The Market Today

Black Friday Reports Appear Strong; Bad Timing for GM Announcement of Layoffs

by Craig Dismuke, Dudley Carter


Home Prices, Consumer Confidence, and Fedspeak: Today’s calendar brings another round of insight into slowing home price growth with the S&P CoreLogic and FHFA home price indices both released at 8:00 a.m. CT.  Both are expected to show a further decline in the annual growth of home prices (FHFA down from 6.8% in March to 5.5% and S&P CoreLogic down from 7.2%, also in March, to 6.1%).  Rising mortgage rates, higher construction costs, slim inventory, and ever-rising prices have created a challenge to affordability for housing.  Those are likely to continue to weigh down the sector, particularly if mortgage rates were to continue rising.  At 9:00 a.m., the Conference Board’s Consumer Confidence index is expected to pull back from the 18-year high it hit in the October reading.  Also on the tape today are Fed Vice Chair Clarida (below) along with regional bank presidents Bostic, Evans, and George.


Clarida Confident, Says Inflation Indicators Soft: Fed Vice Chair Clarida is speaking this morning in New York expressing confidence in the current path.  Clarida has already said, in his initial comments, that he backs the Fed’s gradual rate hikes as the U.S. economy remains robust, the labor market healthy, and the neutral rate uncertain.  The only cautious commentary has come on capex and inflation.  He believes it is important to see capex rebound soon (last week’s durable goods orders report presumably did not help), and that market- and sentiment-based inflation indicators are pointing to slightly softer inflation than target.  He noted that TIPs were pointing to PCE inflation running below 2% and consumer inflation expectations were at the “lower end” of what the Fed considers stable.



Yesterday – Autos, Retailers, and Tech Led Stock Rally While Treasury Yields Fell From Highs on Trade Report: U.S. stocks rallied to start the week with all 11 S&P 500 sectors improving on the day leading the broader index to its best day since November 7. There were multiple forces, including a recovery in shares of tech companies, that helped to lift the Dow and S&P 500 roughly 1.5% and drive the Nasdaq 2.1% higher. Helping spirits early, global sentiment was firmer overnight with shares in Europe notching their best day of November. Within the S&P 500, the consumer discretionary sector was the top performer, helped out by greater-than-3% gains by automakers and retailers. Auto companies received a boost from a 4.8% rally by shares of GM after the company announced it was cutting 15% of salaried workers in North America as part of its restructuring plan. Retailers jumped on hopes of big Black Friday results, with CNBC reporting over the weekend, “Black Friday pulled in $6.22 billion in online sales, up 23.6 percent from a year ago and setting a new high, according to Adobe Analytics, which tracks transactions for 80 of the top 100 internet retailers in the U.S. like Walmart and Amazon.” Tech companies, up 2.3% on the day, closed in second place and financials rose 2.1% to a third-place performance. Energy companies gained as crude recovered 2.4%. While Treasury yields did rise from last Friday’s levels, they finished near their lows of the U.S. trading session. The 2-year yield rose 2.1 bps while the 10-year yield added 1.5 bps, leaving the curve with its lowest slope (21.9 bps) since September. Yields fell from their highs after the stock market closed on a WSJ report that disclosed President Trump still expects the current 10% tariff rate on $200B of Chinese imports to increase to 25% January 1 and, if a deal isn’t reached, he’ll add tariffs to the remaining balance. Stock futures pulled back with yields in after-hours trading.


Overnight – Trade Talk Takes the Steam Out of Monday’s Equity Rally: Following Monday’s synchronized gains, global equities moved in different directions overnight as trade concerns made their way back to the mainstage, increasing investors’ angst ahead of this weekend’s important G-20 meeting. A WSJ interview with President Trump, published after equity markets closed yesterday (more above), knocked U.S. futures lower and pulled Treasury yields down before the close. The President indicated it was “highly unlikely” he would forego next year’s planned tariffs rate increase on $200B of Chinese imports. In that same interview, he indicated that iPhones and laptops, currently excluded from the trade dispute, could be swept into the fray. After climbing 1.4% in yesterday’s rally, shares of Apple were down nearly 2% in overnight trading. Chinese equities ended mixed while the rest of Asia mostly improved. European markets are weaker leaving the Stoxx Europe 600 down 0.4% and U.S. futures had dropped back near session lows amid the renewed trade concerns. Futures on the S&P 500 were down 0.5% as trade concerns overshadowed an early morning headline that, according to data from Adobe Analytics, Cyber Monday sales approximated a record $7.9B, representing a 19.3% gain from one year ago. The Treasury curve was essentially unchanged heading into Tuesday’s U.S. session.



GM Layoffs Bad Timing for Trump/Jingping Meeting: General Motors announced yesterday plans to layoff 14,000 workers in North America, potentially closing five plants.  GM has struggled with poor sales on some of its sedans, high labor costs, and recently reported a $1 billion impact from newly enacted tariffs.  There are two important points to note.  First, we are not reading into GM’s challenges as indicative of today’s economic environment.  Rather, they are company-specific but the tariff-impact has exacerbated those issues.  Second, the tariffs are creating challenges for thinly profitable manufacturing companies, and are likely to continue doing so as the President reiterated yesterday his intention to move forward with raising the tariff on $200 billion in Chinese imports from 10% to 25% on January 1.  In a WSJ interview, he said he was unlikely to waiver on that tariff increase despite requests from Chinese officials to do so.  The President is meeting with Chinese President Jingping later this week at the G-20 in Buenos Aires.


President Making It More Difficult for Fed Not to Hike: President Forcing Fed to Hike to Remain Appearance of Impartiality: President Trump took aim at the Fed again yesterday saying that he was very frustrated with the rate hikes and that “the Fed right now is a much bigger problem than China.”  Ironically, the Fed came into the year projecting just three hikes in 2018 but raised that forecast to four hikes midway through the year.  The fourth hike is expected to come at their December 19th meeting.  Going back to a forecast of just three hikes, therefor skipping the December hike, seems plausible from a communication standpoint without eroding Fed credibility.  However, maintaining political impartiality has long been a goal of Fed officials, a sentiment that has been reaffirmed repeatedly in recent years.  At this point, if there is any question about hiking in December, Fed officials would presumably err on the side of hiking just to maintain the appearance on independence.

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