The Market Today
CBO Projects Trump-onomics to Have Strong Short-Term Boost, Negative Long-Term Effects
by Craig Dismuke, Dudley Carter
Small Business Confidence Pulls Back but Remains Strong: Small business confidence pulled back more than expected in the NFIB’s March report, falling from 107.6 to 104.7. Confidence is now the weakest it has been in seven months, since tax reform came into the picture. Expectations for sales dropped 8 points, a key indicator for future small business decisions. Those saying they plan to hire more rose 2 points but those expecting to raise wages fell 3 points. According to the NFIB report, “for the first time since 1982, taxes received the fewest number of votes as the number one problem.” Despite the disappointing report, business confidence remains very strong.
Producer Prices Rise at Second Fastest Rate Since 2012: Producer prices for the month of March rose 0.3% at both the headline and core levels in March, signaling faster inflation pressure than expected in the production pipeline. Headline prices are now up 3% YoY, the second fastest rate of growth since 2012. Excluding food and energy prices, prices are up 2.7% YoY, the fastest rate of growth since 2011. While this rate of price gain in the production pipeline is not a red flag for consumer prices, the data continue to show prices pressures firming up in almost every category. With this as the backdrop, consumer price gains are likely to rise to between the 2.0-2.5% range keeping the Fed in a hawkish position.
Yesterday – Stocks Gained But Pared Morning Rally: Stocks did rebound Monday but a strong morning rally was pared significantly by the close. The Dow rose 46 points (0.2%) but was up 441 points (1.8%) just after lunch. The S&P 500 added 0.3% after earlier rising as much as 1.9%. Stocks got an early boost as trade tensions eased and markets awaited Chinese president Xi’s speech at the Boao Forum for Asia (more below). However, the major indexes rolled over around 1 p.m. CT and the beginnings of a pullback gathered steam after a report indicated the FBI had raided the office of President Trump’s personal lawyer. As the equity rally faded, Treasury yields also erased most of their earlier increase. After almost touching 2.30%, the 2-year yield ended up 1.2 bps at 2.28%. The 10-year yield briefly rose to 2.81% but closed just 0.5 bps higher at 2.78%. The Dollar was already weaker from an earlier decline after several ECB officials sounded an optimistic tone on the domestic outlook.
Overnight – Xi Gives Markets More Hope for Positive Trade Outcome: U.S. equities will attempt another move higher as pre-market trends reflect a positive response to last night’s speech from Chinese President Xi. In remarks to the Boao Forum, Xi discussed a “new phase of opening up” China which could include changes such greater access to Chinese markets for foreign investors, reducing tariffs on auto imports and duties on others, and doing more to protect intellectual property. However, he didn’t discuss the current tariff proposals from the U.S. and China that have buffeted markets in recent weeks. As Xi spoke, U.S. equity futures strengthened with the major Asian indexes. European equities have also firmed. Haven assets are a bit weaker Tuesday in response, with global sovereign yields higher, the Yen lower, and gold unchanged. The 2-year (2.30%), 5-year (2.62%), and 10-year (2.81%) Treasury yields are all roughly 2.5 bps higher. The Dollar was flat but dropped as the Euro spiked on rate-hike comments from and ECB governor. Governing Council member Nowotny said he “would have no problem with moving from -0.4 percent to -0.2 percent as a first step and then, as a second step, include the (main refinancing) policy rate…This is the structure. The exact timing? It’s too early to tell you.”
CBO Shows Temporary Boost to Economic Growth But Lasting Effects on Deficits and the National Debt: The CBO published its latest Budget and Economic Outlook on Monday. The revised projections estimate that the net effects of the tax law changes and increased government spending deal will be a temporary boost for the economy but a longer-lasting impact for annual deficits and the outstanding debt. The CBO believes the peak impact on the economy will occur this year, with YoY growth in the fourth quarter expected to equal 3.3%, up from CBO’s 2017 projection that growth would be just 2.0%. They project growth will then slow to 2.4% in 2019 and 1.8% in 2020. However, the annual deficit is expected to cross over $1T in 2020 and peak at 5.4% of GDP in 2022 before moderating relative to the overall economy. As to what that means for the national debt, total debt held by the public is expected to grow to $28.7T in 2028, or 96.2% of GDP. On interest rates, the CBO projects the 3-month T-Bill will average 1.9% this year, 2.9% in 2019, but peak at 3.8% in 2021. The 10-year Treasury yield is expected to average 3.0% in 2018, jump to 3.7% in 2019, and max out at 4.2% in 2021. As to the Fed, the CBO expects three more hikes this year (four total to 2.4% by year-end) and four total in 2019 to 3.4%.
Kaplan Keeps Call for Three Hikes: Dallas Fed President Kaplan, who will not vote on policy again until 2020, said his base case is support for two more rate increases this year. He believes the economy is near full employment and expects some firming in inflation this year. Kaplan believes growth will be solid in 2018 but interprets lower longer yields and a flattening yield curve as investors forecasting more sluggish growth going forward. He said it’s too early to assess the effect of a possible trade dispute but believes a sustained period of heated rhetoric could cause damage. Kaplan is keeping an eye on growing government debt levels as a percentage of the economy and cautioned that it will result in the U.S. being more rate sensitive.