an understanding, which prompted oil prices to sell off sharply, Alison Sider and Sarah McFarlane report.
U.S. crude futures fell 1.37%, to $67.70 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 1.14%, to $73.86 a barrel on ICE Futures Europe. Brent had touched $75.47 a barrel in earlier trading, the highest since 2014.
EUROPEAN CENTRAL BANK GATHERS
Trade disputes and a stronger currency are threatening a hard-fought economic recovery in the 19-nation eurozone, potentially delaying a move by the European Central Bank to increase short-term interest rates. Trade conflicts are a particular concern for the ECB because the region escaped the lingering effects of its debt crisis in part due to the strength of its export sector, Tom Fairless reports. But the bloc’s economy appears to have slowed early this year, coinciding with mounting tensions over possible U.S. tariffs and a fresh increase in the euro’s value against the dollar. The ECB’s top officials gather in Frankfurt on Wednesday and Thursday. They’re not expected to take any policy action, but the bank might indicate how worried it is about the latest economic data.
WHAT’S A GREXIT?
After one of the longest and deepest economic depressions of modern times, Greece is finally starting to recover. Gross domestic product grew by 1.4% last year, the first substantial annual rise since 2007, led by a sharp rise in investment, Nektaria Stamouli and Marcus Walker report. Business surveys show activity, new orders and hiring intentions at levels not seen for years. Of course, the battered country still has a long way to go to heal fully from a traumatic decade. Unemployment is over 20%. Hopes of recovery have fizzled out before. But Greece’s prospects look brighter.
“Nobody speaks about Grexit any more,” said Tasos Anastasatos, chief economist at EFG Eurobank. “The question, though, is whether we’re talking about a short-term reaction of the economy, or the start of a longer period of sustainable growth.”
DEMAND, MEET SUPPLY
If consumers want it, companies will make it. New Zealand-based Fonterra Co-operative Group—which sells Anchor butter and Mainland cheese in the U.S.—for years dismissed something called A2 milk as a gimmick. But it will start producing it, following the success of a2 Milk Co., a New Zealand-based operation that has found fans in its home country, and has recently entered the U.S. market.
A2 milk differs from regular milk because the latter contains both A1 and A2 proteins, Mike Cherney reports. Supporters contend it is the A1 protein that causes indigestion for many people, a problem that lactose-free milk won’t solve. Skeptics say there hasn’t been enough independent research to show there is any real benefit to A2 milk. Still, the entry of big companies into the market shows how changing consumer preferences create new opportunities that dairy giants can’t afford to ignore.
HAPPY CONSUMERS
U.S. consumers, for their part, are feeling pretty good. The Conference Board said its index of consumer confidence rose 1.7 points from a month earlier to 128.7 in April. Confidence hit the highest level since 2000 in February but dipped in March. In perhaps the most significant development this month, the share of Americans expecting their incomes to decline over the next six months—6%—fell to the lowest level since December 2000, Josh Mitchell reports.
TWEET OF THE DAY
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WHAT ELSE WE’RE READING
A chicken in every pot. A car in every garage. A guaranteed job for everyone. Sen. Bernie Sanders (I-Vt.) is announcing a plan for the federal government to guarantee a job paying $15 an hour and health-care benefits to every American worker “who wants or needs one,” The Washington Post reports. Sanders’s jobs guarantee would fund hundreds of projects throughout the United States aimed at addressing priorities such as infrastructure, care giving, the environment, education and other goals. Costs TBD.
Children appear to inherit a dependence on government benefits. The University of California San Diego’s Gordon Dahl and Erasmus University Rotterdam’s Anne Gielen use a change to Dutch disability insurance as a natural experiment and find more than 20 years after the reform, reduced parental disability insurance dependency led to a lower dependency among children. “In addition, there are positive effects on future labor market outcomes for these children, with a higher employment rate and a higher level of labor market earnings.”
Does diversity contribute to conflict? Here’s some research that says yes. “These findings arguably reflect the adverse effect of population diversity on interpersonal trust, its contribution to divergence in preferences for public goods and redistributive policies, and its impact on the degree of fractionalization and polarization across ethnic, linguistic, and religious groups,” the Moscow Higher School of Economics’s Cemal Eren Arbatlı, Williams College’s Quamrul Ashraf, Brown University’s Oded Galor and the University of Copenhagen’s Marc Klemp write.
UP NEXT: THURSDAY
The European Central Bank’s rate decision is out at 7:45 a.m. ET., followed by ECB President Mario Draghi’s press conference at 8:30 a.m. ET.
U.S. advance trade in goods for March is out at 8:30 a.m. ET. The figure has become politically important as the Trump administration highlights mounting trade deficits for a string of protectionist moves.
U.S. durable goods orders for March are out at 8:30 a.m. ET. Economists expect a 1.8% rise from the prior month. The headline figure is often skewed by airline orders. Look at new orders for nondefense capital goods excluding aircraft for hints at underlying business investment trends.
U.S. jobless claims, out at 8:30 a.m. ET, are expected to remain historically low.
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