The Market Today
Buckle Up – Busy Week of Economic News
by Craig Dismuke, Dudley Carter
Busy Week of Economic News Including Speeches from Dudley and Yellen: This week’s calendar is packed with data and, more importantly, Fedspeak. On the economic calendar, the most important reports of the week are likely to be August’s Durable Goods Orders report (indicator of business investment), August’s personal income and spending reports (indicators of consumer strength), and August’s PCE inflation report (indicator of future monetary policy). However, the headlines are more likely to be dominated by the Fedspeak. On the calendar are Dudley (Mon), Evans (Mon), Kashkari (Mon), Mester (Tue), Brainard (Tue), Yellen (Tue), Bullard (Wed), Rosengren (Wed), George (Thu), and Harker (Fri). Already, Dallas Fed Bank President Kaplan spoke on Wednesday saying there were “nontransitory” reasons for below-target inflation, sounding less convinced of the need for a December hike. Additionally, the markets will be digesting the German election results this week (more below), as well as comments from the presidents of both the ECB and BOE.
As for this morning’s data, the Chicago Fed National Activity Index fell more-than-expected from +0.03 to -0.31. The 3-month average is now down to -0.04, an indicator that economic conditions are generally moderate. The CFNAI is an index aggregating 85 different indicators of economic activity. At 9:30 a.m. CT, the September Dallas Fed Manufacturing Index is expected to show slightly weaker manufacturing activity in the region. In New York Bank President Dudley’s comments this morning, currently ongoing, he is holding the company line. He still attributes weaker inflation to temporary, idiosyncratic factors and expects inflation to stabilize near 2%. He does expect wage growth to improve and believes the economy is currently running at a stronger-than-normal rate.
German Elections to Create Some Coalition-Forming Drama in Days Ahead: The German elections played out generally as expected with a few small twists. Notably, the far right AfD won 13% of the vote, a significantly stronger result than expected while the Social Democrats came in weaker-than-expected. The Social Democrats, who have been Merkel’s coalition partners, have blamed the weak performance on the coalition with Merkel’s Christian Democrats. As such, they have initially said they will not form a coalition government with Merkel and the CDUs. The AfD is a highly unlikely coalition partner given their hardline stance on immigration. This leaves Merkel with piecing a coalition together with the equivalent of a libertarian and a green party – now being referred to as the Jamaican Coalition because of their party colors. Managing such a coalition will likely be a tough haul for Merkel and puts her in a less certain position in negotiations with French President Macron. The results have led to a small drop in Germany yields with the 10-year Bund yield down from 0.45% to 0.40% (rebounding to 0.42% this morning as we write). Eurozone stocks are flat and U.S. futures are down slightly coming into this morning’s trading session.
ICYMI – Vining Sparks Weekly Recap: Last week’s market action was dominated by the FOMC decision. The economic data was mixed on the week with some notably weak housing reports. Homebuilder confidence dropped more than expected, new housing starts surprisingly fell, and existing home sales dropped again due primarily to a 25% drop in sales in the Houston metro area following Hurricane Harvey. On a positive note, new housing permits beat expectations thanks to a big jump in multi-family activity. Despite the mixed data, however, the FOMC’s decision to move forward with its balance sheet plans in October (something most analysts expected to be a 2018 event) while keeping a more-hawkish-than-expected short-term outlook for their target rate really drove markets. The 10-year Treasury yield ended the week up 6 bps with most of the move occurring immediately after the FOMC news. Finally, a new round of rhetoric threatening to bomb the Pacific Ocean from North Korea’s Kim Jong Un had only a fractional impact on trading – clearly the concept of diminishing marginal utility is in effect. To see the Vining Sparks Weekly Market Recap, please click here.