The Market Today

TODAY’S CALENDAR

CPI Inflation Largely As-Expected, but Soft Month for Housing Inflation: Consumer price inflation for the month of October rose slightly more than expected, up 0.36% MoM on modest core inflation and a 2.7% MoM increase in energy prices.  The firmer headline reading pushed the year-over-year rate of gain from 1.7% to 1.8%.  Excluding food and energy, core prices rose 0.16%, fractionally softer than anticipated, bringing the year-over-year rate down from 2.4% to 2.3%.  The details of core consumer prices were mixed and volatile.  Housing inflation excluding energy rose just 0.06% on an unusually soft month for rent equivalents.  Owners’ equivalent rent prices, which have been the core driver of stable core inflation, rose just 0.18% in October (12m avg. +0.27%).  Adding to the housing weakness, lodging prices fell 3.84%, continuing their streak of big month-over-month fluctuations. In contrast to soft housing inflation, medical care prices jumped 0.96% MoM (12m avg. +0.35%) on outsized increases in medical care commodities (+1.22%) and hospital and related services (+1.24%).  Rounding out the big three categories, transportation inflation fell 0.03% when excluding motor fuels.  New car prices dropped 0.17% MoM while used car prices increased 1.32%.  The year-over-year rate of medical care inflation has now more-than doubled this year to 4.3%.  The smaller categories showed no discernible trend in October with apparel prices down sharply (-1.77%) but recreation (+0.74%), education and communication (+0.05%), and other goods and services (+0.23%) all seeing above-trend inflation.

Bottom line: October CPI report gives no indication that consumer inflation is either accelerating or slowing.  The soft report for rent equivalents and the recent strength for medical care inflation will both be important to watch going forward.

Fed Chair Powell Heads to The Hill: Fed Chair Powell will address the Joint Economic Committee of Congress this morning at 10:00 a.m. CT.  Investors will be listening for any nuanced difference in Powell’s view following two weeks of positive trade developments.  At 12:30 p.m., Minneapolis Bank President Kashkari is scheduled to speak followed by Philadelphia’s Harker at 6:30 p.m.

Mortgage Applications Rise But Purchase Apps Remain Broadly Flat: Mortgage applications for the week ending November 8 jumped 9.6% on a 5.1% increase in purchase apps and a 12.9% gain in refi apps.  Mortgage rates inched higher during the reference week, with the 30-year rate up from 3.98% to 4.03% and the 15-year up from 3.38% to 3.43%.  The broad trend for applications remains positive for refinancings, despite having pulled back in recent weeks, and flat for home purchases.

YESTERDAY’S TRADING

President Trump Praised the Economy but Didn’t Tip His Hand on Trade: With a quiet economic calendar and few headlines of any consequence, President Trump’s lunchtime speech at the Economic Club of New York was Tuesday’s marquee event. Yields and stocks drifted lower into his remarks which were wide-ranging across an array of topics (more below). After much anticipation, there was little trade news broken during his hour-long address, as he struck a balance between sounding optimistic that a trade deal “could happen soon” while holding steadfast in his pledge to raise tariffs “substantially” if one doesn’t. Stocks closed mixed and little changed for a second day while Treasury yields edged back after rocketing higher last week.

Stock and Yields Closed Little Changed After President Trump’s Remarks: The Dow closed exactly unchanged at Monday’s record close while the S&P 500 rose less than 0.2% but finished shy of its all-time high. The Nasdaq gained the most, adding 0.3% to a new historical high. Signs of progress toward the phase one trade deal last week sent yields surging, with the 2-year yield adding 12.3 bps over the five-day period as the 10-year yield jumped 23.2 bps. After Monday’s holiday break, the 2-year yield fell 1.2 bps Tuesday to 1.65% while the 10-year yield pulled back 0.7 bps to 1.94%, although both closed well off the lows following a late-day jump.

OVERNIGHT TRADING

Global Equities Soften as Caution Returns: After rallying sharply recently on positive trade developments, global equities pulled back Wednesday and haven assets strengthened after President Trump’s speech on Tuesday left the veil over the possible timing of a phase one trade deal with China. The lack of clarity returned investors’ focus back to tensions in Hong Kong and a cautiousness on the trade outlook. Hong Kong’s Hang Seng index slipped 1.8% overnight after a slight recovery Tuesday from Monday’s 2.6% tumble. After escalating over the weekend, tensions in Hong Kong remain high as protests have continued. Asia stocks were broadly weaker with the MSCI Asia Pacific Index down 0.9%.

Deadline on EU Auto Tariffs Looms: A similar trend unfolded across Europe as widespread losses, led by peripheral countries, dragged the Stoxx 600 down 0.4%. While data showed Eurozone industrial production rose unexpectedly in September, concerns around possible trade tensions with the U.S. weighed. There was speculation that President Trump could announce yesterday that he was delaying the deadline, set for tomorrow, on deciding whether to impose tariffs on autos imported from the EU. While most still expect a delay, the president instead said the EU was in many ways worse than China with their “terrible, terrible” trade barriers.

Treasury Yields Fall Before Inflation: U.S. equity futures were similarly weak and the stronger bid for safety has pushed Treasury yields lower. Ahead of this morning’s CPI report, the 2-year yield had declined 2.4 bps to 1.64% while the 10-year yield dropped 5.0 bps to 1.88%. Those levels generally held after mixed CPI data showed stronger headline inflation but subdued core price pressures.

NOTEWORTHY NEWS

President Trump Extols Economic Successes but Stays Balanced on Trade Expectations: In his Tuesday speech, President Trump lauded the recent rate of economic growth and strong labor market which he credited to his administration’s tax cuts and focus on rolling back burdensome regulations. He said the economic results had surprised most experts’ expectations and come to pass despite the Fed moving too fast in raising rates 2.00% since his election and, in his opinion, being too slow to lower them. But the major point of angst ahead of the speech was uncertainty around any possible commentary on trade. After rattling off the usual list of offenses China has carried out in its quest in becoming an economic power, President Trump said “They are dying to make a deal, …We’re close. A significant phase one trade deal with China could happen, it could happen soon.” However, he later noted in response to a question that “If we don’t make a deal, we’re going to substantially raise those tariffs.” He was asked about the economic costs of a trade war, through the negative impact the uncertainty has had on business investment. He said “the real cost would be if we did nothing,” a plan he said had been implemented by previous administrations which “was killing us.”

Fed Officials Shun Negative Rates: Philadelphia Fed President Harker said Tuesday that he did not support the Fed’s rate cut in October, but noted the Fed should “stay put for now to see how things work out.” “I think we’re about at neutral,” Harker added, and “if anything we might be slightly accommodative, which is okay by me.” He’s not concerned about a small inflation miss, but would become worried if inflation expectations started to move lower. On negative rates, Harker said the bar is “extremely high” for him to consider the divisive policy tool. Earlier in the day, President Barkin from Richmond also said he wouldn’t favor using a negative rate in a downturn.