The Market Today

TODAY’S CALENDAR

August CPI Proves Weaker-than-Expected on Drop in Apparel and Medical Care Prices: August’s Consumer Price Index came in slightly weaker than expected, up 0.2% MoM at the headline level (exp. +0.3%) and up 0.1% at the core level (exp. +0.2%).  At the headline level, energy prices rose 2.0% MoM, doubling their 12-month run rate, while food prices rose a modest 0.1% MoM.  The core weakness emanated from broadly weaker prices in most categories including another meaningful drop in medical care prices. Housing inflation rose 0.29% MoM, just above the 12-month average keeping the YoY pace of rent (and rent-equivalent) price gains near 3.5%.  Also on the strong side, used car prices rose another 0.35% MoM, although new car prices were largely unchanged MoM.  Other goods and services, recreation, apparel, and medical care categories all showed MoM declines in prices.  Particularly weak were apparel prices, falling 1.63% MoM versus their 12-month average of -0.11%.  Medical care prices, one of the larger contributors to the CPI calculation, fell another 0.23% MoM bringing the YoY rate of growth down from 1.9% to 1.5%.  Considering the base effects (the rolling off of weaker reports from 2017 and the subsequent, temporary increase in YoY growth rates), core CPI would have been expected to hold just above 2.30% YoY.  Instead, the weaker August data brought the growth rate down to 2.19%.  Bottom line: the August CPI data proved weaker than expected on a fairly broad-based basis.  Continued firmness in rent prices will likely keep core CPI near 2.0% in the foreseeable future.

 

Fed News: Fed Vice Chair for Supervision Quarles’ testimony before the Senate Banking Committee, originally scheduled for this morning, has been postponed until October 2.  Atlanta Fed Bank President Bostic is scheduled to speak at noon CT.

 

TRADING ACTIVITY

Overnight – As Expected, Central Banks in Europe Make No Policy Changes: Central bank news was the major focus overnight with both major central banks in Europe announcing their latest decisions. The Bank of England was first up and, as expected, made no changes to its 0.75% target rate after hiking just over a month ago. In addition to the unanimous decision, they expect near-term growth could be marginally stronger than expected but highlighted several ongoing uncertainties, specifically Brexit, emerging market concerns, and trade tensions that posed downside risks. U.K. assets were little changed after the announcement. As to the ECB’s decision, policymakers left their target rates unchanged and fine-tuned the Statement language to update the timeline of its tapering plan while leaving the overall messaging unchanged. They will cut their net asset purchases in half starting in October and, subject to the incoming data, plan to end them in December. European markets were also quiet on the initial headlines. Investors will look to President Draghi’s press conference for any additional details, including confirmation of a report earlier this week that the updated forecasts could show a slight reduction in the expected growth trend. Ahead of this morning’s U.S. CPI inflation report, U.S. equity futures were stronger and Treasury yields had added roughly 1.5 bps across the curve, moving back up to the top end of their recent trading ranges.

 

Yesterday – Stocks Gave Up Trade-Talk Rally, Yield Curve Flattens as Brainard Shows Support for More Rate Hikes: U.S. stocks closed mixed Wednesday after an up and down day of trading. The Dow closed 0.11% higher while the S&P 500 inched up a nearly imperceptible 0.04%. The Nasdaq trailed with a 0.23% loss. The big news was a report that the U.S. was planning to make a proposal to China to reopen trade talks. The headline briefly relieved some concerns around an imminent implementation of tariffs on the next $200B of Chinese imports that has caused markets some anxiety as of late. While the major indexes jumped to their daily highs on the headline, the support waned by the close. Despite the intraday swings for equities, Treasury yields were more steady. Longer yields were lower coming into U.S. trading and remained lower at the finish. The 10-year yield settled down 1.3 bps at 2.96%. The 2-year yield, however, reversed higher after the comments from Fed Governor Brainard indicated support for continuing gradual rate increases and closed marginally above the previous day’s finish.

 

NOTEWORTHY NEWS

Brainard Believes There are More Hikes to Come: In her first public speech on monetary policy in almost four months, Fed Governor Brainard showed support for the Fed continuing to tighten rates gradually. Brainard, who is considered to be a good reflection of where the center of the FOMC stands on monetary policy, told listeners in Detroit that “Over the next year or two, barring unexpected developments, continued gradual increases in the federal funds rate are likely to be appropriate to sustain full employment and inflation near its objective.” The Fed may have to raise rates above where they estimate the neutral rate to be, according to Brainard’s remarks, thanks in large part to a fiscal boost from Washington and an increasingly tight labor market. Equally as notable, Brainard became the latest official to signal a willingness to tighten policy, even if it meant causing the curve to invert. She noted, “I am attentive to the historical observation that inversions of the yield curve between the 3-month and 10-year Treasury rates have had a relatively reliable track record of preceding recessions in the United States. …But unlike these historical episodes, today the current 10-year yield is very low at around 3 percent, which is well below the average of 6-1/4 percent during the decades before the crisis.”

 

Fed’s Beige Book Shows More Solid Growth: The Fed’s latest Beige Book showed growth had occurred at a “moderate” pace nationally with mixed results across several Fed districts. Housing activity remained a weak spot and trade continued to be a concern, with some Districts saying certain business contacts had become cautious about capital investment in response to the ongoing trade disputes. The labor market remained tight and worker shortages seemed to plague even more sectors than before. Still, overall wage pressures remained “modest or moderate.” The report said inflation pressures were consistent with the previous period’s but did note “there were some signs of deceleration.” Overall, the data doesn’t affect expectations for the Fed to hike in September and begin a more intense discussion about the forward path.