The Market Today

Today’s Calendar – Consumer Confidence and More Government Shutdown Drama: The only economic report today is the University of Michigan’s Consumer Confidence index scheduled for 9:00 a.m. CT.  The focus for investors will be the drama on Capitol Hill as the Senate tries to avert a government shutdown.  The House passed a bipartisan stopgap spending measure last night to keep the government from shutting down at midnight tonight.  However, the measure needs 60 votes in the Senate and Senate Democrats have said that they have the votes to block it.  According to the WSJ, “the risk of a standoff has intensified amid partisan fighting and disagreement over immigration, defense spending and other policies. … If lawmakers can’t get the job done by 12:01 a.m. Eastern Time on Saturday, hundreds of thousands of workers would be furloughed, many federal contracts with businesses would be suspended and government services that support private firms would be halted.”  Crucial services including law enforcement and social security payments would continue uninterrupted.

 

White House Considering Moderate Williams for Fed Vice Chair: The White House is reportedly considering John Williams for the Vice Chair of the Fed Board of Governors.  Williams is currently the San Francisco Fed Bank President and is considered an academic economist with expertise in monetary policy. He has been very moderate in his comments and decisions since joining the FOMC.

 

Overnight Activity – Global Stocks Extend the Rally: Global equities have seemingly ignored yesterday’s weakness in U.S. trading to close out another positive week of activity and extend the strong start to 2018. The MSCI All-World Equity Index Ex-U.S. has posted only one decline this year (first day of the year) and only two over the past five weeks. That’s unlikely to change given Friday’s strength across both Asia and Europe. Amidst a sea of gains in the region, China’s CSI 300 rose to its strongest level since June 2015. Sentiment has been equally as impressive in Europe where a 1.0% gain for Germany’s DAX is leading the way. The broad lift from national bourses has pushed the Stoxx Europe 600 up 0.44% and to its highest level since August 2015. U.S. futures are up modestly but off their overnight highs. The boost to investors’ risk appetite is also reflected in European sovereign yields where the spreads between peripheral and core-countries’ debt have tightened. Germany’s 10-year note yielded 1.3 bps more as the Italian 10-year yield dropped by a similar amount. Treasury yields are mixed with shorter yields a touch higher and longer yields modestly lower. In currencies, the messaging isn’t as clear as the Yen as outperformed all majors. The Dollar is down for a second day and just a couple of ticks away from its weakest level since early 2015. Oil prices continued to slip from last Friday’s 37-month peak on more warnings that the recent price rally could spark more non-OPEC production, specifically in the U.S.

 

Yesterday’s Trading Activity – Stocks Dropped as 10-Year Yield Matched Three-and-a-Half Year High: U.S. stocks failed to repeat Wednesday’s record performances as several intraday attempts to turn positive ultimately came up short. Once the final trade was posted, the Dow had dropped 0.37%, the most of the big three, as the S&P slipped 0.16% and the Nasdaq lost a hardly noticeable 0.03%. The Dow’s 98 point pullback was the blue-chip’s biggest daily drop so far in 2018. Within the S&P, real estate companies – which generally become less attractive as rates rise – were the worst performers. Since December 15, the 10-year Treasury yield is up more than 26 bps. Over that same span, the S&P real estate sector is down over 6% while the broader S&P has gained more than 4.5%. The energy sector suffered the second biggest decline as crude prices slipped despite a larger-than-expected drawdown of U.S. crude inventories. Offsetting the big draw, was a 10^th consecutive weekly build of gasoline inventories (seasonally reasonable) and a rebound in weekly production. In the Treasury market, the curve steepened slightly as the 2-year yield ended unchanged at 2.043% and the 10-year yield added 3.5 bps to 2.626%. The decline in the 2-year yield was just the second drop of the year and only the fifth since the Fed raised rates last on December 13. At 2.626%, the 10-year finished just 0.001% of its highest level since July 2014. The 10-year yield may face resistance (yield, not price) given then technical importance of the level.

 

Dudley Reiterated Overheating Concern: NY Fed President Dudley continued to project a concern that the combination of fiscal stimulus by way of the tax cuts, at a time with the economy is at or past full employment, could cause the economy to overheat. And while he’s concerned, he doesn’t think it’s an immediate problem. Dudley told the Financial Times, “In that environment the risk, not in 2018 but longer term, is that the economy could actually overheat, that inflation might not stop at 2%, or 2.1% or 2.2%, and then the Federal Reserve would have to step on the brakes a bit harder.” He also once again signaled support for three rate increases this year.