The Market Today

TODAY’S CALENDAR

Vining Sparks’ 2018 Economic Year-in-Review:  While the economic data were generally strong last year, the markets went on a wild ride that saw record-high stock prices, a monumental implosion for equities in December, and both stock and Treasury prices ending the year lower.  To view the video, click here.

 

Kaplan Supports Keeping Rate Hikes on Hold in the First Half of 2019: Dallas Fed President Kaplan (2020 voter) said the recent downturn in markets is in response to fears that global growth is decelerating and has helped lead to a tightening of overall financial conditions. The ongoing trade tensions between the U.S. and China have served to make those concerns worse, Kaplan noted, and a weaker China will have some impact on the U.S. economy. He’s not concerned about inflation running away from the Fed, and the combined effect of the aforementioned is that Fed policy should be on hold in the first half of the year. However, he also noted he hasn’t even considered the idea of a rate cut. Chairman Powell’s nonchalant dismissal of any changes to the balance sheet plan back on December 19 enhanced market volatility in the second half of December. In his remarks Thursday morning, Kaplan said the Fed should be open to making adjustments to the current pace of balance sheet normalization if necessary.

 

ADP Projects Big December for Hiring: The ADP Employment report blew out expectations showing 271k new private payrolls added in December. November’s tally was revised down from 179k to 157k, putting the figure closer in-line with the BLS report.  Going into tomorrow’s December payroll report, this morning’s ADP result will buoy expectations (economists currently project 185k private payrolls were added during the month).

 

ISM Manufacturing Expected to Disappoint: The December ISM Manufacturing index is expected to pull back from 59.3 to 57.5 at 9:00 a.m. CT.  If correct, the result would be the second weakest ISM report since mid-2017.  Already, five of the regional Fed manufacturing indices fell simultaneously in December for the first time since 2016.  December’s auto sales data is scheduled for release throughout the day but the Census Bureau’s construction spending report has been delayed thanks to the ongoing, partial government shutdown.

 

Mortgage Apps Fall in Throw-Away Week: Mortgage applications for the week ending December 28 fell 8.5% on a 7.6% drop in purchase apps and a 10.6% drop in refis. While this marks the largest weekly decline in over a year, applications can be volatile around the holiday season.  In fact, applications around the Christmas week have dropped an average of 11.6% over the last five years. Particularly given the recent drop in mortgage rates, we are remiss to make much of this report.

 

Welcome to Washington: The 116th Congress officially kicks off this afternoon amidst a 13-day-old government shutdown, a House funding bill expected to be dead-on-arrival at the Senate, and no evidence of any moderation of positions. 

 

TRADING ACTIVITY

Yesterday – Treasury Rally Stuck Even as Stocks and Oil Reversed Higher: The market volatility that was a mainstay of 2018 carried over into 2019’s opening session as the S&P 500 erased its opening 1.6% decline to close up 0.1%, oil prices jumped more than 7% from their intraday lows to close 2.7% higher, and the Treasury curve flattened on a long-end rally. Stocks initial opening drop followed selling across Asia and Europe that was sparked by a second China manufacturing PMI showing activity contracted to close out 2018 amid its ongoing trade fight with the U.S. But the major indices clawed back over the next couple of hours and spent the remainder of the session seesawing around unchanged. Energy companies were the top performers after crude’s impressive intraday reversal on general improvement in risk appetite and reports of lower OPEC output. Despite the turnabout in stocks and oil, an overnight rally in longer Treasurys intensified. The 10-year Treasury yield closed down 6.4 bps at 2.62%, a new low since January 25, with a large portion of the move coming after equity trading closed and on a headline that Apple was cutting its 1Q revenue guidance. The company’s shares plunged nearly 9% after CEO Tim Cook guided quarterly financial estimates lower, in large part because of unforeseen “economic deceleration” in emerging markets, “particularly in Greater China.” The report was simply another line on a growing list of worries that the current trade dispute between the U.S. and China could cause a sharp slowdown in global growth. The 2-year yield also closed near its daily lows but down a smaller 2.0 bps to 2.48%. For a second day this week, the 2-year Treasury yield closed within the range the Fed is targeting for its overnight rate (2.25%-2.50%). The 5-year yield also closed inside the Fed’s target range for the first time, down 5.3 bps Wednesday to 2.46%

 

Overnight – Rotten Apple Guidance Adds to Global Growth Concerns, Lifts Anxiety Ahead of Corporate Earnings Season: Yesterday’s post-market close announcement from Apple that 1Q revenue would be notably softer than previously expected has kept pressure on U.S. futures and weighed on markets globally on Thursday. The company’s shares plunged in overnight trading and were down more than 8% ahead of cash trading. Nasdaq futures, down 2.7% earlier, were leading the majors lower. Contracts on the Dow and S&P 500 were down around 1.5%. Asian markets gave up early gains but saw only modest declines, while tech companies were the biggest contributor to the Stoxx Europe 600’s 0.5% retreat. The index’s tech sector slumped 3.5%, easily outpacing losses in other sectors; consumer discretionary was the next worst performer at down 1.1%. The Dollar was 1.1% weaker against the safe haven yen but drew particular attention after a flash crash, shortly after Apple’s announcement, sent the pair spiraling 3.7% to its lowest level since March. Despite continued weakness for equities and heightened concerns Apple’s woes could be a canary in a coalmine for 1Q earnings, Treasurys faded Wednesday’s bid and yields were up just over 2 bps inside of 30 years ahead of a busy day for U.S. economic data. Yields added to overnight gains after ADP reported the strongest private payroll gain since February 2017 (second strongest since 2015).

 

NOTEWORTHY NEWS

ICYMI – December 2018 Monthly Review: December was historic for the stock market amid growing uncertainties around trade and global growth, Treasury curve inversions, concerns the Fed is tightening too aggressively, and a partial government shutdown. The S&P 500 fell 9.2% in its worst December since the Great Depression (1931), the first time in history a December has registered as the worst month of a year. The 3y5y and 2y5y became the first spans of the Treasury curve to invert since the Great Recession as the Fed hiked for a fourth time in 2018. They did lower their forward expected path but Chairman Powell didn’t sound as dovish as markets would have liked. Still, Fed Funds futures ended essentially pricing out any additional rate increases during this cycle. In response, the 2-year Treasury yield fell 30 bps to 2.49%, the lowest since early June. Both the 5-year and 10-year yields slid 30 bps, the 5-year yield to 2.51% (lowest since early February), and the 10-year yield to 2.68% (lowest since January). Click here view the full December review.

 

WSJ – “Taking Stock of the World’s Debt”: The world has never had as much debt as it has right now—nearly $250 trillion. That figure is three times what it was two decades ago, according to a Citigroup analysis of data from the Institute of International Finance. The biggest borrowers: the U.S., China, the eurozone and Japan, which have more than two-thirds of the world’s household debt, three-quarters of corporate debt and nearly 80 percent of government debt.