The Market Today

TODAY’S CALENDAR

Manufacturing Pain Rolls into the New Year, Producer Prices Reflect Less Pressure: Today’s U.S. economic schedule consists of two second-tier reports that will almost certainly be overshadowed by corporate earnings results, any developments from Washington on the government shutdown, and a parliament vote in the UK on the government’s Brexit deal. The New York Fed’s manufacturing survey was a noteworthy disappointment, falling from 11.5 in December to 3.9 in January, the lowest reading since May 2017. In the details, new orders and employment both posted steep declines as almost every current indicate moderated month over month. Another disappointing reading on manufacturing shows a continued dour outlook amid ongoing trade tensions. An index tracking expectations for general business conditions six months from now dropped to its lowest level since February 2016. Producer price inflation was slightly weaker than expected in December as lower energy prices continued to weigh on measures of price pressures. Headline prices fell 0.2% MoM while core prices, which remove food and energy, dropped 0.1%. There was weakness in retail pricing and consumer airfares while business equipment costs were a bit firmer. On a YoY basis, core producer price inflation was unchanged at 2.7% compared with expectations for a firmer 2.9%.

 

Later today, Fed Presidents Kashkari (10:30 a.m. CT), George (Noon), and Kaplan (Noon) will all make remarks in separate appearances. Kashkari’s view that the Fed shouldn’t raise rates any further is well known. In early January, Kaplan said the Fed should pause to allow for key issues such as market volatility and global growth indications to clear up. Most interesting could be comments from Kansas City’s George, previously a proponent for the Fed continuing to raise rates. Investors will listen to see if George, who votes on policy this year and speaks publicly less frequently than most of her colleagues, adds her name to the list of officials content with being patient on policy in the first half of 2019.

 

TRADING ACTIVITY

Yesterday – Stocks Joined Global Decline Following Weak Chinese Trade Figures: U.S. stocks struggled to start the week in a day where equities pulled back globally following downbeat trade data out of China. Unexpected declines in Chinese imports and exports tripped up investors as they added to worries that the global expansion’s legs were becoming increasingly wobbly amid the ongoing trade uncertainty. The Dow, which never ticked above Friday’s close, slipped 0.4% while the S&P 500 fell a slightly stronger 0.5%. Tech companies, which have been put under a microscope since Apple warned two weeks ago that slower activity in China has hit its revenues more than expected, slumped to leave the Nasdaq down a days-worst 0.9%. Ten of the S&P 500’s 11 sectors slipped while financial companies recovered from an early drop to post the sole positive finish. Earlier, disappointing revenue revenues from Citi had weighed broadly on the sector. Utilities were the worst performing sector, dragged down by a more-than-50% drop in shares of PG&E in response to reports the company was planning to file for bankruptcy protection. Treasury yields recovered from larger declines in the overnight session to end the day little changed. The 2-year yield dipped 0.6 bps to 2.54% while the 10-year yield edged up 0.2 bps to 2.70%.

 

Overnight – Mixed Market Response to Confluence of Factors that Could Keep Investors on Their Toes Tuesday: Global markets were mixed but relatively stable overnight despite facing event risks on multiple fronts on Tuesday. Shares in China rose more than 2% to lead widespread gains in Asia while Europe was broadly unchanged and U.S. futures tilted positively on strength in tech. Weak trade data from China and the negative implications for global growth was blamed for global equity weakness on Monday. Tuesday’s gains were credited in part to Chinese government officials pledging more stimulus, including tax cuts “on a larger scale”, to support economic activity. Data also showed credit growth in China was stronger than expected in December. In Europe, Tuesday’s major focus will be the UK Parliament vote on PM May’s Brexit deal expected sometime during U.S. trading. However, investors also likely took stock of a disappointing growth figure out of Germany. The German economy grew 1.5% in 2018, down from 2.2% in 2017, and the weakest pace since 2013. In the U.S., Dow futures turned negative after JPMorgan missed on both revenues and earnings, just a day after Citigroup’s revenue fell short of estimates. It marked the first time JPMorgan has misses estimates for both metrics since the third quarter of 2015. Some positive banking results were offset by the biggest decline in fixed income trading revenue of the cycle. Most portions of the Treasury curve were down around 1.0 bp.

 

NOTEWORTHY NEWS

Fedspeak and Former Fedspeak: Fed Governor Clarida had his boss’s back on Monday, saying they “don’t vote on the dots” when asked about the two hikes projected for 2019. He again said the Fed could afford to be “very patient”, adding “we’re going to take this meeting by meeting.” He said, “Some of the global growth data have been softening” but “it doesn’t look severe now” and hasn’t materially affected the U.S. economy, which is starting 2019 with “good momentum.” Former Fed Chair Janet Yellen was also on the wires Monday and addressed what a global slowdown that does affect the U.S. could mean for her former colleagues at the Fed. She told listeners at a retail conference in New York that “If there is a downturn in the global economy and that spills into the U.S. …It’s very possible we may have seen the last interest rate hike of this cycle.”