The Market Today

ECB Confirms December End to QE; Brexit Uncertainty Grows


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Show Late-Year Volatility Falling 27k: After four weeks of inexplicably elevated jobless claims, new filings for unemployment benefits plunged in the week ending December 8.  Claims fell from 233k to 206k, only surpassed by three lower reports back in early-September.  Claims tend to be volatile during the holiday weeks. Other labor indicators point to the elevated claims being less reflective of the true market, though time will have to tell what the true trajectory is for claims.

 

Strong Dollar and Lower Oil Prices Weigh on Import Prices: Import prices fell more-than-expected in November at both the headline and core levels. Headline prices fell 1.6% MoM on a 12.1% drop in petrol-based products, the largest such monthly decline in two years. Import prices are now up just 0.7% YoY, down from a 4.8% rate of growth back in July.  Excluding petroleum products, core prices fell 0.3% MoM. The stronger Dollar, now up almost 7% YoY, is tempering production price pressures for the time being.

 

Budget Statement: At 1:00 p.m. CT, the November Monthly Budget Statement from Treasury is scheduled for release.

 

TRADING ACTIVITY

Yesterday – Stocks Shed Early Gains But Close Higher as Yields Rose on Stronger Sentiment, Firmer Inflation: Stock bulls controlled the morning session but the bears put up a respectable fight after lunch. The S&P 500 jumped at the open, rallying as much as 1.8% by lunch on hopes the U.S. and China were making progress on trade. Late Tuesday evening, Huawei’s CFO was released on bail and President Trump said he was willing to meet with President Xi again if necessary to strike a deal. Just ahead of Wednesday’s market open, the WSJ reported that China was reconsidering its Made in China 2025 plan and Reuters later said China had purchased over 500k tons of soybeans, an estimate later raised to 1.5MM to 2MM tons by the U.S. Soybean Export Council. The 2025 plan, which the WSJ report described as “President Xi Jinping’s blueprint to make the country a leader in high-tech industries including robotics, information and clean-energy cars,” epitomizes the forces of frustration world leaders have had with China’s economic practices. While stock bulls shined early, the bears attacked shortly after lunch, with the timing closely surrounding remarks on trade from U.S. Commerce Secretary Ross and a downturn in the price of global crude. Ross said any deal would require structural changes to China’s economic plans and sufficient enforcement mechanisms. Oil prices pulled back as inventories of crude and other related products fell less than expected. As a result of the afternoon doldrums, the S&P 500 ended up just 0.5%. Still, the net positive feelings on trade combined with a firming up in core inflation to push yields higher on the day. The 2-year yield rose 0.8 bps to 2.77% while the 10-year yield settled 3.1 bps higher at 2.91%.

 

Overnight – ECB Confirms End of Net Asset Purchases After December: After several day of sharp opening moves, U.S. futures were earlier signaling sliding more quietly into Thursday’s session. Treasury yields had moved less than 1 bps lower, directionally consistent with trends across Europe. The ECB’s latest decision was expected to be the most important scheduled economic event of the day. Europe’s central bank confirmed it would end net asset purchases in December but updated its forward guidance on reinvestment of cash flows. Previously, the central bank said it would continuing reinvesting cash flows from its portfolio “for an extended period of time after the end of the net asset purchases.” In Thursday’s Statement, officials said reinvestments would persist “for an extended period of time past the date when it starts raising” rates. The ECB kept its guidance for static rate levels “at least through the summer of 2019.” This plan continues following the path the Fed has taken in removing accommodation. Markets will look to President Draghi’s conference for an update on the economic outlook, including any views on recent softness in some key economic trends, and how it lines up with their decision to continue pursuing gradual monetary tightening. European assets were little changed after the statement’s release. Early in Draghi’s remarks, he said that while there has been some weakness in the data recently, largely driven by weaker outside demand, “underlying strength of domestic demand continues to underpin the euro-area expansion.” However, while he noted risks remain roughly balanced, multiple forces are beginning to tilt them to the downside. Elsewhere, the British Pound continued to push higher after PM May emerged from a no confidence vote with majority support late Wednesday. The currency had fallen to a 19-month low on Tuesday amid continued Brexit uncertainty.

 

Brexit Uncertainty Looms After Vote: British Prime Minister Theresa May survived a challenge to her leadership yesterday but is likely to be hobbled going forward.  May has carried the Brexit torch through tumultuous negotiations with Eurozone leaders.  After having sketched out a break-up plan, that plan appears unlikely to receive support from Parliament.  Moreover, she is likely to be in a weaker position with Eurozone leaders in upcoming negotiations.  According to the WSJ, “The lukewarm backing she secured from members of her own party—and the expectation that most lawmakers from opposition parties in Parliament will reject her deal—raises the prospect that almost any version she manages to negotiate with the EU will be rejected by Parliament.”  Given the potential for an unruly Brexit to weigh on global growth, the risks to growth have increased in recent days.

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