The Market Today
FOMC Decision; Deal on USMCA but No Senate Vote Until 2020; Dec. 15 Tariffs Still on Table
by Craig Dismuke, Dudley Carter
Firmer CPI Inflation in November: In one of the week’s two primary economic releases, CPI inflation was slightly firmer-than-expected in November, rising 0.26% MoM bringing the YoY rate up from 1.8% to 2.1%. When excluding energy price’s 0.8% MoM increase and food/beverage price’s 0.1% increase, core prices rose 0.23% which was slightly faster than the 12-month trend rate. This kept the YoY rate steady at 2.3%. The prices of services continues to push prices higher. Core services prices rose 0.27% bringing their YoY rate up to 3.3%. In contrast, goods prices rose 0.04% bringing their YoY rate up to just 0.1%. As it relates to the Fed’s preferred measure of inflation, core PCE, the CPI inputs point to a softer November PCE report.
After a surprisingly soft October report for housing inflation, owners’ equivalent rent prices rose 0.24% which was 3/100ths below the 12-month trend rate. A 1.1% increase in lodging prices helped boost overall housing inflation further. Medical care prices continued their run of strong reports, up 0.32% MoM. Medical care inflation is now up 4.2% YoY Transportation inflation excluding energy rose a benign 0.01%. Price gains were moderately strong across the remainder of the categories. Apparel prices did increase 0.1% MoM after October’s 1.8% decline. Recreation prices and education/communication prices doubled their 12-month trend rates of growth. And other goods and services also out-paced their recent trend on another jump in tobacco prices.
FOMC Decision Expected to Reiterate Pause: At 1:00 p.m. CT, the FOMC is scheduled to release its final, scheduled monetary policy decision of the year. Coming into the year, Fed officials and markets expected Fed Funds to rise in 2019. That outlook changed quickly, resulting in three Fed cuts totaling 0.75%. In the October decision, officials signaled a pause by replacing language that they would “act” as appropriate with language saying they would “assess” the appropriate stance for policy. In Fed Chair Powell’s press conference, he created two bands guiding future policy decisions. On one hand, the Fed is unlikely to cut further unless officials see a “material reassessment of [the] outlook”. On the other, they are unlikely to hike until they see a “really significant move up in inflation that’s persistent.” For today’s meeting, we expect the Statement, the updated official projections, and Chair Powell’s presser to all reiterate this pause.
Hopes for Tariff Delays Drummed Up Optimism Early: Spirits were lifted just before U.S. trading opened following a WSJ report that the U.S. and China were “laying the groundwork” to delay tariffs set to take effect on Monday. Stock futures firmed up and Treasury yields erased an overnight drop to turn higher on the day. The optimism got another boost after Mexico’s President said an updated USMCA had been agreed to by the three North American neighbors. A couple of hours later, House Speaker Pelosi confirmed a deal had been reached and would likely be voted on next week. However, caution returned mid-morning after investors were once again reminded of the unpredictable nature of the negotiations that has so far made a trade deal elusive.
Caution Was Kept in Place by U.S. Posturing: Around 10 a.m. CT, stocks dropped back into negative territory and yields briefly dipped after White House adviser Kudlow said the December 15 tariffs were “still on the table” and that “no definitive decision” had yet been made on a possible delay. Later in the afternoon, Senate Majority Leader McConnell said the Senate would not vote on the USMCA before 2020. Stocks ultimately closed lower amid the uncertainty, with the S&P 500 finishing down a modest 0.1%. Treasury yields, however, held their gains as the 2-year yield closed 3.9 bps higher at 1.65% while the 10-year yield added a smaller 2.3 bps to 1.84%.
Risks Chill Global Markets Ahead of the Fed: U.S. equity futures traded just below breakeven for most of the overnight session and Treasury yields drifted down in front of this morning’s CPI report and this afternoon’s Fed decision. Asian markets closed mostly higher earlier in the day while indices across Europe have generally recovered from an opening drop to trade around unchanged. Yesterday’s WSJ report about a delay of upcoming tariffs was countered by White House adviser Kudlow’s comment that they were “still on the stable.” The continued uncertainty has kept market sentiment chilled Wednesday as the December 15th tariff deadline looms. Additionally, tomorrow’s ECB decision and parliamentary elections in the U.K. added to the caution.
Markets Certain the Fed Will Wait and Watch: Trade uncertainty, its effect of slowing global growth, as well as muted inflation pressures are key reasons why the Fed has eased policy this year. Despite recent updates on each of those factors, the market is certain the Fed will opt for no policy changes today and a continued pledge to watch the data and assess the forward path. Fed funds futures are still leaning toward another ease, but not until later in 2020. Just before this morning’s CPI report, equity futures were mixed but little changed, the 2-year yield had dipped 0.4 bps, and the 10-year yield was 1.2 bps lower. Those moves remained intact after the as-expected reading for core inflation.