The Market Today
Business Investment Shows Positive Sign in October Data
by Craig Dismuke, Dudley Carter
Jobless Claims Fall Back after Two Weeks of Elevation: Initial jobless claims fell back to a more encouraging 213k for the week ended November 23 from more elevated levels during the two weeks prior. Initial jobless claims had moved up unexpected in the middle of November, averaging just under 230k and causing some concern that the labor market could be softening more than expected. The 15k drop last week returns the overall level of claims back in line with the more positive trend that has persisted since June. Continuing claims were also better than expected, down 57k two weeks ago to 1.64MM, a new low since 1973.
Business Investment Shows Positive Sign to Start 4Q: The October Durable Goods Orders report beat expectations across the board. Headline orders rose 0.6% (exp. -0.9%) while orders excluding transportation items rose 0.6% (exp. +0.1%). The headline figure was boosted by a 10.7% increase in nondefense aircraft and a 18.1% gain for defense aircraft. Some of the transportation strength was offset by a 1.9% decline in motor vehicles, the third consecutive monthly decline for the series and likely the residual effects of the now-resolved UAW strike. The key capital goods data, reflecting business investment in equipment, were quite strong at both the orders and shipments levels. Orders rose 1.2%, the strongest monthly gain since January. Shipments rose 0.8%, also the best pace since January. The business investment data remain choppy but the October data at least point to a good start to 4Q investment.
3Q GDP Revised Up to 2.1% on Larger Inventory Accumulation: The first revision to the 3Q GDP report showed slightly better growth for the economy, revised up from 1.9% to 2.1%. However, the largest contribution to the revision came from an increase in inventory accumulation. Inventories were revised up $10.8 billion, personal consumption was revised up $1.9 billion, government spending was revised down $3.0 billion, and the trade deficit was revised up $1.9 billion. All told, the revisions do not materially change the narrative of slowing growth bolstered by continued strength at the consumer level.
Personal Income and Spending and PCE Inflation: At 9 a.m. CT, personal income and spending data will be released alongside the Fed’s preferred measure of consumer price inflation. Nominal income and spending are both expected to have notched a 0.3% gain in October while inflation-adjusted spending is expected to be flat. The more timely retail sales data released a couple of weeks ago indicated consumer spending started 3Q off slowly. The inflation data is expected to show headline pressures firmed up 0.3% last month, lifting the YoY rate from 1.3% to 1.4%, while core prices are forecasted to have risen a more subdued 0.1%, leaving the YoY rate unchanged at 1.7%. Also at 9 a.m., NAR data is expected to show a modest 0.2% improvement in pending home sales.
Beige Book Caps a Busy Day of Data: The Fed’s Beige book will be released at 1 p.m. to close out a busy day of economic data, and will offer an update on the anecdotal economic evidence Fed officials are gathering in conversations with their business contacts.
Stocks Finish at New Records While Treasury Yields Remained Reluctant to Rise: Stocks closed near their highs of the day, posting modest gains and a second set of records this week. While the daily dose of trade headlines weren’t new, the tone from both sides toward a phase-one trade deal remained optimistic. After Chinese officials disclosed overnight that they had a call with the U.S. team about “core issues,” President Trump said the two sides were in the “final throes” of an agreement. Between those two developments, a top White House adviser said “We’re getting really close [to a trade deal] and that the first phase is significant.” While the daily economic data were mixed (more below), the positive trade headlines helped push all three major indexes up 0.2% to a new records. The recent dip in Treasury yields, however, persisted. The 2-year Treasury yield edged back 1.8 bps to 1.58% as the 10-year yield dropped 1.4 bps to 1.74%.
Markets Moved Very Little ahead of a Wave of U.S. Data: Stocks were generally positive following the upbeat comments on trade yesterday and before a second wave of key U.S. economic data hit ahead of the Thanksgiving holiday. At its halfway point in the trading day, Europe’s Stoxx 600 had moved up 0.3%, matching an earlier gain for the MSCI Asia Pacific index. Bond yields were mixed globally but little changed on balance. As investors awaited this morning’s influx of important U.S. data, releases in China and France offered divergent views for the outlook. Industrial profits in China shrank for a third month in a row in October, down 9.9% from a year ago in the biggest decline since at least 2011. In France, consumer confidence rose unexpectedly to its strongest level since 2017 and second best of the cycle. At 7:20 a.m. CT, just ahead of the first set of U.S. data releases, S&P 500 futures were up 0.1% and the 2-year and 10-year Treasury yields had both added 1.5 bps. After some surprisingly strong data, yields shot higher with the entire curve moving up more than 3 bps on the day.
Consumer Confidence Disappointed Ahead of Kick-off of Holiday Shopping Season: Consumer confidence unexpectedly drifted lower in November based on the latest update from the Conference Board. The headline index edged down 0.6 points to a five-month low of 125.5 as a weaker current assessment neutralized a recovery in expectations for the future. While both remained solid for the cycle, consumers’ current feelings about both business conditions and employment softened modestly from October. The number of consumers characterizing current conditions as “bad” rose to a 30-month high and difficulty finding employment inched up to its worst reading since June. Consumers expectations for both also remained cautious, although income expectations strengthened. Paired with a softer trend in the most recent retail sales data, the disappointing confidence report will sharpen the focus on the kick-off of the holiday spending season.
New Home Sales Were Stronger Than Expected: October’s new home sales tally was stronger than expected at 733k annualized units and there were net positive revisions to the prior three months’ data. In total, the prior three months were revised up 32k, factoring in September’s 37k upward adjustment, an unchanged August, and a 5k write-down for July. Looking through the monthly swings, which tend to be volatile, the year-to-date trend remains clearly positive and September’s revised pace and October’s initial estimate represent the first and second best months of this cycle. Sales over the last three months are 23% higher than the same three months in 2018, the strongest annual gain since 2015, and have benefited from a drop in rates. Using the same periods for comparison, the average 30-year mortgage rate was down 1.02 percentage points, from 4.66% to 3.64%. Housing contributed to growth in the third quarter for the first time in seven quarters and could again be a source of stability to close out the year.
Another Fed Survey Came Up Short: For a third time this week, a regional Fed survey came up short of expectations, a sign that manufacturing activity remains soft. Following disappointing data Monday from the Chicago and Dallas Fed Banks, the Richmond Fed’s manufacturing index dropped more than expected to -1 in November, back below zero for a third time this year. Many of the key underlying indicators also softened from October, including key indexes tracking new orders and employment, and the more forward looking indexes remained subdued. Manufacturing weakness continues to be a key domestic area of concern mentioned by Fed officials when discussing how global weakness and trade tensions are casting a shadow over a generally favorable domestic outlook.
Dallas Fed’s Kaplan Likes Rates Where They Are: Dallas Fed President Kaplan, who will vote on policy decisions beginning in January, said in a CNBC interview, “I think policy is in the right place right now,” adding “I’d need to see some material change in the outlook to cause me to want to adjust” rates any further. Kaplan has consistently shown a concern about the potential effect that elevated corporate debt levels could have in the next downturn, placing him among those officials eyeing possible financial stability risks associated with an extended period of low rates.
Fed’s Brainard Suggested Tweak to Forward Guidance and Asset Purchases: Fed Governor Brainard said “there are good reasons” to expect modestly above-trend growth to continue, and while “the balance of risks remains to the downside,” she noted “there has been some improvement in risk sentiment in recent weeks.” As are others at the Fed, she is “watching the data…for signs of a material change in the outlook.” However, it was her discussion of the ongoing framework review that was more interesting. While she caveated that no conclusions have yet been reached, she also singled out a few of her favorite possible policy modifications. To boost inflation, she prefers “flexible inflation averaging,” a policy which aims to achieve 2 percent over time and would “make clear in advance” that the Fed will not “offset modest upward pressures to inflation.” As to policy tools, she suggested small tweaks to increase the efficacy of both forward guidance and asset purchases. She believes there are benefits to forward guidance that ties lift off after a period of easing rates to achieving the dual mandate “on a sustained basis – say over the course of a year.” Doing so could prevent the Fed feeling pressured to “’normalize’ or lift off…preemptively” as they did in 2015. More novel, at least in the U.S., were her thoughts on possible “advantages to an approach that caps interest rates on Treasury securities at the short-to-medium range,” or “yield curve caps.” This modification of traditional asset purchases “would smoothly move to capping interest rates” and address some of the “lumpiness” that occurred in the quantitative easing purchases after the Great Recession.