The Market Today
Busy Week: FOMC Decision; April Jobs; Tariff Decisions
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Good Income and Spending Reports; Core PCE Base-Effect Bump to 1.9% YoY: This week’s economic calendar is full of important reports and events. In this morning’s reports, personal income rose just 0.3% MoM in March, a weaker result than expect although still reflecting a solid annualized rate of growth. Spending rose a strong 0.4% (+0.448% to be precise) pulling the savings rate down from 3.3% to 3.1%. Additionally, February’s data on both income and spending were revised slightly lower, indicating the 1Q personal consumption data may be revised lower when the GDP report is revised. Core PCE inflation in March rose 0.2% MoM bringing the YoY rate up from 1.6% to 1.9%, a rebound from the base effects of the early-2017 reports. This result was as-expected. Also on tap this week are both ISM reports, auto sales, construction spending, a FOMC policy decision (more below), the April jobs data (more below), and more corporate earnings reports.
FOMC Unlikely to Hike and Roil “Gradual Pace” Expectations: The FOMC is scheduled to announce its policy decision on Wednesday but are unlikely to roil market-expectations that they will continue on a gradual pace. They have worked diligently to manage market expectations for a slow, gradual tightening of policy and it will take an even more notable upturn in the inflation data to throw away that hard work. Fed Funds Futures are projecting an unusually high 35% chance of a hike, but this seems unlikely at this point. More likely to be the focus will be the Official Statement’s characterization of the balance of risks, if policy is still considered accommodative, and how they re-write their inflation assessment.
April Jobs Report Data to Be Another Strong Report: Economists currently expect the BLS will announce on Friday that the economy added 191k nonfarm payrolls in April and the unemployment rate ticked down to 4.0%. Average hourly earnings are expected to rise 0.2% MoM keeping the YoY rate at 2.7%. The earnings data has garner a much more correlated impact on financial markets than the jobs number have going back to December 2016.
Tariff Exemptions Set to Expire, Will Exemptions Be Extended? – Many of the U.S.’s most important trading partners were exempted from the steel and aluminum tariffs earlier this year. Those exemptions are set to expire midnight Tuesday leaving Washington with a choice to renew the exemptions or let them kick in. U.S. officials have already indicated plans that could extend the exemptions on the European Union, Canada, and Mexico. European officials have made clear that they will place retaliatory tariffs in place in they are not extended.
Overnight – Markets Steady Before the Data Dam Breaks: Global equities are mildly positive to start the week although a couple of major markets, Japan and China, remained closed for a holiday. The Stoxx Europe 600 was up 0.06% and futures contracts on the three major U.S. indexes were higher by at least 0.3%. Sovereign yields were also up overnight with the bigger moves made on debts of peripheral European countries. The Italian 10-year yield was more than 6 bps higher while the German 10-year yield had risen just 1.0 bp. Italian yields jumped after comments from the leader of the Five Star party implied a coalition government is unattainable and could result in another round of elections this summer. The 10-year Treasury yield rose 1.0 bp to 2.97% overnight but dropped after this morning’s U.S. data. The Dollar added to recent gains and continued to trade at its strongest level since the second week of January. In the economic data, China’s official April PMIs were slightly firmer than estimated but retail sales in Germany were much weaker than expected, falling for a fourth consecutive month. Data also showed inflation in Europe’s largest economy was 0.1% firmer than expected in April’s preliminary estimates at unchanged MoM and 1.6% YoY.
ICYMI – April 27, 2018 Weekly Market Recap: Leveraging momentum from a commodities rally two weeks ago, the 10-year Treasury yield breached 3.00% last week for the first time since January 2014, accomplishing a feat that had been highly anticipated for several months. Stocks were initially spooked by the 3%-handle, but recovered to end the week unchanged as the 10-year yield pulled back into 2% territory and quarterly corporate earnings continued to reflect upside surprises relative to analysts’ estimates. Although those forces captured the markets’ full attention for most of the week, there were several notable economic reports as well. The home sales data were solid, consumer confidence rebounded, there were more signs of wages firming, and GDP growth in 1Q was better-than-expected but still slower than 4Q17. Intraweek, the 2-year (September 2008), 5-year (August 2009), and 10-year (January 2014) Treasury yields touched multi-year highs. Click here to view the full recap.