The Market Today
Core CPI Firms and Retail Sales Kick Off Positive Start to 4Q
by Craig Dismuke, Dudley Carter
Today’s Calendar – Core CPI Firms and Retail Sales Kick Off Positive Start to 4Q: CPI inflation rose 0.1% MoM at the headline level (YoY rate down from 2.2 to 2.0%) and 0.2% MoM at the core level excluding food and energy (YoY rate up from 1.7 to 1.8%). Food prices rose just 0.05% MoM and energy prices fell 1.2% MoM helping tamp down the headline increase in prices. However, the core report showed some stability in the larger components. Two of the big three, rents/rent equivalents and medical care prices both showed a little firming after weaker trends recently. Owners’ Equivalent Rent, accounting for 31% of the core CPI calculation, rose 0.32% MoM stemming the decline in the YoY rate of rent growth. Medical Care inflation rose 0.25% MoM also arresting a decline in the YoY rate. The third component of the big three, auto prices, were mixed. New car prices fell 0.22% MoM but used car prices rose for the first time in 2017, up a surprising 0.76% MoM. Apart from those categories, apparel prices and recreation prices both fell 0.11% MoM but education/communication prices and other goods/services prices rose 0.22% MoM and 0.47% respectively.
In the other big report of the morning, October’s Retail Sales were largely in-line with expectations, providing a decent start to the quarter for the consumer. Sales rose 0.2% MoM but were distorted somewhat by a large 0.6% increase in gasoline station sales and a strong 0.7% gain in auto sales (hurricane-related). On a much weaker note, building material sales fell 1.2%. Excluding those big-ticket items, core sales rose 0.3% MoM, as expected, and September’s figures were revised up from +0.4% to +0.5%. as it relates to consumption trends, the report points to personal consumption rising 3% in 4Q, albeit only one month of data. However, heading into the holiday shopping season, sentiment is very high and this report starts the quarter off on an already good start.
Mortgage applications for the week ending November 10 rose 3.1% fueled by a 6.3% increase in refi apps and just a 0.4% increase in purchase apps. Ironically, there was not a precipitous drop in mortgage rates to cause borrowers to refinance during the week. Looking at the 4-week moving averages, refi apps remain weak while purchase apps have pulled back in recent weeks, not a great omen for future sales.
The Empire Manufacturing Index, covering manufacturing activity in the New York Fed Bank region, fell from 30.2 to 19.4 in November, still at a strong level although weaker than the October data. In a disappointing report, Real Average Hourly Earnings fell from 0.6% YoY to 0.4% YoY. At 9:00 a.m. CT, the September Business Inventories report is scheduled for release.
Overnight Activity – Risk-Off Takes Hold Overnight: Ahead of this morning important U.S. economic reports, global markets were trading in risk-off mode. The Japanese Yen strengthened and sovereign yields fell (curves flattened) as crude prices extended their losses from yesterday and equities retreated. Global equities had teetered back and forth in recent sessions awaiting a new catalyst to shift sentiment in one direction or the other. Tuesday’s reversal in oil prices seem to have been enough to tip the scales. Crude prices remain weak overnight and at their lowest levels in two weeks. Wednesday’s risk aversion has lifted the Yen which pushed Japanese equities down more than 1.5% to lead widespread losses across Asia. The disappointment filtered west into Europe where the Stoxx Europe 600 was off 0.86%. The steepest decline in European equities occurred at the open and coincided with a quick move lower in longer yields there. Germany’s 10-year yield moved consistently lower in morning trade and is now down 3.3 bps. U.S. Treasurys followed a similar pattern, doubling an overnight decline when European trading opened. The 2-year yield inched 1.2 bps lower while the 10-year yield dropped 3.0 bps. The flattening shrank the spread between the two maturities to 66.1 bps, a new 10-year low. Despite the Yen’s outperformance, the Euro added to its recent win streak that started back on November 8; the six-day run is the best since 2013. Despite this morning’s tick higher in the YoY core inflation rate and stronger-than-expected retail sales results, the lower Treasury yields have held. The 2-year yield is now down 0.8 bps at 1.68% with the 10-year 4.4 bps lower at 2.33%
Yesterday’s Trading Activity – U.S. Stocks Joined Global Selling, Crude’s Tumble Weighed on Yields, Dollar Dropped as Euro Rallied: Markets succumbed to separate forces Tuesday with the Euro outperforming all major currencies following a strong German GDP report and sovereign yields falling as crude prices tumbled in early morning trade. The Euro had gained steam overnight after the German economy was said to have expanded 0.8% in 3Q. That momentum extended into the U.S. session and the Euro rose for a fifth day (the longest stretch since April 2016) to gain 1.1% (the best daily result since late June) to close at its highest level since October 25. The U.S. Treasury curve saw the biggest shifts of the major sovereigns with the 2-year yield closing up 0.6 bps at 1.69% and the 10-year dropping another 3.4 bps to 2.37%. Yields briefly popped higher after the October Producer Price Report showed slightly stronger-than-expected inflation pressures but reversed lower as a sell-off in crude and U.S. equities ensued. Despite a quick (partial) recovery for U.S. stocks (the S&P dropped 0.2% after falling as much as 0.7% earlier in the day), oil prices remained lower and a drag on sovereign yields. Crude tumbled more than 3% after the IEA released a more conservative outlook for 2018 demand. While it didn’t seem to impact the markets much, tax reform made headlines again after reports indicated that the revised Senate tax plan is expected to include a repeal of the ACA’s mandate.