The Market Today
Disappointing Economic Data Ahead of ISM and SOTU
by Craig Dismuke, Dudley Carter
ISM Index to Give Needed Insight into Direction of Real Economy: The January ISM Manufacturing index is expected to tick lower, from 57.6 to 57.1, at 9:00 a.m. CT. Being a broad indicator of economic activity, the release is arguably the biggest piece of economic news this week, particularly given the better-than-expected rebound in the manufacturing survey last week. The jury is still out on how stable the economy is coming out of the year-end volatility. At 8:45 a.m., the final revision to the January Markit services PMI is scheduled.
State of the Union Likely to Focus on Trade and Immigration: The president is scheduled to deliver his State of the Union Address tonight at 8:00 p.m. CT with low expectations for any market-moving news. Markets could respond if the president were to announce new progress in the U.S. China trade discussions, or if he were to sound closer to declaring a national emergency on border security.
Yesterday – Friday’s Momentum Kept Yields Higher: U.S. Treasury yields climbed for a second session, tacking on between 3 bps and 4 bps to last Friday’s snap higher. Treasury yields made an even sharper move up last Friday after nonfarm payrolls hurdled expectations with ease and the ISM manufacturing PMI recovered unexpectedly in January from a deep December plunge. Friday’s strong U.S. data gave investors reason to question whether their reading of Wednesday’s Fed decision, that a planned pause would in fact become permanent, was too swift. The carryover of Friday’s upward momentum combined with a solid day for U.S. equities and reports of heavier investment grade supply to keep rates up on the day. The tech sector led the S&P 500 0.5% higher ahead of Alphabet’s (Google) earnings that closed out results for the popular FAANG group. Industrials were the second best performing sector after the U.S and China announced last Thursday further progress on trade negotiations. China said it planned to buy more U.S. goods, soybeans to start, as negotiators work towards a broader agreement before a key March 1 deadline. The Dow gained 0.4% while the Nasdaq outperformed with its 0.9% gain. By the close, the 2-year yield was 3.4 bps higher at 2.54% with the 10-year up 3.9 bps at 2.72%.
Overnight – U.S. Equities Strengthen with European Markets: Most markets are closed across the Asian Pacific for the Lunar New Year leaving a solid day for European equities as the only real news to report. The Stoxx Europe 600 was higher by 0.9% midway through its trading day. Despite lower oil prices overnight, strong earnings from BP pushed the company’s stock price up nearly 5% and the energy sector to outperform its peers. If the broader strength holds, the index will have strung together six days of gains for the first time since September. The steady recovery that’s lifted global equities this year following December’s collapse has pushed the Stoxx 600 to its highest level since mid-November. European yields have tracked equities higher and made a modest tick up after the Eurozone’s January PMI was revised up modestly. Even with the revision, the index remains at a more-than-five-year low. U.S. futures rose as European equities advanced and Treasury yields had added modestly to two days of stronger increases. Futures on the S&P 500 were 0.2% firmer while the 2-year (2.53%) and 10-year (2.72%) Treasury yields gave up their overnight gains to move back closer to unchanged.
No Upward Revisions to November’s Disappointing Business Spending Estimates: November’s Factory Orders report, previously delayed by the government shutdown, was worse than expected and didn’t include the positive revisions to previous business spending estimates economists had expected. Total factory orders were expected to rise 0.3% but instead slipped 0.6% from October despite positive gains in the volatile transportation categories. Stripping out the effects of strong aircraft orders, activity was down an even-worse 1.3%. Adding to the disappointment was a drag from the important capital goods categories, a key indication of how much businesses spent on equipment during the month. Capital goods orders were unrevised at -0.6% versus expectations for a smaller 0.1% loss. Shipments, initially estimated down 0.1% and expected to be revised to flat for the month, fell 0.2%. The biggest drag came from the largest orders category, machinery manufacturing equipment. The softer business orders extends the disappointment that started after a strong July and is consistent with other effects of the late-year uncertainty that weighed on markets and economic activity.
Senior Loan Officer Survey Supports Headwinds FOMC Saw for Financial Conditions’ Effect on the Outlook: A downbeat assessment from the Fed’s most recent Senior Loan Officer Opinion Survey comes less than a week after the Fed signaled a pause of its interest rate normalization amid growing “cross-currents”, including slower growth and tighter financial conditions, affecting the outlook. The January 2019 survey’s description of activity over the last three months (4Q), “Regarding loans to businesses, respondents to the January survey indicated that, on balance, banks tightened standards for commercial real estate (CRE) loans, while standards and most terms on commercial and industrial (C&I) loans remained basically unchanged. Meanwhile, demand for loans to businesses reportedly weakened. …For loans to households, banks reported that their lending standards for most categories of consumer loans and residential real estate loans remained basically unchanged on balance. Credit cards were the one exception, with standards reportedly tightening over the fourth quarter. Meanwhile, banks reported weaker demand for all categories of loans to households. …In addition, the survey included a set of special questions inquiring about banks’ expectations for lending policies and loan performance over 2019. Banks reported expecting to tighten standards for all categories of business loans as well as credit card loans and jumbo mortgages. Demand for most loan types is expected to weaken, on net, with the one exception being credit card loans, for which demand is expected to remain unchanged. Meanwhile, banks anticipate that loan performance will deteriorate for all surveyed categories.”
Mester Says Fed Policy is “Well-Calibrated” for Now: Cleveland Fed President Mester spoke Monday evening after markets closed, throwing her support behind the Fed’s “wait-and-see” approach that was made official in last Wednesday’s FOMC decision. Mester said “the economy is in a very good spot” and “inflation is near 2 percent and does not show signs of appreciably rising.” She believes that “for the time being, is well-calibrated to the economic outlook and the risks around that outlook.” She summarized a more detailed discussion of our economic outlook by saying, “Overall, in my view the most likely outcome is that the economic expansion will continue this year, with growth moving down to a more sustainable pace, at or slightly above trend. But the move may not be a smooth one and there is uncertainty around the forecast. Slowing global growth, uncertainty over trade policy, tighter financial conditions, and the downturn in sentiment pose risks to this forecast and bear watching.” If her most-likely scenario unfolds, “the fed funds rate may need to move a bit higher than current levels.”
Powell Meets Trump for Dinner: After months of public ridicule from the President for their continued tightening of policy through the end of 2018, Fed Chair Powell and Vice Chair Clarida were invited to dinner at the White House on Monday evening. According to the Federal Reserve’s press release, “At the President’s invitation, Chair Powell and Vice Chair Clarida joined the President and the Treasury Secretary for an informal dinner tonight in the White House residence, to discuss recent economic developments and the outlook for growth, employment and inflation. … [Powell] did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook. …Finally, Chair Powell said that he and his colleagues on the FOMC will set monetary policy in order to support maximum employment and stable prices and will make those decisions based solely on careful, objective and non-political analysis.”