The Market Today
Confidence Pulls Back, Trade Deficit Widens
by Craig Dismuke, Dudley Carter
Today’s Calendar – Trade Deficit Widens on Strong U.S. Demand: After two days with moderately important, non-market-moving economic reports, this morning’s data is likely the most influential of the week with the November Advanced Goods Trade Balance report showing a $1.8 billion larger-than-expected decline in the trade balance. After stabilizing around a $62 billion per month goods trade deficit from 2014 to 2016, the monthly deficit began to increase in 2017. While this is reflective of healthy U.S. demand for imported goods, it is also a drag on the overall GDP tally. Through two months of data, it appears that external trade will be a meaningful drag on 4Q GDP. In contrast, the November inventories data were encouraging at both the wholesale and retail levels. Wholesale inventories rose 0.7% (exp. +0.3%) and retail inventories increased 0.1%. An inventory build will offset some of the drag from external trade. Initial jobless claims for the week ending December 23 were unchanged from the previous week at 245k.
Overnight Activity – Dollar Hits a Three-Month Low Despite a Partial Recovery for Treasury Yields: Markets were mixed again overnight although the sentiment seemed evenly split between Asia and Europe. European equities are modestly weaker despite Asian equities closing mostly higher. Volumes remained depressed across all regions. Japan’s Nikkei faltered the most in Asia even after data showed retail sales and industrial production were stronger than expected in November. Sovereign yields in Europe have edged higher which has helped Treasury yields recoup a portion of yesterday’s slide (more below). The German 2-year yield is 2.5 bps higher to -0.66% while the 10-year yield has risen by a slightly smaller 2.3 bps to 0.40%. The ECB’s December Economic Bulletin noted that “an ample degree of monetary accommodation is still needed” to help lift inflation towards target but highlighted that the “economic expansion continues to be solid and broad-based across countries and sectors.” The Euro was stronger overnight and nearing the $1.20 mark which is the strongest of the year (and nearly the strongest in three years). December continues to be unkind to the Dollar which softened against all major currencies and is at its weakest level in three months (September 25). U.S. equity futures were pointing to a positive start and Treasury yields rose to pare yesterday’s decline. The 2-year yield added 1.0 bps to 1.90% while the 10-year yield was up 1.3 bps to 2.42%.
Yesterday’s Trading Activity – Treasury Rally Stole the Show as Stocks Barely Budge: Stocks managed only marginal gains Wednesday while the moves in Treasurys were more marked and meaningful. The Dow was positive for almost the entire session but it was a bout of late-session buying that salvaged the day for the S&P. Within the S&P, energy companies finished at the bottom of the board, giving up some of their recent gains as crude prices moderated. Offsetting those losses were 0.4% gains in two sectors that usually benefit from falling interest rates. Those sectors, utilities and real estate, finished in the first and second spots and were helped by solid gains in industrials and health care companies. The rally in rate-sensitive stocks was sparked by the sharp move lower and flatter in the Treasury curve. The 2-year yield fell 2.2 to 1.89% but it was tumbling yields further out that were the focus. The 10-year yield dropped 6.5 bps to 2.41% and the 30-year yield sank 7.9 bps to 2.75%; both were the biggest single-day drops since early September and the lowest closing yields since last Monday (before the excitement surrounding passage of the tax plan). The shifts briefly sent the spread between the 2-year and 10-year Treasury to below 51 bps which marked a new low for the cycle (October 2007). The Dollar tracked yields lower to close at its second weakest level of the month (December 1).
Pending Home Sales Point to Continued Stability for Existing Home Sales Activity: Pending home sales were subtly stronger in November but the modest 0.2% improvement was better than the 0.4% decline expected. An outsized 4.1% gain for activity in the Northeast was offset by a 1.8% decline in the West. There were more modest changes to contract signings in the Midwest (+0.4%) and South (-0.4%). Compared with a year ago, pending sales were up just 0.6%. November’s small improvement points to continued stability in future sales of existing homes which have been on a hot streak over the last several months.
Consumer Confidence Comes Back to Earth: Consumer confidence tumbled in the Conference Board’s December survey as the future expectations index sank to a 13-month low and offset a small improvement in the current assessment. After reaching a 17-year high in November, the measure fell from a revised 128.6 to 122.1 (expected 128.0). In the current assessment, business conditions were seen as fractionally more favorable but the employment outlook leveled off; the labor market differential – jobs plentiful less jobs hard to get – edged down from a 16-year high. The bigger moves, however, were in the future outlook. More consumers expected business conditions and available employment to soften over the next six months; the percentage expecting fewer available jobs rose to the highest since the election. On a positive note, the difference between those expecting incomes to rise versus fall rebounded and returned to its steady uptrend. As to potential economic activity, fewer expected to purchase an auto while more say they could buy a home or major appliance. Looking at the market metrics, the share expecting higher interest rates or higher stock prices was slightly weaker. Overall, the report was disappointing but the moderation in most key components was from extremely positive levels. Considering the index remains elevated in a longer lookback period (December was still the fourth best month since 2000) and consumers continue to expect incomes to improve, personal consumption should continue to be a driving force for the economy into 2018.
Companies Take 2017 Hit from Tax Bill But See Brighter Future: As reported yesterday in the WSJ, “Royal Dutch Shell PLC and Barclay Bank PLC said they would take large charges attributable to the U.S. tax overhaul—joining a parade of global firms in recent days disclosing how American tax-bill changes will affect their bottom line. … Shell estimated its U.S. tax-related charge in the fourth quarter could amount to between $2 billion and $2.5 billion, stemming from a reduction in the value of its deferred tax assets. Companies can log such assets during unprofitable periods and can use them to offset future tax payments. Those assets—essentially credits toward future tax payments in the U.S.—are worth less on paper after the tax overhaul sharply reduced headline corporate tax from 35% to 21%. … Barclays, meanwhile, said it would take a noncash charge of £1 billion ($1.3 billion) in the fourth quarter, citing similar changes in the value of its deferred tax assets and liabilities. The charge, combined with other restructuring costs, is expected to push the U.K. bank to a net loss for the year.” However, the companies also said that the hit is temporary and are optimistic about the impact of tax reform on future earnings.