The Market Today

December Spending Data Disappoints as Expected, Core Inflation Firms up to 1.94%


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Core Income Growth Steadies Despite Headline Swings; Spending Disappoints in December as Expected; Core Inflation Firms Up: Today’s data included the release of personal income figures for both December and January, which were affected by some unusual fluctuations at the end of 2019. The first release of December’s income gains showed an unusually large 1.0% surge to close out 2018, the largest since year-end volatility in 2012. Per the Commerce Department’s release, the income spike in December was partly affected by a large increase in dividend income, “primarily reflecting a one-time special dividend payment by VMware Incorporated.” In addition, the income figures captured a jump in farm proprietors’ income, “which included subsidy payments associated with the Department of Agriculture’s Market Facilitation Program.” That program was put in place during trade negotiations with China to help U.S. farmers who were impacted China tariffs on U.S. agricultural products. Excluding those effects, wages were up a solid 0.5% in December. The unusual nature of December’s jump makes January’s 0.1% decline (expected +0.3%) less worrisome. The wage component had another solid month in January, up 0.3% to start 2019.

 

Personal spending was also stronger-than-anticipated in November, rising 0.6% MoM, the second strong month for holiday shopping.  However, December’s spending turned markedly lower, down 0.5% MoM.  At least part of this December weakness was already included in the 4Q personal consumption figures, December’s spending on goods was included while spending on services was not.  As such, this morning’s weaker-than-expected number should cause a slight revision to the 4Q GDP total.  It was to be expected that consumer activity lost momentum in December.  The worst December for the S&P since the Great Depression and a looming government shutdown peppered the headlines causing confidence to tank.  The more relevant question today is how quickly and to what degree activity rebounds.

 

Core PCE Remains Below Fed’s Target: December’s PCE inflation report showed energy prices continued to drag on inflation metrics while core prices rose an as-expected 0.2% MoM. December increase in core prices brought the YoY rate up from 1.92% to 1.94%, still rounding to 1.9%. Within the details, energy prices fell 5.8% month while core categories were mixed. Autos and home furnishings saw lower prices while apparel and recreational goods ticked up. In the services categories, however, pricing pressures were generally firmer than in November. Excluding a large decline in airfares, each services category saw greater price pressure than expected. The net result should be an increased confidence for patient Fed officials who expect core prices to hold near 2%, but not move substantially higher.

 

ISM Manufacturing and Consumer Confidence:  At 9:00 a.m. CT, the February ISM report on manufacturing activity is expected to show a partial pullback after jumping from 54.3 to 56.6 in January.  The index averaged 58.8 in 2018 and hit a high mark of 60.8 in August.  Also at 9:00 a.m., the University of Michigan’s final revision to February consumer confidence is expected to inch higher.

 

TRADING ACTIVITY

Yesterday – Treasury Yields Moved Up Even as Stocks Slipped: Each of the three major U.S. indices retreated into Thursday’s close to end the session down 0.3%. Overnight, Asian stocks had traded lower and Europe was mixed after economic data from China and Japan disappointed and the U.S.-North Korea Summit ended early and without a deal. The related uncertainty was strong enough to offset, in equities, the better-than-expected GDP report released before the U.S. open. The U.S. economy grew 2.6% in 4Q (3.1% YoY) as business spending surprised to the upside and helped offset consumer spending cooling a bit more than expected. On trade, White House economic adviser Kudlow claimed “the progress has been terrific” before Treasury Mnuchin separately stated “the deal is not done yet but we’ve made a lot of progress.” The USTR also officially announced it was legally suspending the scheduled tariff increase, scheduled to take place today, “until further notice.” For the month of February, the Dow rose 3.7% while the S&P 500 closed 3.0% higher. While stocks failed to cheer the solid GDP report, Treasury yields jumped when the report was released and closed higher for a second day in a row. The 2-year yield added 1.6 bps to 2.51% while the 5-year (2.51%) and 10-year (2.71%, highest since February 4) both added just over 3 bps. The month of February was an extremely quiet one for interest rates. The 10-year Treasury yield, which added 8.6 bps on the month, moved within an 11.6-bps range, the tightest since March 1979.

 

Overnight – China Leads Global Equities Higher, Treasury Yields Rise for a Third Session: U.S. equity futures rose overnight as global equities strengthened on the first trading day of March. In response, Treasury yields continued to drift higher and, after three days of gains, the 10-year yield touched its highest level since late January. Equities firmed up across both Asia and Europe and were led by a 2.2% gain in China’s CSI 300. The latest round of manufacturing PMIs showed activity remained tenuous across Asia last month, with four of the seven reported indicating activity contracted in February. While China’s Caixin PMI was among the contractors, the index rebounded notably more than expected (48.5) to a nearly-neutral 49.9. Also making headlines, MSCI announced that it will increase the number of Chinese stocks in its emerging market indices in multiple stages throughout the year, ultimately increasing their weight from 0.7% of the index to 3.3%. The change is estimated to attract tens of billions of dollars in new money into the Chinese market. In the Eurozone, December’s unemployment rate was revised down to 7.8% and was unchanged in January, marking the lowest level of the cycle. Still, core inflation dipped unexpectedly to 1.0% in February. Ahead of this morning’s U.S. economic released, Dow futures (+0.7%) and the 10-year Treasury yield (+2.2 bps to 2.74%) were at their highs of the day.

 

Thursday Full of Fedspeak: Fed Vice Chair Clarida again said, “given muted inflation and stable inflation expectations, I believe we can be patient and allow the data to flow in” before determining any future adjustments to monetary policy. The Fed must balance “(1) being forward looking and (2) maximizing the odds of being right given the reality that the models that we consult are not infallible. For example, were a model to predict a surge in inflation, a decision for preemptive hikes before the surge is evident in actual data would need to be balanced against the considerable cost of the model being wrong.”

 

Atlanta Fed President Bostic didn’t say much about policy but President Harker from Philadelphia indicated that, while he remains in “wait-and-see mode,” his baseline still expects one hike this year and one more in 2020. He said “the economy remains in good shape,” and should grow “a bit above 2 percent” for 2019. He also expects core inflation will run “slightly higher” than the 2% target but clarified he won’t become concerned unless “it rose significantly above that marker.” President Kaplan from Dallas continued to sound cautious, saying he fully supports the Fed’s pause and patience considering the number of downside risks that exist. Thursday evening after markets closed, Fed Chair Powell’s remarks on the near-term outlook at a dinner in New York were unsurprisingly similar to what he told U.S. lawmakers over the previous two days. “Signs of upward pressure on inflation appear muted despite the strong labor market,” Powell said and “we have seen some crosscurrents and conflicting signals about the near-term outlook.” As a result, the Fed will be patient.

 

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