The Market Today
FOMC Decision as Labor Data Remains Strong, Inflation Data Soft
by Craig Dismuke, Dudley Carter
ADP Points to Stronger Trend for Job Growth: ADP’s projection for private payroll growth in April far outpaced expectations rising 275k on strength in almost every sector. The construction sector particularly stood out with a 49k gain, 24k above its 12-month trend. Services-providing industries added 223k payrolls with particular strength in the leisure and hospitality sector. While it is hard to draw any cycle-trends from job creation by size of firm, medium-sized businesses (50-499 employees) added 145k jobs, that segment’s second-largest monthly tally of this economic cycle. Applying this to Friday’s BLS payroll report, the ADP data point to a stronger trend than the BLS data have recently. The 3-month average for the ADP report is now up to 215k while the BLS average is at 180k. This strong ADP report certainly points to a stronger-than-expected result on Friday.
Mortgage Applications Cool for a Fourth Week: Following a strong seven-week run that started in February and was spurred by falling mortgage rates, mortgage applications have stalled, pulling back in each of the four weeks of April. According to the MBA, mortgage rates fell from 4.65% in the second week of February to 4.36% by the end of March as Treasury yields retreated after the Fed called off its plans to raise rates twice in 2019. During the recent four weeks of weaker applications, mortgage rates have edged back up to 4.42%. In the current week’s data, purchase applications fell 3.7% while refinancing activity slowed 5.0%. While the four-week average for purchase applications did edge lower, it remains at a solid level for the cycle.
ISM Manufacturing Index Expected to Remain Modest: At 9:00 a.m. CT, the April ISM manufacturing report is expected to tick down to 55.0, remaining in the weaker range established so far this year.
FOMC Likely to Remain Patient as It Waits for Evidence of Stable Inflation: The FOMC will conclude its two-day meeting this afternoon with a policy announcement at 1:00 p.m. CT. There are few expectations for any change in policy at this meeting, specifically as it relates to the target overnight rate, their posture of “patience,” nor the plans for their balance sheet. The recently weak inflation data is likely to loom large in the Fed’s forward-looking communications and be a frequent topic in Chairman Powell’s 1:30 p.m. press conference. Also worth watching is the potential for an unexpected change in the IOER. The effective Fed Funds rate has been over 2.40% for almost five weeks and has nudged even higher in recent days. In an effort to keep the effective rate nearer the mid-point of their target range, the Committee may be forced to tweak the IOER rate again in coming meetings.
Yesterday – Stocks Ended Mixed on Tech Drag, Treasury Yields Slipped Ahead of Fed’s Decision: There was plenty of news Tuesday to keep investors busy, including a couple of upbeat U.S. economic reports (more below), weakness in tech that kept equities in check, turmoil in Venezuela that briefly sent crude prices climbing, headlines of a $2 trillion infrastructure agreement, and another call from the President for the Fed to ease policy. Stocks opened strongly after several major companies, including McDonald’s, Mastercard, Merck, and Pfizer topped earnings, but fell back as shares of Google dropped following Monday’s earnings disappointment and Apple slipped ahead of its post-market release. The Nasdaq ended down 0.8% in response to weakness in the tech space while the Dow and S&P 500 rose between 0.1% and 0.2% on gains in most other sectors. The S&P 500 finished at an all-time high for a third consecutive session. Treasury yields fell early as equities weakened and held those declines even as the indices recovered. Both markets seemed to ignore a tweet from President Trump that the U.S. economy could “go up like a rocket if [the Fed] did some lowering of rates, like one point, and some quantitative easing.” The headlines on infrastructure were also met with skepticism as a battle in Congress over how to fund such an exorbitant plan would likely leave it dead on arrival. For the day, the 2-year yield fell 2.6 bps to 2.27% while the 10-year yield settled 2.3 bps lower at 2.50%.
Overnight – Most Global Markets Closed for May Day: Most major global markets across Asia and Europe are closed Wednesday for a holiday, leaving U.S. investors squarely focused on a busy U.S. calendar that will be capped by the Fed’s afternoon policy announcement. On the trade front, recent reports and comments from top officials have indicated that a deal between the U.S. and China could be close, with a possible final agreement signed by late May or early June. White House Chief of Staff Mulvaney said yesterday, “I think you will know, one way or the other, in the next couple of weeks,” if a deal will be reached. Treasury Secretary Mnuchin tweeted Wednesday, “Ambassador Lighthizer and I just concluded productive meetings with China’s Vice Premier Liu He,” in Beijing. Chinese officials will travel to Washington next week to continue the talks. Ahead of this morning’s brisk economic calendar, tech companies were leading futures higher and Treasury yields were lower but little changed. Shares of Apple were up by more than 5.5% overnight after releasing a strong earnings report Tuesday after markets closed.
Consumer Confidence Bounced Back More than Expected: A good sign for momentum heading into the second quarter, consumer confidence bounced back more than expected in April on healthy gains in both the current assessment and expectations for the future. The Conference Board’s headline index rose 5 points last month to 129.2, its second strongest level in five months but below its 18-year high of 137.9 from last October. The current assessment’s strength was supported by recoveries in the outlook for general business conditions and employment. The share of consumers who believe employment opportunities are plentiful climbed to a new 18-year high and the labor market differential returned close to its best level of the cycle. Future expectations recovered on similar widespread strength, with the net expectations for business conditions, the labor market, and income growth both stronger than in April. Elsewhere in the report, planned purchases of big-ticket items were weaker, inflation expectations edged down, the outlook for the stock market was little changed, and the number expecting higher interest rates fell to the lowest level since July 2016.
Pending Home Sales Recovered More than Expected, Extending Strong Start to 2019: Pending home sales recovered 3.8% in March after falling 1.0% in February, a better result than the 1.5% gain expected and a positive sign for existing sales in the months ahead. Despite a 1.7% pullback in contracts across the Northeast, which accounts for the smallest share of total existing sales, the three largest regions posted solid monthly gains. Sales in the Midwest recovered 2.3% after sinking 7.2% in February, the primary driver of the overall weakness during February. Contract signings surged 8.7% in the West, the largest monthly gain since 2010, and jumped 4.4% in the South, extending a strong start for the region so far for 2019. Pending sales spent most of 2018 in a downtrend and the index remains down 3.2% from a year ago. However, activity has shown signs of life early in 2019 as price gains have continued to slow and mortgage rates have retreated. The 7.2% three-month gain to start 2019 is the strongest such run since 2011.