The Market Today

ECB Backs Off “Normalization”

by Craig Dismuke, Dudley Carter

Initial Jobless Claims Remain Positive But Other Labor Data Points to Weaker Payroll Report on Friday: Initial jobless claims for the week ending March 2 fell 3k to 223k, repeating a firmer tone for the labor market for a third consecutive week.  Also released this morning, the Challenger Job Cut announcement showed the largest number of monthly job cut announcements in February (76,835) since July 2015.  This marked a 45% increase from January’s announcements and a 115% increase from February 2018’s announcements. Heading into tomorrow’s nonfarm payroll report, the leading indicators point to a slowing of job growth.  Jobless claims during the observation period for the payroll report rose, both ISM indices showed weaker results on employment, the Empire Fed index pointed to weaker job gains, the economic data have broadly slowed, and the 304k result for January was well above the trend rate of growth.


Nonfarm Productivity Report Shows Slower Growth in Hours Worked But Better Gains in Productivity: The 4Q nonfarm productivity report from the BLS showed a stronger rate of productivity gains than expected, rising 1.9% during the quarter, although this result was offset by a weaker revision to the 3Q productivity gains (revised down from +2.3% to +1.8%). The 4Q average for nonfarm productivity rose to 1.8%, the second-best pace of the expansion.  However, productivity remains remarkably tame for a recovery/expansion, averaging a meager 0.9% since the end of the recession.  Nonetheless, overall output slowed from 4.0% to 3.1% despite the improved productivity as the growth in hours worked slowed from +2.1% to +1.2%.  Per-hour labor costs rose 2.4% (inflation adjusted), the strongest pace of the year.  Total unit labor costs, a measure of wage inflation, rose 2.0% in 4Q while 3Q’s total was revised up from +0.9% to +1.6%.  The 4Q average for unit labor costs is now down to 1.1%.


Household Net Worth Likely to See Biggest Decline on Record: The 4Q Household Flow of Funds report is scheduled for 11:00 a.m. CT and is likely to show a meaningful drop in overall net worth.  Financial assets, which make up 85% of household assets, are likely to decline $8 trillion after the 20% drop for stocks in the 4th quarter.  This would mark the largest quarterly drop in household net worth on record. However, on a positive note, the wealth effect (expected increase in spending from gains in net worth and vice-versa) has been negligible during this economic cycle.


Fedspeak: At 11:15 a.m. CT, Fed Governor Brainard will speak on the economy and monetary policy.



Yesterday – Stocks and Treasury Yields Slid for a Third Straight Session: Treasury yields more than doubled their overnight declines as U.S. equities grinded lower from the open following a mixed session across Asia and Europe. After settling above 2,800 last Friday for the first time since November 8, the S&P 500 has declined in each of the last three sessions. Wednesday’s 0.7% decline pulled the index down 1.1% below the key technical level and to its lowest level in three weeks. The health care and energy sectors both slumped more than 1% to lead losses across nine of the 11 sectors. The Dow dipped a smaller 0.5% while the Nasdaq fell just under 1%. The Russell 2000 index, which focuses on smaller U.S. companies, tumbled 2% in its biggest one-day decline of the year. As equities drifted lower throughout the day, Treasury yields added to a modest overnight decline with the 10-year yield closing down for a third consecutive session. The 2.4-bps decline pulled the benchmark U.S. yield down to 2.69%, 6 bps lower than last Friday’s finish. Headlines tied to the Fed (more below) continued to reflect a lack of concern about inflation, which also applied downward pressure to the Fed Funds futures’ implied rate and shorter Treasury yields. The 2-year yield dropped 2.8 bps to 2.52%.


Overnight – ECB Pushes Back Possible Rate Hike, Announces Fresh Stimulus: A shaky week for global equities continued overnight as China’s CSI 300 fell for the first time in five sessions and markets waited for the ECB’s policy decision. The Chinese index dropped just 1% Thursday after rising for four days to its highest level since May. The Stoxx Europe 600 was down 0.4% and European yields were pointing in different directions (core down, peripheral up) before the ECB’s announcement. Also ahead of the decision, revisions confirmed the Eurozone’s economy expanded 0.2% in 4Q, a pick-up from 3Q’s 0.1% pace, but YoY growth was revised down to 1.1%, the weakest since 2013. European countries bore the brunt of negative revisions in the OECD’s refreshed growth forecasts Wednesday. European yields moved even lower after the ECB’s updated statement pushed back the timing for a possible rate hike and announced a new series of targeted longer-term refinancing operations (TLTRO) to banks in the Eurosystem. The statement removed a reference to keeping rates unchanged through this summer, now indicating a rate hike is off the table until at least 2020. The TLTROs will be the third iteration of cheap loans to banks during the recovery and will run from September 2019 through March 2021. The quarterly program will allow banks to borrow up to 30% of eligible loan balances, in blocks with a maturity of two years, at favorable interest rates. European stocks gained after the announcement, yields in the regions moved lower, and the Euro weakened against the Dollar. ECB President Draghi is currently discussing the outlook at his press conference. U.S. equities have turned positive since the decision and Treasury yields are near their lows, with the 10-year yield -3.1 bps to 2.66%.



Williams Said Environment Allows the Fed to Be “Flexible and Patient”: NY Fed President Williams told the Economic Club of New York that “slower growth shouldn’t necessarily come as a surprise,” and “isn’t necessarily cause for alarm.” “The base case outlook is looking good, but various uncertainties continue to loom large,” Williams said. There is “no sign of any significant inflationary pressure,” out there right now he added, and “Therefore, we can afford to be flexible and wait for the data to guide our approach.” He noted that, “For the time being, I think we’re in a good place, and I don’t have any particular lean, the term you used, of where policy should be changing from where it is now.” Williams didn’t give his preference for when to end the portfolio roll-off process but did say, “Personally my view is we’re nowhere near the point where we would be at kind of scarcity of reserves.”


Williams’s Predecessor Said Fed May Not Be Finished: In a one-pager published on Bloomberg Wednesday, former NY Fed President Dudley explained there were various reasons that led to the Fed officially becoming “patient” in January. Slower expected growth in the U.S., rising labor participation, a flat Philips Curve, low inflation, and questions about global growth had “collectively” raised the risk of a monetary policy error. He noted some of the uncertainties had lessened but said “it will take more to move the Fed. In particular, the central bank needs to see evidence” of a pick-up in growth that “could cause wage and price inflation to accelerate.” Dudley said “monetary policy is very likely on hold through the first half of 2019,” regardless of what happens. However, he suspects the Fed’s March forecasts “may note the improving outlook” and the dot plot “will probably suggest that the next move, albeit delayed, will still be up. For the Fed, ‘patient’ doesn’t likely mean ‘finished’.”


Beige Book Described Slower Pace of Growth: The Fed’s February Beige Book, analyzing data collected through February 25, reported “slight-to-moderate growth” across most Districts, a downgrade from “modest to moderate” activity in January’s edition. The additional details sounded a more cautious tone on growth due to a host of factors, including harsh weather, costlier credit, global growth concerns, and trade uncertainty. The national summary noted, “About half of the Districts noted that the government shutdown had led to slower economic activity in some sectors.” The employment assessment remained solid and the labor market was described “tight for all skill levels,” and “a majority of Districts reported moderately higher wages.” “Prices continued to increase at a modest-to-moderate pace,” and in margin-compressing fashion, “with several Districts noting faster growth for input prices than selling prices.”



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