The Market Today

Clothing Drags CPI Lower; Brexit Summit

by Craig Dismuke, Dudley Carter


Consumer Inflation Dragged Lower by Apparel Prices, Firm Elsewhere: Consumer price inflation was once again softer than anticipated in March with headline prices up 0.4% MoM but core prices rising just 0.1%, bringing the core year-over-year rate down from 2.1% to 2.0%.  This marks the first report in 13 months that core CPI has not been above 2.0%.  The BLS implemented a methodology change in the CPI calculation, using an unidentified department-store operator to input prices (mainly in the apparel category) adding some uncertainty to the monthly changes in each category.  In fact, the March weakness appears to have come almost exclusively from apparel prices which fell 1.9% MoM, the largest monthly decline for the category since 1949.  Rent inflation rose 0.32% MoM while the overall shelter category climbed 0.35%, both strong readings from the largest contributor to the CPI tally.  New and used auto prices were basically flat on the month.  Medical care prices rose 0.29% MoM, double their 12-month trend rate.  Apart from those big ticket items, other categories were generally in-line with their trend rates, leaving apparel as the lone area of notable weakness.  At the headline level, energy prices jumped 3.67% MoM while food and beverage prices increased 0.25%.  Gasoline prices have risen from $2.23 per gallon (national average for regular grade) in January to $2.76 in April.  Consumers should have enough spare capacity to weather the increase.  Bottom line: The March CPI inflation report is, once again, softer than expected but this appears to be the result of a methodological change and the immediate impact on apparel prices.  Apart from apparel, core inflation was fairly firm.          


Mortgage Applications Tick Lower on Slight Increase in Mortgage Rates: Mortgage applications for the week ending April 5 fell 5.6% on an 11.4% drop in refinance apps but a 0.5% gain in purchase apps. Mortgage rates hit their lowest level since early 2018 in the previous week, with the 30-year fixed rate at 4.36%, before ticking up to 4.40% in the current survey.  The recent drop in rates has helped push the 4-week moving averages up with purchase apps now at their highest level since 2009 and refi apps at their highest since mid-2017. Challenged by declining affordability, housing is likely to remain rate sensitive throughout 2019.


FOMC Minutes and Quarles on the Tape: At 1:00 p.m. CT, the Fed will release the Minutes from their March 20 meeting, the meeting at which they officially completed their reversal of policy from tightening to being on-hold.  Fed Vice Chair Quarles is scheduled to speak today at 10 a.m. as part of a Financial Stability Roundtable panel in Washington.



Yesterday – Stocks Ended Win Streak as Trade and Global Growth Worries Weighed: Renewed focus on trade tensions between the U.S. and EU and a growth downgrade from the IMF appeared to give investors enough reason to end the S&P 500’s eight-day rally. The U.S. said it was planning tariffs on $11B of goods from the EU in response to a WTO report concluding the EU had given Airbus unfair support. The EU responded with a pledge to retaliate, citing a similar ruling by the WTO on U.S. support for Boeing. Shares of Boeing were the biggest drag on the Dow, which fell 0.7% Tuesday and continued to underperform the S&P 500 and Nasdaq which both slid 0.6%. The IMF again stoked worries about the global economy after the group cut its estimate for worldwide growth in 2019 from 3.5% to 3.3%, which would mark the weakest year since the recession. However, the updated outlook also projected better activity in the second half of the year and a firmer 3.6% growth rate in 2020. The broader industrials sector, sensitive to global growth trends and trade, was the largest drag on the S&P 500. However, losses were widespread with nine of 11 sectors closing lower on the day. Tuesday’s 0.6% decline for the index ended an 8-day string of gains that had matched its longest since 2004. The risk-off tone pushed Treasury yields lower, with the 2-year yield down 1.2 bps to 2.35% and 10-year yield down 2.2 bps to 2.50%.


Overnight – Market Sentiment Stable Ahead of Busy News Day: Market sentiment was generally positive overnight ahead of today’s emergency Brexit summit in Europe, the ECB’s latest policy decision, an update on U.S. consumer inflation, and Minutes from the Fed’s March meeting set for release later in the afternoon. Asian equities were mixed following losses for U.S. equities on Tuesday, while Europe’s Stoxx 600 was up 0.3% and near its highs for the day ahead of the ECB’s decision. After making big changes to its statement in March, the ECB’s April Statement was uneventful. They still expect to keep rates unchanged through at least the end of the year and will reinvest cash flows from its portfolio for an extended period past that first rate hike. However, it didn’t mention the new bank loan program announced in last month’s release, meaning ECB President Draghi is likely to field multiple questions related to details of the new stimulus program. U.K. yields were up on reports the EU was planning to offer the U.K. an extension through December or March, although the details were still being decided on. PM May had requested a delay to June 30, and a longer delay could complicate the political environment for her government. U.S. equity futures were up over 0.2% ahead of the inflation data while Treasury yields had move down less than 0.5 bps.



JOLTS Jobs Opening Disappoints: February’s JOLTS report was a disappointment, including a larger-than-expected decline in openings, a weaker pace of hiring, and an increase in the number of layoffs. Total openings fell from a revised-higher 7.63MM in January, 1k shy of an all-time record, to 7.09MM in February, the lowest in 11 months. Economists had expected a more modest decline to 7.55MM openings. In the details of the report, 11 of the 13 sectors reduced their open positions while just manufacturing (+19k) and other services (+40k) looked to hire more workers. The biggest contributors to the 538k decline in total openings, the third largest on record, were trade, transportation, and utilities (-160k), financial activities (-113k), education and health services (-105k), and leisure and hospitality (-105k). In the other metrics, hires dropped 133k while the hires rate fell from a cycle-high 3.9% to 3.8%. Quits were down just 3k, leaving the quits rate unchanged at its cycle-high. And layoffs rose by 47k, pushing the layoffs rate up 0.1% from its cycle-low of 1.1%. While the drop is noteworthy, the number of openings exceeded the number of unemployed for a twelfth month and more recent labor indicators from the ISM, NFIB, BLS, and initial jobless claims have all improved in March.



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