The Market Today

TODAY’S CALENDAR

Initial Jobless Claims Resume Rising Trend: Initial jobless claims for the week ending December 7 surprisingly jumped 49k to 252k, the worst week for new claims in over two years.  The data is generally noisy around holidays.  This year, Thanksgiving fell on the latest day possible and likely skewed the volume of filings in the final week of November and first week of December more than normal.  We suspect the seasonal adjustments then exacerbated the strength of the November 30 report and the weakness in the December 7 report.  Looking through the week-over-week noise, the four-week moving average is now up to 224k, the highest since May and evidence of a rising trend in new unemployment claims.  This will continue to be a story to watch moving forward as a potential indicator of a slowing labor market.

Producer Prices Show Little Evidence of Cost-Driven Inflation Pressure: Producer prices were unchanged in November on a 0.3% increase in goods prices and a 0.3% decline in services prices.  The 0.3% increase in headline goods prices came mostly from a 1.1% increase in food prices and a 0.6% increase in energy prices. Excluding these two volatile categories, core prices actually fell 0.2% MoM.  On a year-over-year basis, headline producer prices held at a 1.1% growth rate while core prices pulled back from 1.5% to 1.3%.  There continues to be little evidence of cost-driven consumer inflation pressure coming from the production pipeline.

At 11:00 a.m. CT, the Federal Reserve will release its 3Q flow of funds report showing changes in household net worth.

YESTERDAY’S TRADING

Markets Liked the Fed’s Reinforcement of October’s Signal for an Extended Pause: Markets took kindly to the Fed’s decision to leave rates unchanged and show little inclination to make any adjustments to policy through at least the end of next year (more below). Equities fluctuated around unchanged for most of the morning ahead of the Fed’s afternoon decision and Treasury yields were modestly lower, despite an early-morning CPI report that showed core inflation picked up on broad participation across categories. Immediately ahead of the Fed’s announcement, stocks were mixed but close to even, the Dollar was flat, the 2-year yield was 1.6 bps lower, and the 10-year yield had declined 3.6 bps.

Yields Fell and Stocks Rose as Powell Put the Period After the Pause: After updated projections showed the Fed expects no changes to its policy rate through at least next year, stocks began to move higher and yields added to their earlier declines. Those moves gained steam during Powell’s press conference in which he repeatedly and dovishly dismissed the risk of an unwanted pick-up in inflation, even with unemployment at 50-year lows. With the Fed’s refreshed outlook reinforcing the initial signal from October that they are on hold for now, further-out fed funds futures flattened, while the 2-year yield ended the day 3.8 bps lower at 1.61% and the 10-year yield dropped 5.0 bps to 1.79%. The S&P 500 gain 0.3% and the Dollar declined 0.3%.

OVERNIGHT TRADING

Global Market Response to Fed Signal Was Mixed with Other Events on Deck: Global equities were mixed across Asia and Europe following the Fed’s signal that it plans to hold rates steady through next year, as caution remained ahead of the ECB decision and parliamentary elections in the U.K. MSCI’s Asia Pacific Index rose 0.6% while Europe’s Stoxx 600 held around unchanged at 7 a.m. CT. Foreign sovereign bond markets were closed at the time of yesterday’s Fed announcement, but had drifted lower overnight before the ECB’s decision.

Uneventful ECB Decision Has Little Impact on Markets: Europe’s central bank left policy unchanged and the statement was a near-mirror image of October’s. Rates will remain “at their present or lower levels” until “the inflation outlook robustly converge[s]” to target, and asset purchases of 20B Euro per month will continue “as long as necessary.” This morning’s press conference will be President Lagarde’s first since taking the reins from Mario Draghi last month. The Euro was unchanged against the Dollar shortly after the decision. After the unexpected jump in initial claims, the 2-year Treasury yield was 2.8 bps lower, the 10-year yield had inched up 1.4 bps, and U.S. equity futures were modestly weaker.

NOTEWORTHY NEWS

Fed Held, Showed Little Urgency to Adjust Policy Further: The Fed voted unanimously to keep policy unchanged on Wednesday and showed little urgency or desire to make any adjustments from here absent a “material reassessment” of the outlook. The Fed’s overnight target remains within a range between 1.50% and 1.75% and the interest on excess reserves rate was held steady at 1.55%. The current economic assessment was entirely unchanged in the Official Statement and a phrase was added to say that “the current stance of monetary policy is appropriate to support” activity. A reference to “uncertainties” overhanging the outlook was removed, but a line was added to say officials would monitor “global developments and muted inflation.”

Dot Plot Shows Rates Unchanged Through 2020: The only significant change in the economic projections was that unemployment is expected to fall even further below a reduced estimate of full employment. The Fed estimates unemployment will average 3.5% in the fourth quarter of 2020 before rising back towards a longer-run estimate of 4.1%. Behind the economic pages, the updated dot plot showed officials believe the current fed funds range will remain appropriate through the end of next year; only four participants penciled in a rate increase in 2020. In the out years, the median dot reflected the potential for one rate hike in both 2021 and 2022, leaving the projected path accommodative through the forecast horizon, below the unchanged neutral estimate of 2.50%. Implicitly, the Fed expects continued policy accommodation in the years ahead will further strengthen the labor market but have almost no effect on inflation.

Powell Stressed Pause Amid Muted Inflation Pressures: In his press conference, Powell said the “economic outlook remains a favorable one despite global developments and ongoing risks,” thanks in large part to the three rates cuts this year and a “strong” household sector. Unsurprisingly, he recycled his October remarks that current policy “likely will remain appropriate” absent a “material reassessment” of the baseline outlook, reinforcing the messaging in the updated forecast that the Fed is comfortably on hold for now. While the labor market is expected to tighten further, Powell said the relationship between slack and inflation has gotten “weaker and weaker over the years” which meant that “the need for rate increases is less.” “We can sustain much lower levels of unemployment than had been thought,” Powell said, and not “have to worry so much about inflation.” Personally, Powell again said it would take “a significant move up in inflation that is persistent” for him to support a rate hike.