The Market Today
Brexit Uncertainty; Better U.S. Earnings Reports
by Craig Dismuke, Dudley Carter
Most Important Report of the Week Delayed: The most important report of the week, December’s retail sales report, has now officially been delayed due to the ongoing government shutdown. While the Census Bureau report, whenever it is released, will clear up some conflicting indicators for December’s consumer activity, the overall environment continues to be quite positive for consumers.
Mortgage applications for the week ending January 11 rose 13.5%, rising 40% over a two-week span after the previous week’s 23.5% increase. Over the two-week span, purchase apps have risen 27% while refi apps have jumped 61%. According to the MBA data, the average 30-year mortgage rate dropped to 4.74% during both observation periods, down from a peak of 5.17% in November. While two weeks does not make a trend, the positive results improve the short-term outlook for housing activity.
Import prices for the month of December fell 1.0% MoM on the continued weakness of oil prices. When excluding petroleum products, import prices were a touch firmer than anticipated, rising 0.3% MoM along with a higher revision to November’s figures. Looking at the YoY data, headline import prices continue to show weakness caused by the decline in oil prices. Excluding petroleum, core import prices continue rising at an unalarming 1.0% YoY.
At 9:00 a.m. CT, the NAHB will release its January homebuilder confidence index. Confidence collapsed in the December report, falling to its lowest level since 2015. Perhaps the dip in mortgage rates will buoy homebuilder confidence.
At 1:00 p.m. CT, the Federal Reserve will release its Beige Book report in preparation for its January 30th FOMC meeting. Also in Fed news, Minneapolis Bank President Kashkari is scheduled to speak in New York this evening.
Yesterday – S&P 500 Reclaimed 2,600: Stocks rose Tuesday as stronger Netflix shares supported communication services and other consumer-related sectors while a positive earnings report from UnitedHealth Group lifted the health care space. Those positive effects shielded the major indices from weakness in stocks tied to home construction (analyst downgrade) and brief disruptions from trade headlines and the Brexit plan defeat. Shares of Netflix jumped more than 6% after the company announced it was raising prices for each of its subscription plans. UnitedHealth’s stock rose more than 3.5% after its quarterly earnings topped estimates, lifting the broader sector more than 1.7% and to the top of the S&P 500’s sector ladder. Financials recovered from early weakness as investors looked through disappointing trading results at JPMorgan to more stable activity in its banking business. While Tuesday’s general trend was upward, there were two visible strings of downticks. The first came on a headline that USTR Lighthizer saw no progress in last week’s vice-minister meeting on “structural changes” the U.S. wants China to make as part of its trade negotiation. The second slip occurred after PM May’s Brexit Plan was easily voted down by Parliament, leading to the opposition calling for a confidence vote on Wednesday. The British Pound recovered after PM May pledged bipartisan talks for a way forward. When the dust settled, the S&P 500 was up 1.1% and above the technically-important 2,600 level for the first time since December 13, and finished 11% above it’s Christmas Eve low. Treasury yields rose amid all the news, with the 10-year yield closing up 0.9 bps at 2.71% but below its daily high. The 2-year yield ended unchanged at 2.54%.
Overnight – Brexit Remains a Key Focus as More U.S. Bank Earnings Roll In: Global equities are so far mixed but mostly upbeat Wednesday, helping to push core sovereign yields higher with UK Gilts leading the way. Despite the defeat of PM May’s Brexit plan on Tuesday, investors’ base case result, the UK’s 10-year yield was 6.1 bps higher. PM May is set to face a no-confidence vote later during the U.S. session (7 p.m. London time) but is expected to win enough support to keep her government intact. There are now growing calls for working with the EU to extend the Brexit deadline past March 29, although other options such as a Hard Brexit or a second referendum can’t be fully dismissed. Despite the uncertainty, the Pound remains near its highest levels since November. Also adding to the upward pressure on UK yields, core inflation unexpectedly firmed to 1.9% in December. Treasury yields were tracking Euro yields higher overnight with the 2-year yield up 0.8 bps to 2.545% and the 10-year yield 1.4 bps higher at 2.73%, pushing the spread to a two-week high. Though less commonly cited, the spread between the 5-year and 30-year yields (55 bps) has widened out to an eleven-month high amid the Fed’s newfound desire for patience. U.S. equity futures were positive as more bank earnings poured in. Bank of America, despite also suffering from weakness in its fixed income business, beat on revenues, net interest income, and earnings and saw their shares rise 5% in pre-market trading. The company’s CEO said on the earnings call, “Through the trillions of dollars of consumer transactions we process and from the steady confidence and activity of our small business and commercial clients, we see a healthy consumer and business climate driving a solid economy.”
Kashkari Still Sees No Reason for Rate Hikes: Minneapolis Fed President Kashkari said the data will drive the Fed’s rate decisions in 2019 but that he’s not seeing evidence additional rate increases will be needed. He said a 3.9% unemployment rate would historically have represented full employment but countered that wage growth hasn’t responded as quickly as might have been expected. He said, “If inflation is low, there’s no need to tap the brakes prematurely. Let’s let the economy continue to strengthen. If the economy picks up and if inflation starts to pick up, then we can always raise rates then.”
Fed Hawk Agrees Patience is Prudent in 2019: Kansas City Fed President George, a current year policy voter and potentially the most hawkish member of the Committee, added her name to the list of Fed officials who believe the prudent current policy stance is one of patience. She concluded a positive economic summary by saying “Notwithstanding both upside and downside risks, the outlook for the economy appears favorable.” She then asked and answered, “Have we reached the proverbial soft landing where the economy has achieved maximum employment, stable prices, growth at potential, and monetary policy neutrality? In my view, we are not there just yet. However, we are close and for now, it seems to me that we should proceed with caution and be patient as we approach our destination.” She went on with a list of reasons that support a “pause [of] our interest rate normalization”: lagged effects of monetary policy changes, nearness of the overnight rate to the neutral estimates range, uncertainty around tightening effects of portfolio roll-off, and weakness in key historical economic relationships. In conclusion, George said, “It is possible that some additional rate increases will be appropriate. But making that judgment is not urgent and should depend on a careful look at the data…”
Kaplan Thinks Fed Should Wait At Least “a Quarter or Two”: Dallas Fed President Kaplan doubled down on his cautious tone from public remarks in recent weeks, saying Tuesday that the Fed should wait at least “a quarter or two” before deciding if another rate increase is necessary to keep economic activity moving at a stable rate. While he hinted that current policy is still accommodative on balance, he said “I think the wise move here is to be patient,” amid a growing list of economic uncertainties. He noted “we’re in an uncertain time” and “we’re going to have to see how this economy unfolds,” adding “it will take a little bit of time to let this situation unfold…I think it’s in the matter of months, not weeks.”