The Market Today
Fed Hawks Tabling Outlook until More Clarity
by Craig Dismuke, Dudley Carter
2019 Economic Outlook: Vining Sparks Economic Outlook Webinar will be hosted this morning at 10:00 a.m. CT. In the presentation, we will highlight the current strength of the economy and detail the growing risks to stability. To register, please click here.
New Jobless Claims Drop 17k, But Four-Month Trend Shows Slight Increase: Initial jobless claims for the week ending January 5 fell from 233k to 216k, a welcomed drop after some volatile holiday-season data. The 4-week moving average ticked up to 222k, below the early-December rate of 229k but still above mid-September’s 206k trend. It does appear that claims have inched higher over the past four months, an indication that some employers are beginning to lay off workers. However, in historical context, the rate of layoff continues to remain abnormally low.
Fed’s Barkin Hearing More Concerns: Richmond Fed Bank President Barkin spoke this morning echoing comments he made a week prior. He expects weaker growth in 2019 and is hearing a growing chorus of concern from his business contacts. According to Reuters reporting, Barkin said, “But as we enter 2019, I hear a lot of concern. Some is environmental, driven by trade, international economies or politics. Some is market driven, as volatility has increased and the yield curve has narrowed. Some is margin pressure. But overall, the question I hear most is, ‘How long can this growth continue?’”
More Fedspeak on Tap, Including Powell: With fifteen economic reports now delayed because of the government shutdown, the calendar remains fairly light. However, there is a plethora of Fedspeak on the calendar today. St. Louis Bank President Bullard speaks at 11:40 a.m. CT. Bullard has already argued for an end to the rate hikes earlier this week, citing below-target inflation. Fed Chair Powell, in arguably the most-watched comments of the day, will speak at 11:40 a.m. Chicago Fed Bank President Evans, a perennial dove who has supported rate hikes more recently, speaks at noon. Minneapolis’s Kashkari is scheduled for 12:20 and Vice Chair Clarida will speak to the New York Money Marketeers at 4:30 p.m.
Yesterday – Stocks Rose With Oil Prices as Yields Pulled Back on Patience Confirmation by the Fed Minutes: Another day of ups and downs for U.S. equities left the S&P 500 higher for a fourth consecutive session for the first time since September. The index’s 0.4% gain Wednesday helped raise the post-Christmas Eve rally to just under 10%. A bonus day of trade negotiations between vice ministers from the U.S. and China ended with sourced reports of enough advancement on lower-hanging fruit to likely allow for more meaningful, high-level talks later in the month. The underlying sectors closed pointing in different directions with energy in the top spot. Oil prices surged roughly 5%, despite a smaller-than-expected draw of U.S. crude and a huge build of gasoline supplies, on the hopes for trade progress and after Saudi Arabia said it would do what it takes to balance supply with demand. Further fueling oil’s rise was the Dollar’s 0.7% decline. The currency slid after the Fed’s December Minutes stressed patience and data dependency amid greater uncertainty (more below). Those Minutes followed comments from four separate Fed officials Wednesday with a similar sound (more below). The combination pulled yields lower for the first time this week, with the 2-year settling down 3.3 bps at 2.55% as Fed Funds futures repriced lower to show essentially no policy changes over the next 12 months. The 10-year yield dropped 1.8 bps to 2.71%.
Overnight – Global Equities Cool After Trending Higher to Start the Week on Trade Optimism: After a solid start to the week, global equities have calmed somewhat Thursday and core sovereign yields have drifted lower. Both the U.S. and China have now released statements noting positive progress over the three days of trade talks between mid-level officials. The USTR released a statement Wednesday describing the topics discussed. Overnight, China’s Ministry of Commerce said the meetings had “improved mutual understanding and laid a foundation for resolving issues of mutual concern,” likely through a second round of discussions between more senior officials later this month. The trade tensions have added to worries that slowing in the Chinese economy would speed up, and likely played a part (again) in weaker-than-expected data on Thursday. Both consumer (seven-month low) and producer price (27-month low) inflation fell short of expectations, a potential sign of less robust economic activity. China’s CSI 300 ended down 0.2%. In Europe, economic data showed an unexpected drop in industrial production in France in November, which led to the largest year-over-year decline since 2014. France’s CAC 40 was off 0.7% and leading broader weakness in the region. Ahead of a second day saturated with Fed communications, U.S. futures were trading 0.4% lower and Treasury yields had added to yesterday’s decline. The 2-year yield was down 1.4 bps to 2.54% while the 10-year yield was unchanged at 2.71%.
Evans Says Fed Can Be Patient, But Could Become Restrictive if Downside Risks Dissipate: Chicago Fed President Evans, who rotated back onto the voting committee at the turn of the year, still expects the overnight rate will need to be pushed “a touch above its neutral level” if “the downside risks dissipate and the fundamentals continue to be strong.” He pointed to the market turmoil and the trade war as increasing downside risks. He noted that, “As we enter 2019, the incoming data on economic activity generally continue to be strong — witness the December jobs report. Moreover, the most recent reports from my business contacts support these data.” However, he added that “Because inflation is not showing any meaningful sign of heading above 2 percent in a way that would be inconsistent with our symmetric inflation objective, I feel we have good capacity to wait and carefully take stock of the incoming data and other developments.” The first of the year “will be very important for making this assessment of our future monetary policy actions.”
Rosengren Willing to Table His Optimism Until There Is More Clarity in the Outlook: Boston Fed President Rosengren, who will have a vote on policy decisions this year, said in a speech Wednesday, “My own view is that the economic outlook is actually brighter than the outlook one might infer from recent financial-market movements,” which he suspects “have become unduly pessimistic.” While he acknowledged that risks to the U.S. economy have increased, he pointed to a strong labor market, solid wage gains, and historically high consumer confidence as “reasons to believe the consumer is still engaged and willing to spend.” However, he views “the current economic outlook as being quite uncertain,” and said “Recent data from China’s economy, the potential for increased trade tensions, and heightened volatility all counsel for policy to be both flexible and patient.” Because of the discrepancy these uncertainties have created between the views of the financial markets and most economic forecasters, “There should be no particular bias toward raising or lowering rates until the data more clearly indicate the path for domestic and international economic growth.”
Fed Minutes Confirm Tilt In Recent Fed Remarks Towards Patient, Data-Dependent Policy in 2019: The Fed’s December rate hike was unanimous amongst the voters, announced in a cautiously optimistic Statement, accompanied by a slightly lower projected path for Fed Funds, and overshadowed by Chair Powell’s seemingly cavalier approach towards the balance sheet. Since the decision, Powell has walked back his comments on the balance sheet with remarks that all tools could be used in the event of a slowdown. And the associated Minutes released yesterday enhanced the dovish flavor of his comment last week that the Fed could be patient with policy in 2019, a view consistent across recent remarks from various other officials. Outside of the typical economic assessment of the economy, which remained upbeat overall, the Minutes showed discussion of the contrary signals sent by the recent market volatility and tightening of overall financial conditions. Outside of the unanimous voting bloc, there were a few in the broader group that preferred not to hike. And two sentences in the paragraph discussing the outlook for monetary policy gave the decision the more cautious tone seemingly absent from the Statement. The Minutes showed that recent signs of concern had “made the appropriate extent and timing of future policy firming less clear than earlier,” and said “many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming.”