The Market Today
Business Optimism Slips in December as Inflation Remains Subdued
by Craig Dismuke, Dudley Carter
Soft December Consumer Inflation Appears Temporary: Consumer prices rose 0.2% MoM in December and 0.1% when excluding the volatile food and energy categories. Both results were softer than expected. Headline inflation is now up from 2.1% to 2.3% YoY after dropping off a stiff November 2018 report. Core inflation continues to increase at a 2.3% YoY pace. The services sector showed the softest pace of price gains since August 2018, up just 0.18%. The price of goods declined fractionally. Energy prices rose 1.4% in December as oil prices averaged $59.80 per barrel during the month, the firmest month since May. Food prices continued to grow at a tempered rate, up less than 0.2% in December. Driving the softer core price gains, an almost-2% drop in lodging away from home prices kept housing inflation soft, up just 0.1% for the month. The broader owners’ equivalent rent category, which typically drives the pace of housing inflation, grew a moderate 0.24%. Also on the soft side, transportation prices excluding energy fell 0.5% on a 1.5% decline in public transportation costs (airfare) and a 0.8% drop in used car prices. In contrast, medical care inflation was quite firm, up 0.6% and almost double its 12-month trend rate. The smaller categories were mixed with apparel prices up 0.4%, trend-like growth in recreation and education/communication prices, and a soft month for other goods and services.
Bottom Line: It appears that some anomalous December results led to the weaker-than-expected pace of inflation. The larger core categories, including rents and medical care, continued to show stable price gains. In the short term, there remains no evidence of a pickup in inflation to alter the Fed’s policy view. Longer term, the December weakness is unlikely to reflect a new trend.
Small Business Optimism Pulls Back in December Report: Small business optimism pulled back from 104.7 to 102.7, remaining in the range established early in 2019. On a positive note, respondents expecting better sales and a better economy rose 3%. However, a 10% drop in those expecting a positive earnings trend and a 4% decline in those saying this is a good time to expand weighed on overall confidence. Those planning to hire fell 2% and those planning to raise compensation dropped 2%.
S&P Reached a New Record In Optimistic Start to Busy Week: U.S. stocks posted solid gains Monday and Treasury yields rose in an upbeat start to a week brimming with important economic events. The S&P 500 rallied 0.7% to a new all-time high as all but one of its eleven sectors posted a positive daily performance. Tech companies joined the materials and real estate sectors as the three industry groups that gained more than 1%. The standout strength of the tech sector led to the Nasdaq outpacing the other major indexes with a 1.0% gain that pushed it to a new all-time high of its own. The Dow lagged behind, rising a modest 0.3% and ending short of a record.
Treasury Yields Ticked Modestly Higher In Partial Post-Payroll Unwind: While Monday was generally quiet, the pace of headlines will surely pick up with an active U.S. economic calendar, the start of the corporate earnings season, and the expected signing of the U.S.-China phase one trade agreement. Treasury yields moved very little during the U.S. session amid the equity gains, holding onto modest overnight increases that unwound a portion of last Friday’s post-payroll drop. The 2-year yield finished up 1.4 bps at 1.58% while the 10-year yield added 2.6 bps to 1.85%.
Stocks Struggle for Direction: An obvious risk bias was absent from Tuesday’s overnight trading session, with global markets moving in opposite directions as investors look ahead to corporate earnings and the official signing of the trade deal. Chinese stocks declined while most other indexes in Asia firmed up. Most national indexes in Europe were struggling for gains and the Stoxx 600 was hovering around unchanged after recovering from a steep opening decline. Despite a surprisingly strong earnings announcement from JPMorgan, U.S. equity futures were fluctuating around flat at 6:45 a.m. CT. The company’s actual results for every key metric exceeded expectations – revenue and net income hit historic records – and its CEO said the consumer remains in a “strong position” and “global growth [has] stabilized.”
Longer Rates Inch Lower: Global sovereign rates were also little changed with longer yields in most major countries inching lower. Treasury yields were essentially flat ahead of the CPI data while ten-year yields in Germany and France were down 1.1 bps, but trailing a slightly larger 1.7-bp drop in the U.K. A surprisingly weak reading of economic growth paired with a clearly dovish tone in recent remarks from several policymakers at the Bank of England have increased speculation the central bank could cut rates soon. The British pound has weakened steadily to start the year to a three-week low.
Chinese Trade Activity Picks Up: China’s currency has also worked its way back into the headlines, quietly strengthening back below 6.90 per U.S. Dollar, its firmest reading since July. The U.S. Treasury yesterday announced it was removing China from its list of currency manipulators. Data overnight showed China’s exports (in USD) rose for the first time in five months in December and by the most since March. China’s imports also exceeded expectations with a 16.3% jump, the strongest in 14 months. After breaking a 14-month stretch of annual declines in November, imports from the U.S. continued a V-shaped recovery in December with a 7.8% surge. Although the two weren’t explicitly linked, real imports of soybeans also surged, up 67% from a year ago.
Rosengren Reiterated He is Worried about Risks: Boston Fed President Rosengren, who doesn’t vote on policy in 2020 but dissented each time the Fed voted to cut rates in 2019, stuck to his hawkish guns in his latest public commentary. Rosengren told a group of business leaders in Connecticut that he worries the economy faces potential risks from an unwanted pick-up in inflation and financial stability vulnerabilities. Those two risks, in his opinion, are “somewhat more concerning, overall” than “downside risks…primarily centered on the potential for trade disruptions and slowing growth among our trading partners,” and could be growing with the Fed’s easy monetary policy.
Bostic Wants to Wait and Watch, But Believes the Bar for Hike is “Pretty High”: Atlanta Fed President Bostic, also a non-voter in 2020, is less concerned than Rosengren about the outlook, saying in his most recent outlook that “the economy is doing fine.” He noted that his team sees nothing in the data that would give the impression that looser or tighter rate policy is needed. Instead, he believes the Fed should “sit back” and observe how the economy responds. Despite his laissez-faire tone, Bostic’s general policy lean remains somewhat more dovish. “From a policy perspective, it’s going to be a pretty high bar for us to make policy more contractionary,” Bostic noted, “We’re going to want to let the economy run and run hot enough to where that inflation starts to move.”