The Market Today
Business Spending Recovers in January, Producer Price Inflation Remains “Muted”
by Craig Dismuke, Dudley Carter
Mortgage Applications Recovered on Strong Purchase Activity: Total mortgage applications rose 2.3% last week after cooling 2.5% in the week before. The weekly gain was driven entirely by a 4.3% in new purchase inquiries as refinancing applications were mostly unchanged, down just 0.2% from the prior week. The four week average for both purchases and refinancings both edged higher during the week. The MBA’s 30-year fixed contract rate edged down 0.03% to 4.64%, the lowest level since February 2018.
Producer Price Inflation Joins Consumer Price Inflation in the Cooler: Producer price inflation was softer than expected in February, up just 0.1% MoM for each of the three major measures. In the more volatile categories, stronger energy prices were offset by weakness in the food categories. At the core level, which excludes food and energy prices, price gains cooled 0.1% to 2.5% YoY. Notable swings in February included notably weaker consumer goods prices, strong pricing for business equipment, and a near-record drop in airfares. Excluding the effects of trade categories, prices were up just 2.3%. February’s producer price inflation report shouldn’t give the Fed any sense of urgency to change their characterization of inflation pressures as “muted.”
Durable Goods Orders Disappoint But Business Spending Bounced Back: January’s durable goods orders activity was better than expected because of an unexpectedly strong month for aircraft orders. Total durable orders rose 0.4% MoM compared with expectations for a 0.4% decline. However, stripping out the benefit of transportations categories, core orders actually declined 0.1%, missing estimates for a modest 0.1% gain. The disappointment for overall durables activity was offset somewhat by a surprisingly strong snapback on business orders for new equipment. Core capital goods orders were expected to be up 0.2% but rose 0.8% instead. Shipments in January were expected to pull back 0.2% but matched orders with a 0.8% gain. December’s data also saw marginally positive revisions. Business spending on equipment rose 6.7% in 4Q and accounted for 0.39% of the overall 2.6% growth in total economic activity reported in the GDP report two weeks ago. That strength stood in contrast to generally weaker activity in recent durable goods data, considered a leading indicator for business equipment spending. Today’s report will be viewed positively as a sign of stability to start the year.
Construction Spending Expected to Recover: At 9 a.m. CT, the Census Bureau is expected to report a 0.5% recovery in construction spending to start 2019. Spending fell 0.6% in last week’s report for December as residential activity dropped 15.8% and non-residential outlays were unchanged.
Yesterday – Fed’s Outlook Doesn’t Clear Up Much as Yields Fall Amid Continued Uncertainty: It was an interesting day for markets in the context of monetary policy, as Treasury yields stair-stepped lower in response to a handful of items the Fed is keeping an eye on. Three weeks ago, the Fed’s January Minutes listed uncertainties that warranted a patient approach to monetary policy, including a deterioration of business confidence, Brexit uncertainty, and recent softness in core inflation. An intraday chart of the 10-year yield indicates the Fed’s desire for more clarity was likely unfulfilled after Tuesday. The 10-year yield had risen 4 bps around 4 a.m. CT on hopes of a Brexit breakthrough. However, yields pulled back after U.S. business confidence missed estimates, barely budging from January’s 26-month low. The next dip occurred after the UK Attorney General dismissed the overnight breakthrough as an insufficient legal change. And a softer-than-expected core inflation result fully wiped out the yield’s overnight gain. The 10-year yield, after traveling within a daily range of nearly 8 bps, closed down 3.8 bps at 2.60%, the second lowest level since January 2018. Adding to downward momentum was an auction of 10-year notes that stopped through by a full basis point and enticed a bid-to-cover at the top end of the recent range. Shorter yields fell too, as an inversion in the Fed Funds Futures curve deepened. The 2-year yield closed down 2.5 bps to 2.45%, its lowest yield since January 3. Stocks, however, showed little concern about the day’s event. In fact, the S&P 500 gained 0.3% after briefly flirting with the key technical resistance level around 2,800. The Dow ended down 0.4%, again affected by a drag from Boeing on a continuation of the negative crash-related headlines.
Overnight – Treasury Yields Recover in Quiet Overnight Session: U.S. equity futures fell in the first half of the overnight session as Asian markets closed mostly lower Wednesday. However, sentiment turned around with European markets opening in positive territory and recently moving to their highs of the day. The mixed global trends occurred after yesterday’s eventful U.S. session and in the absence of any new market-moving news. Brexit was a major topic of discussion on trading floors yesterday and is likely to continue to create some chatter today. After voting down PM May’s plan by a 149-vote margin on Tuesday, UK parliament will take another vote later during U.S. trading (7 p.m. London Time, 2 p.m. U.S. CT) to determine if there is majority support for crashing out of the EU without an agreement. Speculation is that there is not, meaning another vote is likely to follow on Thursday to decide if the UK will request an extension of Article 50 from the EU, currently set to expire March 29, to allow for more negotiations. The Pound had recovered overnight and fully erased Tuesday’s drop. In the U.S., Treasury yields had moved higher after falling Tuesday to the low end of recent trading ranges. Around 7 a.m. CT, the 2-year yield had added 1.4 bps to 2.47% while the 10-year yield had added 2.2 bps to 2.62%.