The Market Today
Fed Confident in Inflation Outlook, June Hike on-Track
by Craig Dismuke, Dudley Carter
1Q Trade Deficit Largest of Cycle: The March Trade Balance report showed a slightly smaller-than-expected increase in the deficit, $49.0 billion versus expectations of a $50.0 billion deficit. All told, the trade deficit in 1Q18 now totals $163.4 billion matching the largest quarterly trade deficit of the cycle.
Productivity Remains Anemic: The first quarter’s nonfarm productivity and unit labor cost data showed productivity rising just 0.7%; but, with a positive revision to 4Q data from +0.0% to +0.3%, effectively matches the expected total productivity gains. Until labor costs were revised down for 4Q from +2.5% to +2.1% on the better productivity revision. Unit labor costs for 1Q were weaker-than-expected, up just 2.7% versus expectations of +3.0%. Productivity growth remains anemic, averaging just 1.3% gains per quarter since the recovery/expansion began, but unit labor costs are making some progress.
Initial Jobless Claims Second-Lowest Since 1969: Initial jobless claims for the week ending April 28 rose from 209k to 211k, still the second lowest reading since 1969. The 4-week average has now dropped to its lowest level since 1973.
ISM Non-Manufacturing Index and Durable Goods Orders at 9:00 a.m. CT: April’s ISM Non-Manufacturing Index is expected to pull back from 58.8 to 58.0 at 9:00 a.m. CT, remaining very strong. The report on manufacturing activity pulled back more-than-expected earlier in the week. Also scheduled for 9:00 a.m., the March Durable Goods Orders report will be finalized. The initial report showed weaker-than-expected capital investment.
Yesterday – Markets Unsure What to Make of Fed’s Wordsmithing: U.S. assets fluctuated ahead of the Fed’s decision but were little changed immediately before the announcement. Stocks had traded lower but were back near even. Treasury yields had erased an overnight rise but inched back up in the minutes preceding the Statement’s release. The Dollar had weakened overnight but regained its footing in early U.S. trading. Immediately after the Fed’s Statement was released (more below), the knee-jerk reaction reflected a dovish market interpretation. Stocks climbed, the yield curve moved lower, and the Dollar dropped. By the close, that assessment was less certain. Stocks had reversed course and tumbled into the close. The S&P 500 ended down 0.72% and near its lows of the day. While short yields remained lower, the 2-year settled down 1.6 bps and near its daily low, longer yields had recovered with the 10-year ending up 0.2 bps.
Overnight – Trade Talks and Eurozone Inflation in Focus after Wednesday’s Fed Decision: Investors shifted their focus away from Wednesday’s Fed decision (more below) in Washington to ongoing trade talks in Beijing and a downside surprise in Eurozone inflation data. A group led by heavy-hitting U.S. officials – Mnuchin, Ross, Lighthizer – arrived in Beijing Thursday to discuss the ongoing trade spat. Both the U.S. and China have detailed plans for import tariffs but neither has made them effective. China’s CSI 300 was up 0.8% and the sole gainer in Asia. In the Eurozone, stocks are lower and yield curves flattened after the initial estimate of April’s CPI inflation unexpectedly pulled back. Core inflation slowed from 1.0% to 0.7%, below the 0.9% estimate and the weakest since March 2016. Headline cooled from 1.3% to 1.2%. The report is likely to discourage policymakers at the ECB who were expected to announce soon a plan to wind down its QE program. Yesterday, data showed the Eurozone’s economy grew at its slowest pace in the first quarter since mid-2016. European yields are near their lows of the day. Price action has been similar in the U.S. as longer yields have led the Treasury curve lower and flatter. The 10-year yield was down 2.2 bps at 2.94% with the 2-year yield 1.2 bps lower at 2.48%. U.S. equity futures are weaker with the Dollar.
FOMC Confident on Inflation Outlook, June Hike Likely: As expected by most, the FOMC voted unanimously Wednesday to keep its overnight rate range at 1.50-1.75%. The Statement included a slight upgrade to the Committee’s economic assessment by way of a more favorable characterization of business spending and a notable improvement in the confidence regarding their inflation target. The Statement noted that headline and core inflation have “moved close to 2 percent” and are now expected to “run near the Committee’s symmetric 2 percent objective over the medium term.” In addition, a line saying that “the Committee is monitoring inflation developments closely” was struck from the Statement’s risk assessment, signaling the Committee is less concerned about inflation running below target. Neither are they concerned about inflation running exceedingly hot, evidenced by the Statement continuing to note that “market-based measures of inflation compensation remain low.” Bottom Line: The FOMC is increasingly confident in the inflation outlook. With the labor market expected to continue tightening beyond what the Committee believes is sustainable longer term, they are likely to continue hiking at every other meeting, including another hike at the upcoming June 12-13 meeting.