The Market Today
A Much More Quiet November 8 than in 2016
by Craig Dismuke, Dudley Carter
Today’s Calendar – It Was Not This Quiet One Year Ago: It is another quiet day for economic news. Mortgage applications for the week ending November 3 were unchanged with purchase apps rising 0.5% and refi apps falling 0.5%. The 30-year mortgage rate, according to the report, fell 4 bps on the week to 4.18%. The 30-year rate was just 41 bps higher a year ago at 3.77%. Purchase applications are currently 3.9% higher YoY pointing to a moderate, but continued, pace of gains in new and existing home sales.
One year ago today, President Trump won a surprising election setting off a wave of volatility. Despite fewer legislative changes than may have been expected given the new administration’s campaign, the markets and sentiment measure have exhibited great optimism while actual economic activity has been fractionally better. The S&P 500 is now 21.5% higher than it was on November 7, 2016. The 10-year Treasury yield was at 1.88% but is now at 2.32%. The target Fed Funds range was 0.25-0.50% but has since been raised three times to 1.00-1.25%, with another hike expected in five weeks. The Dollar, after rising 5.1% and then dropping 9.4%, is now just 1.2% weaker than pre-election. Consumer confidence is 13.5 points higher and business confidence is up 8.1 points. Nonfarm payroll growth has slowed from a trailing 12-month average of 212k to 164k but the unemployment rate has continued falling from 4.8% to 4.1%. Core PCE inflation is down from 1.83% YoY to 1.33% YoY. After averaging 2.2% during President Obama’s tenure (post-recession), GDP growth has averaged 2.4% since President Trump was inaugurated. The outlook for GDP growth over the proceeding four quarters is up from 2.2% last October to 2.4% now. Separately, no wall has been built, we still trade with foreign trade partners, the ACA was not repealed and replaced, tax reform is in-process (but success looks questionable), the increase in business regulations has and continues to slow, and President Trump has not closed his Twitter account (and Twitter now, unfortunately, allows 280 characters).
Overnight Activity – Curve Continues to Flatten as Markets Look for Direction in Quiet Week: The quiet global economic calendar (a deafeningly silent economic calendar relative to last week’s screaming slate) continued to provide little impetus for global investors to move decidedly in any direction. U.S. assets are little changed this morning although the Treasury curve has continued to flatten (see link in Yesterday’s Trading Activity for more on the curve’s flattening). Equity futures are lower with the S&P’s modest 0.15% decline currently the sharpest shift. Global equities are generally weaker and the financial sector has been the biggest blemish on most global indices. That sector dragged the most on U.S. equities in Tuesday trading (more below). The Dollar is essentially flat after spending most of the overnight session below yesterday’s close. The Treasury curve has flattened, albeit modestly so, with the 2-year yield up 0.4 bps to 1.63% and the 10-year down another 0.7 bps to 2.31%. The 10-year yield has inched lower in eight of the last nine sessions and is at its lowest level since October 17. Sovereign yields elsewhere were more volatile with the biggest shifts seen in peripheral Europe. Yields there had dropped sharply Tuesday but clawed back most of that decline overnight. Germany’s 10-year yield slipped 1.7 bps to 0.31%, its weakest level since September 7.
Yesterday’s Trading Activity – Bank Equities Hit by An Eighth Day of Flattening, Ongoing Tax Debate: The Treasury curve didn’t move much all told on Tuesday but the continued flattening may have been one catalyst for the divergent sector performance that kept the major U.S. equity indices essentially unchanged for the day. The 2-year yield rose 0.8 bps to 1.63% while the 10-year yield fell 0.2 bps to 2.31%. The net result was an eighth consecutive day of flattening between 2s and 10s (the longest stretch since November 2015) with the respective spread falling to 68 bps and to a new 10-year low. While investors remained focused on the House Ways and Means Committee and its markup of the tax plan, the continued flattening may have been a driving force behind financials’ worst single-day performance since September. The S&P 500’s financial sector dropped 1.33% and was the biggest drag on the index. Greater-than-1% gains in the defensive utilities and consumer staples sectors, however, helped neutralized the drag from U.S. banks as the S&P lost just 0.02% on a net basis. The Dow turned positive in the final minutes of trading and its 0.04% gain was sufficient to solidify its 58th record high close for 2017. The Dollar remained stronger but pulled back off its highs and crude prices extended early morning losses.
September JOLTs Report Shows Hurricane Disruption, Positive Underlying Trends: The September JOLTs report showed generally positive trends despite the hurricane-effect on hiring. Job openings actually rose during the month, albeit fractionally. Openings remain at the highest level on record save the June and July reports. Job quits rose 89k to their fourth highest level of this cycle while layoffs fell 78k. In combination, rising quits and fewer layoffs are positive indicators for the labor market. The one disappointing data point was the 147k drop in hiring. However, hiring was likely disrupted in September due to the hurricanes as evidenced in the weak nonfarm payroll data (which has subsequently rebounded).