The Market Today
China Trade Delay; Another Brexit Vote
by Craig Dismuke, Dudley Carter
Import Prices Rise on Higher Oil Prices, Remain Tame: Import prices rose more-than-expected in January and February slolwing the year-over-year rate of decline from 1.6% to 1.3%. Oil prices averaged $54.98 per barrel in February, up 6.7% MoM, but remained 11.5% below their year-ago prices. Excluding petrol-based products, import prices rose a more modest 0.1% MoM in February after falling 0.6% in January. More important to core import prices, the Dollar remains higher, up 7.8% YoY, pushing lower prices of both imports and exports. Although there are signs of firming, input costs remain a drag on inflation rather than a risk to acceleration.
Fear of Rising Jobless Claims Largely Resolved with Recent Data: Initial jobless claims for the week ending March 9 rose 6k to 229k. With the last of the shutdown-affected reports now five reports ago, the four-week moving average dropped to 224k, the lowest since January. There were growing fears that initial jobless claims might be on the rise, ushering in a period of weaker net job growth. However, much of that concern has been allayed by the recent data.
New Home Sales and Bloomberg Survey: At 8:45 a.m. CT, the Bloomberg Survey of Economists will be released and is likely to show economists continuing to lower their interest rate projections. At 9:00 a.m., the January New Home Sales report is expected to add to the last two weeks run of better housing data. New sales are expected to be up 0.2% MoM.
Yesterday – S&P 500 Closed Above Technical Resistance as Divergence Between Asset Classes Continued: Wednesday’s trading activity was reminiscent of the day prior’s. Stock prices slowly climbed to solid daily gains while Treasury yields reflected more caution about the outlook, extending the mixed messaging between asset classes so far in 2019. The S&P 500 and Nasdaq both rose 0.69% Wednesday while the Dow again lagged behind with a still-strong 0.58% gain. The S&P 500 closed above 2,800, a key technical resistance level, and at its highest level since November 7. The general uptrend was disrupted by another tumble in shares of Boeing after President Trump announced that the U.S. was joining a list of countries grounding the company’s 737 Max airliners. Boeing’s shares tumbled 3.2% after the announcement but recovered for a 0.5% gain by the close. Brexit was a focus late in the U.S. session after the UK parliament approved a motion to take a no-deal Brexit off the table by a vote of 321 to 278. While a hard-Brexit remains the base case scenario absent the passage of a deal or the EU granting an Article 50 extension, the message from parliament sent the British Pound surging more than 2% in its best day since April 2017. Even with stocks stronger, Treasury yields had gradually erased an overnight rise before spiking late to close higher for the day. The 2-year yield rose 1.4 bps to 2.47% while the 10-year yield added 2.0 bps to 2.62%.
Overnight – Brexit Vote Later Today, U.S.-China Trade Delay, Weak China Data Will Not Stay Away: Brexit will be a continued focus Thursday as UK parliament gets set for its third major vote in as many days, while a bit of bad news from China and renewed trade uncertainty have already impacted markets overnight. China’s CSI 300 fell 0.7% in a mixed session across Asia after data showed a larger-than-expected slowdown in industrial production to start the year. Industrial production was up 5.3% YTD through February when compared to the same period in 2018, short of the 5.6% expected increase and the slowest start since 2009. Officials dismissed the disappointment as a disruption caused by the Lunar Year, pointing instead to the modest acceleration in fixed investment. European stocks shook off the weakness in Asia and rose in response to yesterday’s voting down of a no-deal Brexit. The outcome of the vote, which occurred after European markets closed Wednesday, also initially nudged up yields on European government bonds. Both moves were briefly interrupted by a headline around 5 a.m. CT, that a potential meeting later this month between President Trump and President Xi to sign a trade agreement had been pushed until at least the end of April. Treasury yields and U.S. equity futures also dipped on the trade headlines. Futures contracts on the S&P 500 moved from up 0.2% to down 0.3%, but have since recovered to unchanged. The 10-year yield fell from up 1.6 bps to up 0.3 bps, and most recently had slipped to -0.2 bps on the day (2.62%).
Construction Spending Beat Estimates But Housing Remained a Drag: Construction spending was stronger than expected in January, but there was a large negative revision to prior activity and housing remained soft. Overall construction spending rose 1.3% to start 2019, easily beating expectations for a 0.5% gain, but wholly driven by activity outside of the housing sector. Non-residential spending rose 2.4% on the back of a 0.8% improvement in the private sector and a 4.9% surge in public spending, the largest public-sector gain since 2004. Private residential spending, which accounts for nearly all of total residential activity, declined again marking a sixth consecutive month of slower spending and the fewest total dollars spent since January 2017. Within the residential categories, multi-family spending rose 1.4%, single family activity slipped 0.7%, and home improvement dollars declined 0.3%. Negative prior revisions could weigh on 4Q growth estimates but, combined with better-than-expected business equipment activity data earlier in the day, the improvement in non-residential construction will add to optimism that business investment stabilized to start the year. The residential weakness, however, shows the housing sector continues to face an uphill battle despite a boost from lower mortgage rates.