The Market Today
10-Year Treasury Closes Week at Second-Lowest Yield in 13 Months
by Craig Dismuke, Dudley Carter
Homebuilder Confidence Expected to Inch Higher: This week’s slow economic calendar kicks off today with the March homebuilder confidence survey at 9:00 a.m. CT. The index is expected to tick up from 62 to 63 after falling from a cycle-high 74 in December 2017 to 56 in December 2018 (a 3-year low). Confidence has ticked up in the last two reports but remains modest relative to post-2016 sentiment readings (see Chart of the Day).
Wednesday FOMC Decision: The bigger news this week will be the FOMC decision on Wednesday. There is no sentiment that the Fed will hike. Instead, investors will be focused on two things, the dot plot and any progress on discussions about the Fed’s inflation target. As for the dot plot, economists are debating the likelihood of the Fed’s median forecast showing one hike in 2019 versus it showing no hikes. Sentiment seems to be evenly split on the topic meaning the markets are likely to move one the decision is announced. On the inflation-target discussions, the idea which seems to have gained the most traction is using average inflation rather than a singular target. Under the average-inflation-target scheme, the Fed would attempt to average a 2% rate of inflation over some period of time. As a result, if they have a run of weaker-than-target inflation, they would be expected to run above-target inflation for some period of time. Looking at today’s example, the below-target inflation reports seen lately would imply easier monetary policy to bring – not just the one-month rate – but the average of the inflation reports up to target. One of the key questions yet to be answered is, how long of a time period would the averaging cover. Any progress on these talks will be important to the markets.
Overnight – Relatively Quiet Start to Fed Week: U.S. assets were relatively quiet overnight after the S&P 500 ended last week at its best level since October while the 10-year yield slipped to its second lowest level since 2018 (more below). At least deserving partial credit for the divergence between the two asset classes, the market expects the Fed’s refreshed forecasts on Wednesday to better align with January’s turn toward a patient wait-and-see approach for future policy adjustments. While U.S. assets were quiet overnight, the rest of the world was mostly upbeat. China’s CSI 300 rose 2.9% to its best mark since May before the Stoxx Europe opened 0.2% higher at its highest level since October. Italian assets saw the biggest swings across Europe after Moody’s left the country’s credit rating unchanged at Baa3 last Friday. Italy’s FTSE MIB was 0.9% higher and its cost of borrowing for 10 years was down 5.2 bps at 2.44%, its lowest since May. Brexit will also be back in the headlines this week with PM May potentially putting her deal up for a third vote before she heads back for another meeting with the EU. The British pound, which rose 2.1% last week, was marginally weaker on Monday. Just after 7 a.m. CT, Dow futures contracts were lagging behind in negative territory as Boeing continued to weigh and Treasury yields had ticked back up to new highs for the day (2s + 0.2bps, 10s +1.3 bps).
ICYMI – March 15, 2019 Weekly Market Recap: U.S. equity and fixed income markets continued with 2019’s mixed messaging last week, as investors faced a flurry of Brexit-related votes, the delay of a trade meeting between Presidents Trump and Xi, and mixed U.S. economic data. Three key votes by UK Parliament (against PM May’s deal, against no-deal Brexit, in favor of requesting Article 50 extension) failed to clear up uncertainty around Article 50’s expiration later this month that could leave the UK outside of the EU without a deal. While those votes swung the British Pound, they had minimal impact on U.S. markets. So too did a headline that President Trump will not meet with President Xi to discuss trade until later next month. As for the data, last week’s schedule did little to lift the uncertainty that has clouded the outlook and pushed the Fed to the sidelines. Retail sales bounced back in January but December’s disaster was revised even worse. Small business confidence hardly budged while consumer sentiment rebounded more than expected. Capital goods activity (business equipment) was stronger than expected but manufacturing output contracted unexpectedly. New home sales were weaker in January but there were positive revisions to prior data. Overall construction spending was better but residential activity remained weak. Importantly, CPI inflation cooled unexpectedly on broad-based weakness a day before core producer price pressures eased to a nine-month low. For the week, the S&P 500 gained 2.9%, the strongest week since November, and closed at its highest level since October 9. The 10-year yield, however, fell 4.1 bps to close at its second lowest level since January 2018. Click here to view the full recap.