The Market Today
Japanese and German Data Good; Small Businesses Plan to Raise Compensation
by Craig Dismuke, Dudley Carter
Today’s Calendar – Small Business Optimism Comes Back to Earth but Compensation Plans Jump: Small business optimism pulled back from its highest level since 1983 (107.5) to 104.9 in the December reading from the NFIB. At 104.9, the sentiment index ended the year right in-line with the average for 2017 which was almost 10 points higher than the average from 2016. In the underlying data, expectations for future sales fell 6 points and plans to hire fell 4 points, likely seasonal factors reflecting the end of a near-record holiday shopping season. Ironically, compensation plans rose 6 points to match the highest reading since 1989. There continue to be indicators that wages are on the precipice of ticking higher.
At 9:00 a.m. CT, the November JOLTs Job Openings report is scheduled for release. It is expected to show an increase in job openings after an October pullback. Minneapolis Fed Bank President Kashkari is on the calendar to speak on a panel today from Wayzata, MN.
Overnight Activity – Stocks Still Climbing and Longer Yields are Still Stuck: Stocks continued to run higher overnight as the positive start to 2018 showed no signs of letting up. Shares of the MSCI Asia Pacific Index rose 0.1% but undershot bigger gains is Japan (0.57%), Hong Kong (0.36%), and China (0.70%). The gains in Japan unfolded even as the Yen jumped the most of the major currencies. The Yen, which usually benefits from a more turbulent risk environment, responded instead to a policy tweak by the BoJ. As part of maintaining its yield curve control policy, a 10-year yield peg of 0.00%, the BoJ tweaks from time-to-time the level of bond purchases it makes at various points of the term structure to affect the shape of the curve. Overnight, the BoJ announced it was trimming purchases of 10-25 year bonds by 10B Yen to 190B Yen and those of bonds maturing in more than 25 years by the same amount to 80B Yen. While core inflation has trended positively since mid-2016, it remains well short of 2% and the BoJ has told markets not to make too much of daily operational changes as an indicator of the longer look. Instead, the change likely reflects a concern from BoJ officials regarding the 10s30s spread which has flattened to the low end of its 12-month trading range. In Europe, German trade data was better than expected and industrial production rose by the most in a single month since 2009. Also, the unemployment rate ticked down 0.1% as expected to a new cycle-low of 8.7%. Still, yields in Europe drifted lower. The 10-year yield in Germany fell 1.2 bps to 0.42% while similar maturity yields in surrounding areas moved modestly more. In the U.S the yield curve steepened slightly with the 2-year yield down 0.6 bps to 1.95% and the 10-year yield up 1.8 bps to 2.50%. U.S. equity futures have inched higher and the Dollar firmed for a second day, notching its strongest two-day stretch since October. Not to be outdone, crude price reached new highs since the summer of 2015.
Yesterday’s Trading Activity – Mixed Stock Performance Sets a Couple New Records as Treasury Curve Tarries at Friday’s Finishing Levels: U.S. stocks traded mixed Monday with the S&P and Nasdaq managing modest gains to make it five straight record closes (every day so far in 2018) while the Dow dropped a quiet 13 points, or 0.05%. At the sector level, utilities and real estate companies closed out the top two spots for the S&P while the energy sectors finished in a close third. Crude prices gained and returned towards their two-and-a-half-year-highs reached in last week’s trading. Despite some intraday ups and downs for U.S. yields, the closing results were even quieter than for equities. On the day, note maturities inside of seven years lost roughly 0.2 bps of yield. The 10-year yield added 0.4% bps to close at a round 2.48%. The Dollar finished stronger on the day, almost exclusively because of gains against the Euro. The common currency pulled back against the American greenback after reaching its strongest level in three years last week, causing some to chalk up Monday’s stall to technical difficulties for the Euro.
Bostic Signals Support for a Slower-than-Median Pace of Tightening: Atlanta Fed President Bostic, a member of the 2018 voting committee, portrayed a mostly dovish perspective in unscheduled comments from Atlanta. On the overnight rate, Bostic said his base case for 2018 is for two to three rate hikes, which puts him at or below the median dot from the December projections. He acknowledged he worries that the Fed’s missing inflation for so many years has potentially caused inflation expectations to meander below the central bank’s 2% target. He noted that tax cuts pose upside risks for economic activity but cautioned that he doesn’t expect 2018 to be a breakout year for the economy. On the shape of the yield curve, Bostic said “Long-term rates have been much stickier…I am going to do all I can to make sure our policy does not invert the yield curve. …If we got close to it I would argue strongly that we should be extremely cautious.”
Consumer Credit Jump May Partly Explain Recent Strength in Retail Sales: The Federal Reserve released the November G.19 non-real estate consumer credit data that shows changes in revolving and non-revolving categories. The data showed an unexpected uptick in total credit outstanding for November, the same month that a strong start to holiday spending pushed retail sales well past economists’ estimates. On an aggregate basis, total credit expanded $27.95B, or 8.8% seasonally adjusted annual rate (SAAR), marking the strongest percentage gain for outstanding credit since September 2015. Within the details, revolving credit expanded at a 13.3% SAAR (best in 12 months) while non-revolving credit grew by 7.2% SAAR (best in 13 months).
FASB to Discuss Changes to Deferred Tax Items Resulting from New Tax Law: The FASB has scheduled a meeting for January 10th at 9:00 a.m. ET to discuss several aspects of accounting for the recently enacted Tax Cuts and Jobs Act. According to the FASB’s website, as part of those discussions “The Board will decide whether to add a narrow-scope project on the reclassification of certain tax effects stranded in accumulated other comprehensive income.” As a result, the FASB could decide to allow the effect of the tax law changes for deferred tax items that are customarily components of accumulated other comprehensive income (AOCI) (unrealized gains and losses on available-for-sale securities, etc.) to be an adjustment through AOCI instead of through income tax expense or benefit as accounting standards codification (ASC) 740 requires.