The Market Today

Brexit Weighs on BOE Outlook


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Drop after Teachers’ Strike and Shutdown: Initial jobless claims for the week ending February 2 pulled back from an elevated 253k to 234k. Looking at the claims data by state, it appears the previous week’s elevated claims came primarily from the California teachers’ strike where reports of 36,000 teachers went on strike for one week. Claims in California jumped to 56.8k for the week ending January 26, 17k above their 12-month average.  The government shutdown appears to have had a smaller impact.  The state-level claims data show new filings were above trend in Maryland, Virginia, and Washington D.C., collectively, by just 10k in the January reports.

 

Bloomberg Survey to Reflect New Fed Paradigm: At 8:45 a.m. CT, Bloomberg will release their January survey of economists.  With the market paradigm shifting from believing the Fed’s next move will be a rate hike to it being a rate cut, shorter Treasury yields have entered established a new, lower trading range.  The 2-year Treasury yield was trending between 2.80% and 3.00% between September and mid-December but has since found a range between 2.40% and 2.60%.  Given the market’s conviction that the next move will be a cut (we continue to project the next move will be a hike), we slightly lowered our 2-year yield projections for the next several quarters.  Apart from this, we expect to see very few changes to economists’ forecasts.

 

Fedspeak to Include Discussions on the Appropriate Level for Interest Rates: Fed Vice Chair Richard Clarida will speak this morning at a Czech National Bank conference, discussing research he completed in 2017 on global factors and their impact on the neutral rate.  Given the recent discussion about the neutral rate, today’s comments should provide insight one Fed governor’s view of how the proverbial neutral rate is evolving.  Also on the calendar today are Dallas Bank President Kaplan and St. Louis Bank President Bullard. Bullard is a voting member this year and has been an advocate for re-evaluating the appropriate level of Fed Funds, with a bias toward that level being lower.

 

TRADING ACTIVITY

Yesterday – Stocks Broke Recent Win Streak While Treasury Yields Held Steady: U.S. stocks faded an opening jump and spent the entirety of Wednesday’s session floundering in modestly negative territory. The Dow ended 0.1% lower while the S&P dipped a slightly greater 0.2% and the Nasdaq lagged with a 0.4% loss. The S&P 500’s daily decline snapped a five-day winning streak for Wall Street that had pushed the index to its highest level since December 3. The communication services sector was the biggest drag on overall sentiment, down 1.5% on double-digit declines for multiple media stocks. Electronic Arts (Tuesday after-market) and Take-Two Interactive Software (Wednesday pre-market) posted mixed earnings results and disappointing revenue guidance. Seven other sectors also fell below Tuesday’s close while three others saw modest gains; healthcare stocks rose 0.4% and were top performers. Treasury yields dipped with German Bunds after an unexpected decline in German factory orders and were lower for most of the U.S. morning session. However, yields popped after an auction of 10-year notes tailed slightly (2.689% awarded versus 2.681% when-issued) on a bid-to-cover ratio (2.35x) that was weaker than the average of the last four auctions (2.50x). For the day, the 2-year (2.52%) and 10-year (2.70%) yields were less than 0.5 bp changed.

 

Overnight – The “Fog of Brexit” Leads Bank of England to Lower Rate Path and Growth Outlook in Uncertain Forecast: Global sentiment is somewhat softer Thursday as open Asian markets traded mixed and losses across Europe have helped drag U.S. futures lower. Another piece of weak German data pushed the DAX down 1.3%, among Europe’s biggest daily decliners which have collectively pulled the Stoxx Europe 600 0.6% lower. A day after disappointing factory orders weighed, industrial production was reported to have slowed 0.4% in December, worse than the 0.8% gain economists expected. Brexit is among the more prominent risks facing the global economy in 2019 and was a key driving force for the Bank of England lowering its expected forward rate path and trimming its domestic growth outlook. The bank’s February forecasts were based on one rate hike over three years, down from two in November, and included lower growth estimates for 2019, down from 1.7% to 1.2%, and 2020, down from 1.7% to 1.5%. The central bank left its policy rate unchanged and Governor Carney said the “fog of Brexit” is creating tensions within the economy and widening uncertainty bands around forecasts. The Minutes, released concurrently with the Statement, also highlighted slower global growth, trade tensions, and tighter global financial conditions as reasons for the increased caution. Longer yields in Germany and the U.K. have pulled back between 3 bps and 4 bps and are causing similar shifts in Treasurys. The entire Treasury curve was lower by between 2.5 bps and 3.5 bps. Futures on the S&P 500 were down by 0.6%.

 

NOTEWORTHY NEWS

Yellen Said Fed’s Next Move Could Be in Either Direction, Will Depend if Global Weakness “Spills Over” into “Solid and Strong” U.S. Economy: Fed Chair Yellen appeared on CNBC Wednesday afternoon and said she expected the U.S. economy to slow in 2019 but remain solid. Similar to the current Fed Chair’s press conference comments from last week, the former Fed Chair said slowing global growth, trade tensions, and Brexit all pose risks to the U.S. economic outlook. She compared the current environment to that of 2015 and 2016 when similar foreign developments caused the Fed to veer from their projections, a correlation also drawn by Powell in previous public remarks. Because she doesn’t see signs of strong inflation pressures emerging, and because the Fed’s nine rate increases have put policy near the range of neutral estimates, Yellen signaled the Fed could be patient; there is no need for further preemptive policy tightening. She said the current stance also means the Fed’s next step could be in either direction, a hike or a cut, depending on how the outlook unfolds.

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