The Market Today
Fed Notes Weak Investment, Remains Upbeat and On-Course for a December Hike
by Craig Dismuke, Dudley Carter
Producer Prices, Consumer Confidence, Bloomberg Survey, and Fedspeak: After a modestly quiet economic calendar this week, today’s brings a small flurry of reports including PPI, consumer confidence, wholesale inventories, the November Bloomberg Survey of Economists, and three Fed speakers.
October’s Producer Price report came in stronger than expected, pushing Treasury yields back up from their overnight decline. Prices for final demand items rose 0.6%, the strongest monthly gain since September 2012. Foods prices rose 1.0% and energy prices rose 2.7%. Excluding food and energy, producer prices still jumped 0.5% MoM on a 1.6% gain in trade services items and a 1.9% increase in construction items. At the headline level, producer prices are now up 2.9% YoY and 2.6% at the core level. However, with the Dollar continuing to hold its strength (up 5.1% YTD), production price increases are expected to remain tame. The biggest concern going forward is the impact of tariffs on trade-related items.
At 7:45 a.m. CT, the Bloomberg Survey of Economists will be updated with post-election results. The general opinion seems to be that a small infrastructure deal could be on the table in the aftermath of the election but that little else will be changed. However, a deal is expected to be small enough (and not certain enough at this point) that it is unlikely to affect economists’ forecasts.
At 9:00 a.m., the UM Consumer Confidence report for November is expected to show a fractional pullback on lowered expectations for the future. Nonetheless, confidence is expected to remain high.
In the aftermath of yesterday’s FOMC decision, comments today from New York Bank President Williams and Philadelphia Bank President Harker will be closely watched. Harker does not vote until 2020 but has been an advocate of slowing rate hikes. Also speaking will be Fed Vice Chair for Supervision Quarles in advance of an 11:00 a.m. release of the inaugural Supervision and Regulation Report. The report will characterize the current state of the banking industry and the Fed’s efforts on regulations.
Fed Makes Note of Weaker Business Investment, December Rate Hike Still Likely: The FOMC held its overnight target rate range at 2.00-2.25% yesterday and made only one noteworthy change to their Official Statement. The Committee’s assessment of business fixed investment was downgraded from “grow[ing] strongly” to “moderated from its rapid pace earlier in the year.” Recent Durable Goods Orders data and 3Q GDP report have both shown a weaker rate of business investment. Qualitative reports have blamed some of the pullback on concerns over tariffs. However, with such a strong consumer as a tailwind and still-favorable tax treatment, business investment should remain strong enough to keep economic growth stable. With inflation continuing to run near-target and the labor market remaining strong, a December rate hike will continue to be the base case expectation.
Yesterday – Yields and the Dollar Rose, Stocks Fell after Fed Stuck with Plan for Further Gradual Rate Hikes: Stocks closed mixed Wednesday as Treasury yields and the Dollar closed near their highs after the Fed’s latest decision did little to alter expectations for a rate increase in December. Tech companies slipped, leaving the Nasdaq down 0.5%, and five other sectors within the S&P 500 also declined, leaving the broader index down 0.3%. Energy companies were outlier underperformers, dropping more than 2% as U.S. WTI finally fell into a bear market. The commodity shed another 1.7% on Thursday to under $61 per barrel, its ninth consecutive decline and enough to push WTI down 21% from its early-October peak. The Dow eked out an 11-point (0.04%) gain. In their statement, the Fed acknowledged a softer recent trend for business spending but still said overall growth as strong and indicated “further gradual [rate] increases” are likely (more below). The 2-year yield pushed higher for the ninth time in the last ten tries, adding 0.8 bps to 2.97%, the highest since it had a 3%-handle back in June 2008. The 5-year yield rose 1.2 bps to 3.09% to close at its highest mark since September 2008. The 10-year yield added a smaller 0.2 bps, but the 3.24% finish was the highest since May 2011. The Dollar also benefitted from the barely-changed Fed Statement by having its best day since late September.
Overnight – Optimism Dinged by Falling Oil Prices, Weak Data Overseas: Overnight activity has seen stocks sputtering and sovereign yields lower as oil prices slide and news from Asia and the Europe has been disappointing. West Texas is now down for a 10th consecutive day to $59.74 per barrel, a 1.5% drop to its lowest level in almost eight months. It was reported overnight that the Chinese government would set quotas on banks providing credit to private companies which helped send Asian stocks lower. French industrial production fell 1.8% in September, a big disappointment. The U.K.’s IP report was also disappointing based on revisions to previous months’ data. And U.K. GDP grew an expected 0.6% in 3Q, but the underlying details were soft. All told, China’s CSI 300 is down 1.4%, the Hang Seng fell 2.4%, the Nikkei dropped 1.1%, the Euro Stoxx 50 is down 0.5%, and U.S. futures are down 0.4%. The risk-off tone has sent German and U.S. 10-year yields down 3.0 bps to 0.42% and 3.21%, respectively.