The Market Today
Fed Shift and Global Fears Weigh on Yields Ahead of Busy Week
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Packed Calendar to Give Investors Wide-Ranging View of U.S. Economic Health: This week’s calendar will bring another flurry of important data including February Housing Starts and Building Permits (Tue), January’s S&P CoreLogic Home Price report (Tue), February’s Pending Home Sales data (Thu), February’s New Home Sales (Fri), the March consumer confidence reports (Tue and Fri), January’s trade balance (Wed), the final revision to 4Q GDP (Thu, exp. -0.2% to 2.4%), January’s PCE inflation report (Fri), and the most recent Personal Income and Spending data (Fri). All told, by the end of the week, investors will have another updated look at the health of the economy – at a time when the uncertainties have increased. On top of the heavy data calendar, investors will hear a strong dose of Fedspeak, beginning this morning.
Fed Speakers Emphasize Growing Risks to Downside: Already this morning, Philadelphia Fed Bank President Harker has commented that he believes “neutral” is one to two hikes away, and that he believes, at most, one hike this year would be appropriate. According to reports from his speech in London, “The potential risks tilt very slightly to the downside, but I emphasize the word ‘slight.’ I still see the outlook as positive, and the economy continues to grow.” Harker is not a voting member of the FOMC this year. St. Lois Bank President Bullard, a 2019 voter, was even more cautious saying a rate cut could be in store. According to his prepared comments in Hong Kong, “At the moment, the risks from the downside scenarios loom larger than those from the upside ones. … If activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold — or perhaps even loosened — to provide the appropriate accommodation to obtain our objectives.”
Chicago Fed National Activity Index Posts Third Consecutive Monthly Decline: The Chicago Fed National Activity Index fell, again, from -0.25 to -0.29, bringing the 3-month average into negative territory for the first time since 2017. The index tracking 85 different economic indicators; including reports on 1) production and income, 2) the labor market, 3) personal consumption, 4) housing, and 5) sales and inventories; has been negative for three consecutive months adding to the fears of a U.S. slowdown. This reading is also consistent with less inflation pressure in future months (see Chart of the Day).
Dallas Fed Report and Boston’s Rosengren: At 9:30 a.m. CT, the Dallas Fed’s report on regional manufacturing activity is expected to weaken, but remain positive. At 7:30 p.m., Boston Fed Bank President Rosengren is scheduled to deliver remarks in Hong Kong.
Overnight – Friday’s Fear Keeps Risk Appetite at Bay to Start the Week: Market anxiety remains elevated Monday after the 10-year Treasury yield crossed below the 3-month T-bill Friday for the first time since 2007 (more below). More weaker-than-expected data from Europe last Friday came on the heels of the Fed removing the two rate hikes it had previously planned for 2019 in response to a more cautious assessment of economic growth. The combination fueled a curve-flattening rally in government bonds that led to last Friday’s inversion and renewed concerns about a possible global recession. U.S. stocks sank once longer rates moved below bill rates and ended the week with modest losses. Overnight, Asian stocks tumbled, European markets opened lower, and U.S. equity futures continued to reflect a feeling of unease. Treasury yields have, however, ticked higher (2s +0.6 bps to 2.32%, 10s +1.9 bps to 2.46%) and the 10-year yield has edged back above the 3-Month bill rate. One bit of good news from Europe, a key gauge of German business confidence rose for the first time in seven months on both a better current assessment and stronger future expectations. Still, the growth fears stoked last Friday are likely to split headline coverage with the weekend release of Special Counsel Mueller’s findings and continued drama in the UK over Brexit. Weekend reports indicated PM May was being pressured by some in her Cabinet to move aside amid continued Brexit chaos.
ICYMI – March 22, 2019 Weekly Market Recap: Last week was a tale of two halves for bond market, with the Fed’s March decision Wednesday afternoon jolting the Treasury market back to life from a moribund two and a half days of trading. Yields drifted modestly up and down early in the week in response to flat home builder confidence, unrevised (solid) business equipment orders, conflicting trade headlines, and continued confusion about the UK’s attempt to leave the EU. But Fed’s announcement sent yields sharply lower, a response to a softer economic assessment and a dot plot that helped quantify the Fed’s January pledge to be patient. The Fed now expects no rate increases in 2019, a notable drop from the two penciled in last December and an even greater shift from the three it expected back in September. While they still expect rates to rise once in 2020, Fed Chair Powell said the current data isn’t signaling the need for an adjustment in either direction. He again mentioned slower global growth as a headwind, a claim that gained further support on Friday. Weakness in PMIs for France and Germany helped drive the Eurozone’s manufacturing PMI to its lowest level in six years. The German 10-year yield responded with its first negative print since October 2016, which sparked a second weekly rally in U.S. Treasurys. The 10-year yield dropped 8.6 bps and 9.8 bps on Wednesday and Friday, respectively, ending the week down 15 bps in total. Friday’s close at 2.439% was the lowest since January 2018 and the first time the note has closed below the 3-Month T-bill (2.44%) since 2007, leading to a reemergence about the yields curve’s signal about an economic slowdown. Click here to view the full recap.