The Market Today
Brexit Deal Boosted Sentiment Temporarily Before Realities of the Uphill Battle That Remains Hit
by Craig Dismuke, Dudley Carter
Housing Starts and Building Permits Mixed on Multi-Family Volatility: Housing starts were notably weaker than expected in September but a stronger-than-expected result for building permits offered offsetting hope that the weakness in starts could prove temporary. In a bout of a notable volatility, housing starts tumbled 9.4% last month while August’s initial surge of 12.3% was an even stronger 15.1% after revisions. Still, September’s pace of 1.256MM units started was much softer than the 1.320MM units economists expected. The big drop was driven entirely by the multi-family sector, as single-family starts inched higher by 0.5%. However, the positive single-family print was the result of a solid 7.1% gain in the South that offset weakness in the other three regions. As for permits, total activity fell a less-than-expected 2.7% and August’s gain was revised stronger. Again, the single-family series firmed up while multi-family activity fell off. The single-family gain in permits was concentrated solely in the west. The single-family housing data continues to show a slow but positive response to lower mortgage rates.
Philadelphia Fed Business Outlook Signals Better Days Ahead: The Philadelphia Fed’s Business Outlook index cooled more than expected in October to a four-month low. Changes in current conditions were mixed as stronger new orders and employment were offset by weaker shipments and a shorter workweek. The outlook for six months from now was more positive with the expectations index rebounding from a four-month low.
Initial Jobless Claims Rise but Remain Low: Initial jobless claims rose less than expected last week and remained low. While economists had expected new initial claims of 215k, actual claims rose 4k to 214k. The four-week average also ticked higher to 214,750, but it too remains at a historically strong level.
Industrial and Manufacturing Production Expected to Contract: At 8:15 a.m. CT, the Federal Reserve’s Industrial Production report is expected to show both total production and manufacturing output contracted in September after a solid gain in August. Manufacturing has been hardest hit by the trade war and the recent weakness for the sector is no secret.
Thursday’s Fedspeak: A trifecta of current-year Fed voters are scheduled to speak today. Two of them, Chicago’s Evans and Governor Bowman, will attend one of the Fed Listens events in Chicago at 1 p.m. CT. New York Fed President Williams, a key voice on the Committee, will speak in New York at 3:20 p.m.
YESTERDAY’S TRADING ACTIVITY
Global Developments and Weak Retail Sales Weighed on Sentiment: U.S. stocks and Treasury yields drifted lower after a weak retail sales report and global developments weighed on investor sentiment, offsetting another day of mostly-upbeat corporate earnings announcements. Ahead of the retail sales data, China threatened “strong countermeasures” in response to what it believes is U.S. meddling in its domestic affairs. The U.S. House of Representatives passed several bills Tuesday afternoon in support of the pro-democracy protestors in Hong Kong. In addition, conflicting Brexit headlines swung U.K. assets about as mixed messaging kept a cloud of uncertainty over recent optimism about a possible deal. As U.S. trading opened, the Census Bureau reported that core retail sales stagnated in September, snapping a six-month stretch of solid consumer spending.
Fed’s Beige Book Echoed Recent Softness in Hard Data: The uncertainty of the pre-market developments was echoed by the softer outlook in the Fed’s latest Beige Book (more below). Despite acknowledging continued uncertainty, Fed President Kaplan said he’s “agnostic” about the next rate decision (more below). However, President Evans noted he is open-minded about another insurance cut in the face of increased downside risks (more below). The 2-year yield dropped 3.5 bps to 1.58% as the Fed-Funds-futures’-plotted rate path drifted lower. The 10-year yield fell 3.1 bps to 1.74%. The S&P 500 slipped 0.2% on split sector performances.
OVERNIGHT TRADING ACTIVITY
Brexit Agreement Reached, But Notable Hurdles Remain: Global risk assets recovered overnight and yields pushed higher after the U.K. and EU announced that negotiators had reached a Brexit agreement. U.K. yields and the British pound shot higher around 4:30 a.m. CT on reports that an agreement had been reached. However, both have since pulled back on multiple reminders of the uphill battle PM Johnson, who does not have a majority backing of lawmakers, faces in advancing the deal through parliament. Already, comments from multiple opposition parties have pushed back on the agreement. The sharpest pullback in U.K. assets came on a headline that the DUP of Northern Ireland, a key group Johnson needs to tally the needed votes, said it won’t vote for the deal.
Assets Pare Initial Optimism as Much Work Remains to Finalize New Brexit Agreement: After jumping as much as 8 bps immediately after the announcement, the U.K.’s 10-year yield had pulled back and was 2.4 bps lower on the day just after 7:15 a.m. CT. The British pound, which had rallied as much as 1.2%, fell back and was 0.5% lower. A similar trend unfolded for European stocks as the Stoxx 600 trimmed a 0.9% gain to just 0.3%. In an otherwise quiet night for headlines, Treasury yields ticked higher but also softened their initial Brexit response. The 2-year and 10-year yields were earlier up 1.0 bp and 1.8 bps, respectively. U.S. equity futures held on to most of their gains as investors look ahead to another day of corporate earnings. The S&P 500 was 0.3% stronger.
Home Builder Confidence Improved Unexpectedly in October: In contrast to the more pessimistic messaging in the weekly mortgage applications data released earlier Wednesday, the NAHB reported home builder confidence climbed unexpectedly in October to match its best level since January 2018. The surprise improvement in the headline index was driven by sizeable gains in the sales outlook and a gauge of interest from prospective buyers. Optimism around current sales and expected sales over the next six months, as well as the amount of traffic from prospective buyers all climbed to their best levels since the first half of 2018. While it has been slow to develop, most of the major housing datasets have shown improvement in response to lower mortgage rates.
Evans Currently Supports Holding Rates Steady, But Open to Arguments for Additional Accommodation: Chicago Fed President Evans, a current-year policy voter, said his policy outlook changed this year as “some data on economic activity came in weaker, downside risks multiplied, and inflation and inflation expectations retreated.” As a result, he noted the Fed’s two rate cuts since July “were quite appropriate” and that “policy is probably in a good place right now.” Looking ahead, his projected path “is pretty much in line” with the median forecast for no further adjustments through the end of next year. However, he acknowledged that downside risks remain and said he is open-minded to the “argument for more accommodation now to provide some further risk-management buffer against these potential events.” Evans added that another rate cut would increase his confidence on inflation.
Kaplan Is Agnostic on October Decision and Brainard Is No Fan of Negative Rates: Dallas Fed President Kaplan said he “strongly” supported the Fed’s rate cuts in July and September but is “a little more agnostic…right now on what we do next.” In a speech focused on digital currencies, Fed Governor Brainard said she sees “the cost-benefit assessment of negative rates as unattractive for the current U.S. context,” later noting her “strong preference is to address the effective lower bound by using our existing tools vigorously.”
Beige Book Echoes Softer Activity and Signals Businesses Are More Wary about Trade Policy: The Fed’s Beige Book, which compiles anecdotal economic data from the Fed’s business contacts, echoed the softer tone of several key economic reports released in recent weeks. The pace of activity across the U.S. was described as “slight to modest” in October’s edition, a notch lower than the “modest” pace noted in August. Additionally, the outlook of the business community was more cautious. The summary said, “Business contacts mostly expect the economic expansion to continue; however, many lowered their outlooks for growth in the coming 6 to 12 months.” Previously, a “majority of businesses remained optimistic about the near-term outlook” despite continued uncertainty about U.S. trade policy. On the Fed’s mandate, slower employment was mostly blamed on a shortage of workers, although manufacturers in several districts reduced headcount in response to weaker activity. Inflation pressures remained modest.