The Market Today

TODAY’S CALENDAR

Government Shutdown Averted: President Trump has reportedly scheduled a press event at 10 a.m. ET in the Rose Garden where he is expected to sign the bipartisan spending deal passed by Congress on Thursday. While the deal will avert a second government shutdown, its funding levels for border security fell short of the amount requested by the White House. The White House has indicated that, after signing the deal to fund the government through the remainder of the fiscal year, the President will concurrently declare a national emergency in an attempt to secure the remaining funds needed to construct a more expansive physical barrier along the southern border.

 

Positive, But Mixed, Results from New York Fed Manufacturing Report: The New York Fed’s Manufacturing index partially rebounded in February, up slightly more than expected.  The index of manufacturing activity in the New York Fed region fell from 21.4 in November to 3.9 in January, rebounding to 8.8 in February’s report.  While the partial rebound is positive news, it falls short of changing the expected direction of the broader ISM manufacturing index (see Chart of the Day).  By subcomponent; new orders rose 4.0 points, inventories rose 6.2 points, and unfilled orders rose 6.9 points (although the latter two remained in negative territory).  Also a positive sign, expectations for capex six-months forward did rebound strongly.  The indices tracking number of employees and the average workweek both fell to their lowest and second-lowest levels, respectively, since 2017.

 

Import Prices Fall 1.7% YoY, Weakest Rate Since 2016: Import prices fell more-than-expected in January, down 0.5% MoM at the headline level and down 0.7% when excluding petroleum.  The 0.7% decline for the ex-petroleum measure marks the largest monthly decline since 2009.  Prices of imports from Canada dropped 1.5% MoM, from Mexico they dropped 1.0%, and from China they fell 0.3%.  Incidentally, after a nine-month rally, the Dollar actually weakened versus a basket of trade-weighted currencies in January.  After rising 10% from mid-April through mid-December, the Dollar fell 2% in early-January.  While inflation pressures appear to be firming up domestically, input costs remain soft with the YoY rate of decline for import prices now up to 1.7%, the weakest import inflation pressure since 2016.

 

Industrial Production, Capacity Utilization, Consumer Confidence: At 8:15 a.m. CT, the January Industrial Production and Capacity Utilization reports are expected to show manufacturing output maintained its recent strength without further acceleration.  At 9:00 a.m., the University of Michigan’s report on consumer confidence is expected to show confidence rebound after plunging in January.

 

TRADING ACTIVITY

Yesterday – Retail Sales Miss Rippled Through Global Markets: Stocks managed a modest intraday recovery Thursday but couldn’t completely overcome early-session damage. Equities sank at the open after December’s retail sales report showed the biggest monthly decline since September 2009. The Dow ended down 0.4% but was off as much as 0.9% within the first half hour of trading. The S&P 500 closed 0.3% lower after falling as much as 0.8%. Not surprisingly, consumer-related stocks suffered with consumer staples down 1.2% and at the bottom of a mixed sector ladder. Shares of Coca-Cola were the biggest drag on the sector, down more than 8% after providing weaker-than-expected 2019 guidance. Financials were the second worst performers as Treasury yields sank immediately on the retail sales data. The 2-year yield closed down 3.7 bps at 2.49% as Fed Funds futures repriced lower in yield; the December 2019 contract ended at 2.38%. The 3-year (-4.6 bps) and 5-year (-5.1 bps) yields also closed within the Fed’s target range. Further out, the 10-year yield dropped 4.8 bps to 2.65%. Even after Thursday’s decline, each maturity remained up on the week. There were mixed reports on trade during the session and the White House confirmed President Trump would indeed sign the spending bill, while concurrently declaring a national emergency to obtain the balance of funds needed for a border barrier. After equity markets closed, the Senate voted 83-16 in favor of the bipartisan spending agreement.

 

Overnight – Trade Talks to Continue Next Week, President Trump Expected to Sign Spending Deal to Avert Shutdown: A day after U.S. retail sales posted their biggest decline since 2009, in a month beleaguered by heightened uncertainty about the global economic outlook, investors were anxious for news on how trade talks in Beijing concluded. So far Friday, Treasury Secretary Mnuchin tweeted about “productive meetings” between the two sides and USTR Lighthizer noted “We feel we have made headway on very, very important and difficult issues.” China’s President Xi said, “Negotiations between both sides have achieved important progress in another step, …Next week, both sides are going to meet in Washington. I hope you keep up the good work, and push for a mutually-benefiting and win-win agreement.” A statement released by the White House confirmed next week’s meeting and said this week’s “detailed and intensive discussions led to progress between the two parties. Much work remains, however.” U.S. stock futures fell with Asian equities, which closed before confirmation that trade talks would continue next week, but recovered and turned positive as Europe rallied. Trade-sensitive sectors have led the Stoxx Europe 600, on pace for its best week since November, to a 0.9% daily gain. Fears of a government shutdown have gradually subsided this week and President Trump is expected to sign the spending deal passed by Congress on Thursday evening. Treasury yields were earlier up between 1.6 bps and 2.2 bps across the curve.

 

NOTEWORTHY NEWS

Fed’s Brainard is Ready to Bring Balance Sheet Normalization to an End: Shortly after the disappointment from December’s retail sales report rippled through global markets, Fed Governor Brainard said on CNBC that “it’s a miss” that “certainly caught my eye.” She added, however, that “It’s one month of data, so I don’t want to take too much signal from it.” Nonetheless, she noted “the risks to the downside have grown, so we’ll have to wait and see what the right move, if any, later in the year is, …Right now we’re in a very good place to watch and see that data as it comes in.” While she wouldn’t get more specific on interest rates, she did offer her opinion on the balance sheet. “In my view, that balance-sheet normalization process probably should come to an end later this year,” she said. She added “We want to have an ample supply of reserves, …We’ve taken some soundings from the market in terms of what that demand for reserves is, and I’d want to have a substantial buffer on top of that to avoid volatility.”