The Market Today
Another Disappointing ISM Report; President to Address Nation on Border Security
by Craig Dismuke, Dudley Carter
Business Optimism Holds in December Despite Dreadful Month of News: Small business optimism held in better-than-expected in December, falling from 104.8 to just 104.4. After a few months of growing fears of a global slowdown, the impact of the trade battle, and a deteriorating equity market; confidence held close to its 2017 average (104.8) but well above the pre-election, 2016 average (95.3). Expectations for sales did pull back another point but remain strong. Plans to hire ticked higher and remained very good. The biggest concern, of late, has been the pullback in the economic outlook which peaked in mid-2016. Difficulty in filling open job positions increased in December and, according to the NFIB survey, continues to be the primary challenge for small businesses.
Job Openings; Presidential Address; Tax Refunds: At 9:00 a.m. CT, the November JOLTs Job Openings report is expected to show job openings ticked lower in November after posting the second best level on record in October. Also today, the November Consumer Credit report is scheduled for 2:00 p.m. CT. The President is scheduled to address the nation from the Oval Office at 8:00 p.m. CT, speaking on the “humanitarian and national security crisis on our southern border.” While this speech is unlikely to have an economic impact, it could be a catalyst for a funding deal to end the partial government shutdown. The White House announced yesterday that tax refunds would go out as scheduled despite the IRS being shuttered.
Yesterday – U.S. Stocks, Treasury Yields Added to Friday’s Gains: U.S. stocks reversed an opening drop, gradually climbing to their highs of the day (Dow +1.1%, S&P 500 +1.4%) around the lunch hour. By the close, those gains had been trimmed to 0.4% (Dow) and 0.7% (S&P 500). The S&P 500 has now reclaimed all of its losses incurred since Powell’s post-rate-hike press conference in which he was seen as too cavalier about balance sheet normalization remaining on autopilot. Monday’s gains came one session after both indices posted a greater than 3% gain in response to a blowout jobs report and Fed Chair Powell pledging patience in the face of muted inflation and heightened uncertainty. The resumption of trade talks between the U.S. and China in Beijing also lifted spirits. Consumer discretionary companies led with automakers and retailers out front. The energy sector closed in second place as U.S. WTI climbed for a sixth session, the longest stretch since 2017, to their highest level since December 17. Tech was also strong as evidenced by the Nasdaq outperforming with a 1.3% improvement. As stocks turned higher, so too did Treasury yields. The curve finished higher and flatter and near its daily peaks. The 2-year yield rose 4.7 bps to 2.54% marking the first time in six days the note’s yield has closed above the Fed’s target range. The 10-year yield added a smaller 2.8 bps to 2.70%, its highest level of a young 2019. The Dollar, however, continued to soften, slipping to its weakest level since mid-October as trade tensions appeared to ease and another Fed official stressed patience (more below).
Overnight – Risk Assets Rose Overnight on Hopes of Way Forward on Trade: After a mixed session across Asia, global market sentiment turned up during European trading and U.S. futures are signaling a third positive start since last Friday’s feel-good jobs report. Investors are watching for any headlines related to the two days of U.S.-China trade talks that are set to wrap up today. While it’s not expected that the vice-ministers from the two countries hammered out a detailed trade agreement, investors are hoping they were able to make some tangible progress and set the stage for higher-level talks later this month. High level officials from both countries made positive comments Monday from the sidelines of the current talks about a desire to do a deal. In the meantime, investors have pushed the Stoxx Europe 600 up more than 1% despite further confirmation the economy slowed. Amidst a handful of Eurozone economic confidence measures, all weaker than expected, overall economic confidence fell for a twelfth straight time in December, the longest streak since a 22-month run that ended in March 2009. Related, German industrial production missed in November and is down 4.9% since May, the steepest six-month decline since 2009. Sovereign yields in the region still managed to tick higher in response to stronger stocks. The Treasury curve is modestly higher and flatter in front of U.S. trading with the 2-year yield up 1.8 bps and the 10-year yield just 0.3 bps higher. Oil prices are stronger for a seventh day in a row for the first time since June 2017.
ISM Non-manufacturing PMI Eases More Than Expected: The ISM Non-manufacturing survey cooled more than expected in December, joining its sister survey covering U.S. manufacturers to show U.S. economic activity cooled in the final month of 2018. The headline services PMI pulled back 3.1 points in December to 57.6, slightly weaker than the 58.5 economists had expected. The index tracking new orders inched up 0.2 points in December to its highest level in six months while most other metrics were softer than in November. Weaker production dragged the most on the headline, down 5.3 points to a five-month low, while suppliers had less trouble making timely deliveries. The supplier deliveries index tumbled to a 16-month low in December. Contrary to stronger services growth in last Friday’s nonfarm payroll report, the employment index cooled 2.1 points to a five-month low. Most other metrics, excluding stronger new export orders, also signaled a slower pace of growth late in 2018. Just a day after Fed Chair Powell said muted inflation meant the Fed could be patient with policy in 2019, the prices paid index fell to its lowest level in 17 months, a sign of less inflation pressure from U.S. service providers. Despite the downbeat headline and a couple of mentions of tariffs by respondents, the comment section was generally upbeat about the current outlook for 2019.
Fed’s Bostic Cuts 2019 Rate Hikes Expectations from Two to One: Atlanta Fed President Bostic (2021 voter) said the U.S. economy appears “in a pretty good position” despite the recent return of volatility to global markets, although the latter he said could potentially be a symptom of something developing in the real economy. Considering the continued uncertainty, he additionally mentioned trade tensions and the ongoing government shutdown, Bostic said he’s in favor of just one rate increase in 2019. That’s one fewer than his previous base case and would place the Fed Funds rate at 2.50% to 2.75%, where he estimates the neutral setting to be. On the balance sheet, he said the Fed should continue allowing its portfolio to gradually and predictably run-off towards a more “steady state”, quoting previous estimates of between $2.5T and $3.5T. The Fed’s balance sheet totaled $4.106T at the end of last week (January 4), down from $4.517T in October 2017 before the normalization process commenced.
Fed Nominee Drops Out: Late Monday evening, the WSJ reported Nellie Liang, one of the two pending nominees for vacancies on the Fed’s Board of Governors, was removing herself from consideration for the position. Liang, who earned her Ph.D. in economics from the University of Maryland, is currently a senior fellow in economic studies at the Brookings Institution. Prior to her current position, she completed a more-than-30-year career at the Fed that was capped by her appointment by former Fed Chair Bernanke to start and lead the office of financial stability. Her withdrawal hands President Trump an opportunity to reappoint another individual of his choosing. Marvin Goodfriend, a former Fed economist and professor at Carnegie Mellon, remains in limbo in the confirmation process since he was nominated in November 2017.