The Market Today
Dovish Tilt from FOMC Overwhelms Better Economic News
by Craig Dismuke, Dudley Carter
November’s Capital Goods Data (Previously Delayed) Expected to Be Revised Higher: This week’s U.S. economic calendar should be less exciting relative to last week’s schedule that concluded with January’s Fed decision and nonfarm payroll report. This morning’s sole report will be January’s Factory Orders report for November. The report, which was delayed by the government shutdown, will also include revisions to previously released data on business investment in equipment. Economists expect slightly positive revisions to the initial estimates that showed declines across both orders and shipments of equipment to U.S. businesses.
Other Economic Reports: Tuesday’s calendar includes two services surveys, one from Markit (less popular in the U.S.) and one from the ISM (more popular in the U.S.). The ISM services PMI is expected to have cooled slightly in January back towards the bottom of its range since mid-2017. Wednesday’s trade balance report is also a catch-up release that includes November data initially delayed by the shutdown. Jobless claims data on Thursday morning and consumer credit activity for December will mark the end of this week’s releases.
Fed Officials To Make Remarks after FOMC Switched to Patience: There are multiple Fed officials that are scheduled to make public remarks this week, and each of them is likely to be asked for color on last week’s more-dovish-than-expected Statement that caught investors somewhat on their heels. Chronologically, comments will be made by Cleveland’s Mester (Monday evening), Governor Quarles (Wednesday evening), Chairman Powell (Wednesday evening), Dallas’s Kaplan (Thursday), Vice Chair Clarida (Thursday), Bullard (Thursday evening), and San Francisco’s Daly (Friday).
Overnight – Quiet Start after Big Moves Last Week, Asia Starts Lunar New Year: Last week’s overstimulation from the Fed’s decision, a U.S.-China trade meeting, nonfarm payroll report, and ISM manufacturing PMI may be partly responsible for the lack of excitement overnight in global markets. In addition, global markets have had little fresh news to respond to Monday, keeping moves modest and yields little changed. Asian volumes will be notably light this week as most major markets in the region, including China, close down in observance of the Lunar New Year. Coming off its best month since October 2015, Europe’s Stoxx 600 had slipped 0.1% midway through the day. U.S. equity futures had earlier moved less than 0.1% into positive territory. U.S. Treasury yields, after being whipped about last week by the Fed’s dovish decision (yields sank) and the combination of a decidedly strong jobs report and unexpected recovery in the manufacturing PMI (yields surged), were up around 1 bps ahead of the U.S. session. The 2-year yield had added 1.0 bps to 2.51% while the 10-year yield was 0.9 bps higher at 2.69%.
ICYMI – January 2019 Monthly Review: Stocks ripped higher in January and Treasury yields declined as the Fed officially pivoted away from its bias for higher rates. The S&P 500 followed up its worst December since the Great Depression (1931) with its best January since 1987 (best month since 2015). Despite signs the global economy continued to struggle to start 2019, the index rose 7.9% as the U.S. and China appeared to make positive progress in trade negotiations and the Fed signaled a policy paradigm change. More dovish rhetoric from a chorus of Fed officials throughout the month culminated with an official pivot towards patience and a pause in the January 30 FOMC Statement. Treasury yields rose with stocks early but split lower after the Fed’s pivot. The 2-year yield ticked down 3 bps to 2.46% while the 10-year yield fell 5.5 bps to 2.64%, its lowest month-end close since December 2017.
ICYMI – February 1, 2019 Weekly Market Recap: Treasury yields were whipped about last week after the Fed officially declared it will be “patient” as it watches the data to decide what “future adjustments” to its policy rate will be needed. The wording change comes just six weeks after the FOMC judged “some further gradual increases” would be needed. In addition, a separate statement from the FOMC said that officials were willing to alter their balance sheet plans, also a divergence from their stance six weeks ago. Yields sank and stocks surged on the announcement. The 10-year yield fell as low as 2.62% by Thursday afternoon before Friday’s wave of strong economic reports pushed yields higher. Another stellar jobs report, a better-than-expected rebound for the ISM Manufacturing index, and a strong November construction spending report all lifted spirits and yields. The 10-year yield closed the week at 2.69%, down 5 basis points from the previous week’s close.