The Market Today

TODAY’S CALENDAR

Industrial Production and Capacity Utilization – Strong Economy Has Yet to Fill Productive Capacity: At 8:15 a.m. CT, the October reports on industrial production and capacity utilization are expected to show slight improvement in manufacturing output and fractionally tighter capacity.  One interesting point to note, despite the strong labor market and stable economy during this cycle, there remains much more capacity than would be expected based on historical relationships (see Chart of the Day).  The recent run-up in manufacturing output has helped fill some of the spare capacity, but the economy does not appear to be close to inflationary-type capacity constraint.

 

Also released at 10:00 a.m. CT will be the Kansas City Fed Manufacturing Index.

 

TRADING ACTIVITY

Yesterday – Stocks Recover in Afternoon Trade, Helping Lift Yields Off Their Lows: U.S. stocks rose after a mixed global session as tech recovered to the lead the S&P 500 up 1.1% and to its first gain in six sessions. Chinese shares led an up day in Asia after reports that the country had planned some level of concessions to the U.S. on trade, sparking hopes of a possible cooling of the ongoing trade dispute. There were conflicting reports and developments on trade during the U.S. session, with the USTR denying a report he had said further China tariffs were on hold and Commerce Secretary Ross stating the meeting between Presidents Trump and Xi later this month would focus on the “big picture.” Ross also noted he ultimately expects a deal but the plan to raise the 10% tariff rate to 25% in January was still in place. European equities fell after a couple of members of PM May’s cabinet resigned over the agreed-upon Brexit plan and numerous members of her party wrote letters in support of a no-confidence vote. At one point, the British 10-year yield had plunged 16 bps, the most since the 2016 Brexit vote. Back in the U.S., the S&P 500’s tech sector gained 2.5% and energy shares rose 1.5% as crude strung together two days of gains for the first time since October. Crude ended higher despite the largest U.S. inventory build since February 2017 as a measure of demand climbed to a record high. Materials and industrials companies also averaged a greater-than-1% gain amid increased hopes of positive trade developments. The afternoon rally for stocks helped lift Treasury yields off their lows of the day. The entire curve had moved roughly 4 bps lower as U.K. yields sank but ended down between 1.2 bps and 1.9 bps between two and 30 years.

 

Overnight – Tech Weakness Leads Pullback in U.S. Futures: U.S. futures point to the major indices giving back some of yesterday’s gains as tech shares have retreated. Nasdaq contracts were down more than 1.4% after a mixed global session in which tech closed near the bottom of most major indices. Shares of Nvidia, a U.S. producer of technology chips and cards, sank more than 17% in overnight trading after the company warned on 4Q revenue and reinforced fears about a broader slowdown in the semiconductor space. Shares in Europe jumped early after a mixed session in Asia but have slowly fallen back into negative territory. Energy companies are a rare gainer Friday as oil prices strengthened for a third day. Investors believe OPEC could announce a production cut sometime soon amid the rapid price decline and in response to its forecast for slower 2019 demand. Yields in the U.K. and the British Pound both recovered a bit on Friday after plunging Thursday on heightened uncertainty around Brexit. U.S. stock futures were modestly negative during Asian trading but accelerated to the downside as European markets gave up gains. Treasury yields showed less certainty, flipping above and below yesterday’s closing levels. As equity futures move to new lows, the 2-year yield dropped 1.1 bps to 2.84% while the 10-year yield slipped 2.0 bps to 3.09%, both the lowest yields since October 29.

 

NOTEWORTHY NEWS

Bostic Supports Slowly Moving to Neutral: Atlanta Fed President Bostic said Thursday, “Inflation is effectively at the FOMC’s longer-run 2 percent objective” and “we are very close to the FOMC’s other key goal — promoting maximum sustainable employment growth. Possibly, we have gone some measure beyond.” So the “Conditions warrant the final steps in removing any remaining accommodation and adopting a neutral stance of monetary policy.” Bostic added “I don’t think we are too far from a neutral policy, and neutral is where we want to be, …I am inclined to think that a tentative approach as we proceed would be appropriate.” Doubling down on his desire for gradually moving forward with additional rate increases, so as to avoid “short-circuiting an otherwise sustainable expansion,” he reiterated “I can think of no superior approach than to proceed cautiously and keep a keen eye on the data.” On other topics, he’s watching the Brexit developments, which could have “significant” implications, and said his business contacts are delaying investment because of tariffs.

 

Fed Discloses Plan to Review How It Pursues Its Congressional Mandate: A press release posted to its website Thursday after lunch said that “The Federal Reserve next year will review the strategies, tools, and communication practices it uses to pursue its congressionally-assigned mandate of maximum employment and price stability.” In included a quote from Fed Chair Powell that, “’With labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy.’” The process will include a Fed-funded research conference in early June “with speakers and panelists from outside the System,” as well as “a series of public events around the country to hear from a wide range of stakeholders.” The Fed said it will study and discuss the information received through those efforts and report back with its findings.

 

Powell Said Wage Growth Makes Sense, Kashkari Wants to Quit Raising Rates: Fed Chair Powell’s Thursday comments were less comprehensive than those the day before, adding only that “the job creation space is very good. Wages have now moved into a range that makes sense given productivity and inflation.” His colleague from Minneapolis, Neel Kashkari, also discussed wages in a separate appearance, saying they’re up but not yet at inflationary levels. In defense of his argument for no more rate hikes, he said “There’s been more slack in the labor market than we had appreciated,” and “we’re not yet seeing signs of an economy that’s overheating.” If that changes, he noted, “If we see signs of inflation picking up, or inflation expectations picking up, we could always raise rates then.”

 

The Senate Confirmed Bowman as Fed Governor: Michelle Bowman, a banking regulator from Kansas, was confirmed by the Senate in a 64-34 vote to fill one of the remaining three vacancies on the Federal Reserve Board of Governors. Bowman will fill a slot on the Board saved for someone considered an expert on the community banking space. With Bowman confirmed, there are now two Trump nominees left in Senate-confirmation limbo, Marvin Goodfriend and Nellie Liang.