The Market Today
Fed’s Preferred Inflation Measure Falls to 1.6%
by Craig Dismuke, Dudley Carter
This Week’s Data – FOMC Decision, Payrolls, Earnings: Later this week, investors will be focused on Wednesday’s FOMC decision and Friday’s labor market data for the month of April. The earnings calendar will also continue to be brisk with reports from GE, Apple, General Motors, pharmaceuticals, energy companies, and a host of others. Halfway through earnings season, sales have largely been in-line with expectations but 78% of companies have beaten analysts’ earnings estimates.
Fed Likely to Upgrade Economic Assessment but Show More Concern about Inflation: The Fed is not expected to make any changes to policy this week, although the Statement’s qualitative assessment of economic growth is likely to be more optimistic while officials are bound to also note more concern related to inflation. The inflation data have continued to disappoint relative to the Fed’s 2% inflation target, including this morning’s 1.6% YoY core PCE figure.
Job Growth Expected to Continue, Will Participation Continue to Increase?: As for Friday’s labor data, job growth is expected to continue at an above-sustainable 185k (above sustainable based on the underlying population growth rates) while the unemployment rate is projected to hold at 3.8%. However, participation will be a key variable to watch. Illustrating the importance of participation, since the unemployment rate first fell to 3.8% (May 2018), the economy has added 2.5 million more jobs despite the unemployment rate holding near 3.8%.
Core PCE Inflation Drops to 1.6%; Personal Income Growth Tame but Spending Rebounds: Core PCE inflation undershot expectations once again in March falling from 1.7% to 1.6%, moving further below the Fed’s 2.0% target and increasingly becoming a problem for policymakers. While there remain some sources of inflation on the services side and in housing rents, the broader trend has been fairly convincingly below the Fed’s objective. Going back to 2008, core PCE inflation has only been above 2.00% for six of 129 months (five of those months were in 2011-2012 when oil prices were well above $100 per barrel). Personal spending, however, rose more-than-expected in March, jumping 0.9% MoM marking one of the best results in a decade. February’s spending data, delayed by the government shutdown, showed a smaller 0.1% increase. Regardless, the March bounce is sufficient evidence that consumers might be rebounding from the year-end malaise. On the income side, personal income disappointed, rising a paltry 0.1% MoM. In the absence of stronger income gains, the savings rate shot lower, down from 7.3% to 6.5%.
Overnight Activity – Positive U.S.-China Trade Headline; Disappointing Eurozone Confidence Reports: Treasury Secretary Mnuchin said early this morning that the enforcement component of a trade deal with China was close to being done. Historically, headlines of progress on a trade deal have boosted investor sentiment. However, the overnight reaction has been tepid. The European Commission’s April report on overall sentiment in the region disappointed expectations, falling for a 10th consecutive month to its lowest level since 2016. Looking at the breakouts, industrial confidence disappointed by falling further into negative territory (lowest since 2014), but confidence from the service sector and consumers held steady. Despite the mixed news overnight, there is little volatility in the markets ahead of this week’s important data on the U.S. calendar.
ICYMI – April 26, 2019 Weekly Market Recap: Yields retreated last week with sizeable declines on both Wednesday and Friday and despite the S&P 500 closing at its first new all-time high since last September. Wednesday’s move lower for yields followed weaker inflation in Australia, an unexpected decline in German business confidence, crude prices coming off of six-month highs, and a decision by the Bank of Canada to remove a reference to future rate increases from its policy statement amid a slowing economy. Friday’s drop followed surprisingly strong U.S. GDP growth of 3.2% that hid a somewhat softer 1.4% pick-up in final domestic demand. An unusually large 1.7% positive contribution from trade and inventories, the largest combined in six years, accounted for more than half of the total 1Q gain and could prove a headwind in coming quarters. The GDP report also echoed recent monthly data that have continued to signal a lack of inflation pressures, the key focus of Fed officials. The 2-year yield fell 9.8 bps last week to 2.28% as Fed Funds futures repriced aggressively lower to imply a 25-bp rate cut by February 2020. The 10-year yield dropped 6.1 bps to end at 2.50%. The spread between the two finished at 21.4 bps, the widest since November. The move lower in rates likely added to the positive push for equities that was primarily fueled by a continuation of positive corporate earnings surprises. While there were mixed corporate reports last week, the overall tone continues to be better than what had been expected. The S&P 500 closed up 1.2% for the week and closed at a new all-time high on Tuesday and Friday. Click here to view the full recap.
$10 Trillion in Negative Yielding Global Sovereigns (WSJ): “A growing number of investors are paying governments in Europe for the privilege of holding their bonds. … The amount of negative-yielding government bonds outstanding through 2049 has risen by 20% this year to about $10 trillion, the highest level since 2016, according to data from Deutsche Bank Securities. … The expanding pool of such bonds—which guarantee that a buyer will receive less in repayment and periodic interest than the buyer paid—highlights how expectations for growth in much of the developed world have deteriorated. … Negative yields also mean it will be difficult for developed economies to revive growth should they enter a recession…” Not only will this limit the effectiveness of future stimulus, but there is great uncertainty about the economic response to the unwinding of these types of policies.