The Market Today
Fed Minutes Point to March and at Least Two More in 2018
by Craig Dismuke, Dudley Carter
Jobless Claims Continue to Show Historically Low Job Losses: Initial jobless claims for the week ending February 17 fell from 229k to 222k, now the second-lowest reading of this cycle and the previous five cycles. There’s not much analysis to do on the labor statistics at this point – other than recognizing that they continue to be very strong.
At 9:00 a.m. CT, the January Leading Indicators Index will be released and is expected to tick up 0.1% to 0.7% MoM. At 10:00 a.m., the Kansas City Fed Bank’s regional report on manufacturing activity is also expected to increase, up 2 points to 18.
Yesterday – Stocks Tumbled, Yields Rose after Fed Minutes Called for Further Tightening: After a brief hesitation following the release of the Fed’s January meeting Minutes, stocks sold off and erased earlier gains and the U.S. Dollar rose with U.S. yields as markets priced in “further gradual policy firming” from the Fed. The initial dovish market response may have been because the Minutes said “some participants saw an appreciable risk that inflation would continue to fall short.” However, the overall positive tone from a seemingly more optimistic Fed ultimately overwhelmed and the focus seemed to shift to the “modestly stronger near-term outlook” and call for “further gradual [rate] increases”. By the close, the 2-year yield had added 4.7 bps to 2.27%, a new cycle high, and fed funds futures had priced in more than an 80% chance of at least three hikes this year. Further out, the 5-year yield rose 4.1 bps to 2.69%, a new high since April 2010, and the 10-year yield tacked on 6.0 bps to 2.95%, a new four-year high. After spending most of the day well into positive territory, stocks turned lower and negative for the day. From its intraday peak, the Dow fell 470 points to end the day down 0.67%. The S&P followed a similar path to finish 0.55% lower.
Overnight – Global Stocks Move Lower: Despite a slight overnight recovery in U.S. equity futures and a pullback in longer U.S. yields, global equities have tracked yesterday’s post-Fed-Minutes drop in U.S. stocks. A call for further rate hikes this year on a stronger economic outlook and expectation for inflation to firm up sent U.S. yields to multi-year highs and stocks sliding to their lows of the day. In response, equities in both Asia and Europe dropped at the open and U.S. futures were initially weaker. Since then, however, the Stoxx Europe 600 has moved close to its daily high at -0.66% and U.S. futures have recovered into positive territory. European yields also popped higher at the open but made a turnabout after a popular German business confidence survey fell more than expected to match an eight-month low. U.S. yields had already moved lower from yesterday’s highs lower but shifted down further with European yields after the release of that confidence survey. The 2-year Treasury yield is 0.4 bps lower at 2.26% while the 10-year yield has fallen 3.7 bps to 2.91%. In currencies, the Dollar is up for a fifth session, matching its longest streak in more than a year.
Fed Minutes Reflected Growing Confidence: The Minutes from the January FOMC meeting reflect a Fed that is 1) more optimistic about near-term growth, 2) more convinced that inflation would rise to the Committee’s 2% target over the medium term, and 3) more confident in their current base-case call for three hikes in 2018. On economic activity, “most [voting] members viewed the recent data bearing on real economic activity as suggesting a modestly stronger near-term outlook than they had anticipated at their meeting in December,” and most expect the boost from the tax cuts could be “a bit greater in the near term than they had previously thought.” There continued to be a group unconvinced about the prospects for faster inflation but “almost all participants believe inflation will reach the 2% target over the medium term”. As for the addition of the word “further” to the Official Statement relating to gradual rate hikes, the Minutes provided a little more context to that decision. Given the additional context, it appears that “further,” at least for now, refers to the continuation of hikes along the projected path as opposed to additional hikes above and beyond the current projection. However, if the better-than-expected economic results continued, the meaning could easily morph into meaning more rates hikes than initially expected. Bottom Line: The Minutes depicted a Fed more comfortable in their call for three 2018 rate increases because of the combined effect of U.S. tax cuts, an improving global economy, and accommodative financial conditions. For now, a March hike appears to be in the bag with at least two more likely to follow by year-end.
Fed’s Quarles Focuses on Economic Stability: Fed Vice Chair of Supervision Quarles spoke yesterday in Tokyo echoing recent comments from other Fed members that he isn’t too worried about the recent market volatility. Rather, he is more focused on the positive developments of the economy. He said, “The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis. Recent volatility in equity markets is a reminder that asset prices can move rapidly and unexpectedly. However, it is my assessment that the underlying fundamentals of the U.S. economy are sound and much improved relative to earlier in the decade.”
At Least Treasury Cares About the National Debt: Treasury’s undersecretary for international affairs, David Malpass, who previously worked as Bear Stearns’ Chief Economist, said yesterday on Fox Business that he is concerned by the growth of the national debt. He said, “I think it is too high now, and it’s going higher. …I am troubled by the deficit and troubled by the national debt, and I think we need a three-year program to grapple with it, starting this month, next month and on forward.”