The Market Today

Tuesday’s Early Data – Business Confidence Weakens more than Expected: In the first economic report of the week, the NFIB reported a new post-election low in small business confidence for September. The index had rebounded in July and remained stable in August, largely on gains in confidence surrounding real sales expectations, plans for capital investment, and the outlook for business expansion. Disappointingly, these three areas were among the weakest in this morning’s report. The share of respondents expecting higher sales dropped 12 points and the number who see now as a good time to expand fell 10 points; both were new lows since November. The share of respondents planning capital expenditures in the next three to six months dropped 5 points to match its second weakest level since the election. While those were among the weakest components underlying the headline result, good news was elusive elsewhere in the report. The only positive indications from the report were the stability the index tracking hiring plans, a slight improvement in inventory accumulation expectations, and a lack of further deterioration in the profit outlook. The delays in implementation of the key pillars of Republicans’ agenda so far in 2017, and with the plan for tax reform still up in the air, have continued to weigh on confidence. Advancement of the pro-business reforms in Washington could be the key for a sustained continuation of the recent strength in business investment over the last several quarters.

 

The Remainder of This Week’s Calendar – Fedspeak will Keep Markets Busy Until Friday’s Retail Sales and Inflation Reports: Excluding the headline payroll figure from last Friday’s nonfarm payroll report – which was negatively impacted by Hurricane Irma, and to a lesser extent Hurricane Harvey – last week’s economic calendar included relatively strong economic data overall. This week’s holiday-shortened calendar includes some equally important data points for markets to consider. The biggest focus will be on a deluge of Fedspeak scattered throughout the week and surrounding tomorrow’s September FOMC Minutes and a heavy slate of data on Friday morning.

 

Several of the Fedspeakers have made public remarks lately and therefore their current paradigms are well known. The officials furthest removed from their most recent comments are Chicago Fed President Evans and Governor Brainard who will speak on Wednesday and Thursday, respectively. Markets will, however, be interested to hear how all officials view the labor data from last week that appeared to be affected by the hurricanes; specifically what their takes are on the contraction in hiring, the spike in September wages and positive revisions to the prior months’ earnings, and the drop in unemployment.

 

The focus of Wednesday’s FOMC Minutes is likely to be on the changes to the dot plot and what the general tone of the Committee is when it comes to the inflation mandate. At the September meeting, the Fed announced that it will begin the process of normalizing its balance sheet this month. That plan has been well telecast and much talked about and will likely provide few surprises. It was the most recent dot plot that drove the biggest market response at the time of the release. The Fed continued to project one more hike this year and three in 2018. Further out, however, they removed a hike from 2019 (projecting two total instead of three) and lowered the longer-run rate from 3.00% to 2.75%. Given the continued miss on the inflation mandate, markets will be interest in the general tone of the conversations on inflation; specifically what kept the near-term dots unchanged and what  was the catalyst for calling for one fewer in 2019 and a reduction in the neutral rate.

 

As to the actual data, the most important reports will be released on Friday; September’s CPI inflation and retail sales report. Headline inflation is projected to match its biggest monthly jump since 2009 (0.6%) and the YoY rate is expected to climb to 2.3%, the highest since March. While the recent hurricane-driven jump in energy prices is expected to boost these headline figures, core prices are expected to have risen a more modest 0.2%. Still, this would push the core YoY rate up to 1.8% and end the four-month streak of 1.7% YoY price gains. This price-effect is also expected to push headline retail sales, which are not inflation adjusted, up 1.6% MoM. This would be the biggest monthly gain since March 2015. Excluding sales of autos, gasoline, and building materials, core sales are expected to be up a positive 0.4% following the 0.2% decline in August.

 

Overnight Activity – U.S. Equities Look for Rebound: U.S. equities will open against a mixed global backdrop as strength in Asian stocks has faded during the European session. Japan’s Nikkei led gains in the Asian-Pacific, climbing 0.64% to its highest level since August 2015. However, that strength failed to boost sentiment in Europe where most national exchanges have weakened and the broader Stoxx Europe 600 is hovering around the flat line, down 0.03%. The uncertainty surrounding Spanish politics continues to weigh on risk appetite in region. Spanish stocks are currently Tuesday’s worst performers based on the current 1.05% decline midway through the trading session. Reports indicated that, despite threat of arrest from the national police, Catalan President Puigdemont has planned a speech later Tuesday in relation to the recent referendum on independence. Notwithstanding weaker equities, sovereign yields in Europe are modestly higher from Monday. The Spanish 10-year yield is up 1.9 bps but not an outlier compared with a 2.7 bps increase in Italy’s 10-year yield or a 0.8 bps increase in Germany’s. Treasury yields inched lower overnight but is back to nearly unchanged. Equity futures point to a rebound from Monday’s modest decline and the Dollar weakened against almost every major currency.

 

ICYMI – September 6, 2017 Weekly Recap: Yields were nearly unchanged last week despite a heavy-handed economic calendar that included some hurricane-affected, but generally positive, economic data points, an overall hawkish tone from several Fedspeakers, and a brief bout of concern surrounding happenings in North Korea. Friday’s nonfarm payroll report was the most talked about economic report because of the hurricane-driven contraction in total payrolls (the first since 2010) and the positive revisions to previous months’ earnings data that accompanied a big jump in earnings. The decline in total payrolls and the big monthly jump in earnings have been dismissed as an anomaly in the hiring trend because of the disruption caused by the hurricanes. However, the earnings revisions caught investors’ eyes and puts the wage story on slightly stronger footing than before. Click here to see the full recap.