The Market Today

Disposable Income Gets Huge Boost From Tax Savings

by Craig Dismuke, Dudley Carter


Disposable Income Gets Huge Boost from Tax Savings:  January’s personal income report showed stronger-than-expected gains in income, up 0.4% MoM, while personal spending rose in-line with expectations, up 0.2%.  However, the biggest news of the report was the effect of tax reform on personal income.  Tax and non-tax payments fell a huge 3.3%, which pushed disposable income up an equally impressive 0.9% MoM.  After controlling for inflation, real disposable income rose 0.6% MoM.  This is exactly the boost in personal income expected to lift consumption in 2018 and create even-faster growth.  Given that spending was not as strong as the gains in income, the savings rate jumped a needed 0.7% to 3.2%.  Also released this morning, January’s PCE inflation data showed core inflation up 0.3% MoM to 1.5% YoY.  This was as-expected.  Initial jobless claims fell to yet another 48-year-low of 210k for the week ending February 24.


At 9:00 a.m. CT, the January Construction Spending report is expected to show a 0.3% MoM increase in activity, hopefully one of the few sectors starting off 2018 on a positive foot.  Also scheduled is the February ISM Manufacturing Index which is expected to tick down from very high levels recently, but remain strong.


More Testimony from Powell and Possible White House Announcement of Tariffs to Dominate Headlines Today: The bigger events this morning will no doubt be new Fed Chair Powell’s testimony before the Senate Banking Committee.  On Tuesday, Powell roiled the markets during his House testimony when he sounded a more hawkish tone than his predecessor.  His remarks appeared to be less focused on micro-nuancing his message, not caveating his optimism over the recent run of strong data and more focused on the 30,000-foot view.  Stocks haven’t responded well to his testimony with the Dow falling 299 points on Tuesday and another 380 points yesterday.  Also on today’s radar is a possible announcement from the White House on steel and aluminum tariffs which could have significant repercussions for international trade. After the Commerce Department made recommendations including a 24% global tariff, reports from Washington indicate the President is leaning toward a 25% tariff on steel and 10% on aluminum.  An announcement of any protectionist trade policy will likely roil the markets further.



Yesterday – Stock Sell-off Sent Treasury Yields to Close Near the Lows of the Day: Wednesday’s market moves were relatively benign until a bit of excitement during the last several hours of trading. Stocks spent most of the morning in positive territory and longer Treasury yields were only modestly lower after slipping overnight. However, stocks began to sell-off after lunch and the major indexes finished near the lows of the day. The Dow ultimately fell 380 points, or 1.5%, after gaining as much as 166 points, or 0.7% earlier in the day. The S&P ended down 1.1% after gaining as much as 0.6% intraday. For the month of February, the Dow and S&P both had their worst months in more than two years. As the stock selling gathered momentum, longer Treasury yields added to their overnight declines and higher shorter yields reversed. Most portions of the curve finished near their daily lows. The 2-year yield dropped 1.0 bp to 2.25% as the 5-year yield ticked down 2.0 bps to 2.64% and the 10-year yield fell 3.3 bps to 2.86%. And while the equity weakness was broad-based, energy companies led losses with a more-than-2% decline. A pullback in crude prices likely played a role, as rising stockpiles of crude and gasoline and another month of record production weighed on sentiment. Despite all of the negativity, the Dollar strengthened against every major currency except the Yen to its highest level since January 15.


Overnight – Longer Yields Continued to Move Lower as Equities Continued to Face Pressure: Global equities are mostly lower again Thursday after U.S. stocks gave up early gains Wednesday to close down and at intraday lows for a second consecutive session. Ever since Fed Chair Powell gave Congress an upbeat update to his economic outlook on Tuesday, stocks have struggled to sustain positive momentum. Markets have repriced fed funds futures to reflect a 100% chance the Fed will hike three times in 2018 and begin considering the risk they could do more. With Powell set for day two of his testimony, this time before a group of senators, markets will look to see if he tries to soften at all his previous remarks. U.S. futures are lower and European equities are down 1%. Safer sovereigns assets continue to benefit from shakier risk sentiment with prices being bid up and yields being pushed down. The German 10-year yield is down 3.0 bps with the 10-year Treasury lower by a larger 3.5 bps.



Pending Home Sales Plunged to Start 2018: The trends in January’s housing data didn’t get any better in yesterday’s pending sales report that showed activity slowed 4.7% MoM instead of the 0.5% gain that was expected by the median economists. In addition, the initial 0.5% rise in December was revised down to unchanged and offset a smaller 0.1% positive revision for November. The 4.7% drop in pending sales to start 2018 was the biggest monthly decline since May 2010 and points to more potential pain for existing sales in the coming months. According to the NAR’s chief economist, “There’s little doubt last month’s retreat in contract signings occurred because of woefully low supply levels and the sudden increase in mortgage rates. …With the cost of buying a home getting more expensive and not enough inventory, some prospective buyers are either waiting until listings increase come spring or now having to delay their search entirely to save up for a larger down payment.” According to Fannie Mae, the national average of the 30-year homeowner commitment rate averaged 4.03% in January compared with 3.95% in December. Looking ahead to what may play out in future reports, the same rate averaged 4.33% in February.

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