The Market Today
FOMC Expected to Hold, ADP Projects Big Month for Job Growth
by Craig Dismuke, Dudley Carter
Market Today’s Thoughts on the Recent Jump in Market Volatility (Click here to read the full text)
Excerpt – “Global Sovereign Sell-Off Has Yields at the Highest Levels in Years, Market Nerves on Edge: The murmurings from market watchers have become increasingly audible as global yields have risen in recent months to their highest levels in several years. A rapid ascent in yields beginning in early September has pushed the U.S. yield curve outside of the top-end of its most recent trading range. Not only has the degree to which yields have risen raised eyebrows, so too has the speed. The 2-year Treasury yield closed yesterday at 2.12%, its highest level of the cycle and up 86 bps since September 8 (annualized change of over 200 bps). The 5-year Treasury yield finished at 2.51%, its highest yield since April 2010 and up 87 bps over the same time. The 10-year Treasury yield closed Tuesday at 2.72%, its highest yield since April 2014 and up 67 bps since September 8. As has been the case for many years, global yields have moved directionally coupled with U.S. yields. The German curve is similarly stretched with the 2-year bund yield hovering at its highest level since June 2016, the 5-year yield near its highest level since November 2015, and the 10-year bund yielding the most since September 2015. In Japan, the Japanese 10-year yield is at 0.09%, the furthest it’s been from the Bank of Japan’s 0.00% peg since July 2017.”
Today’s Economic Calendar – FOMC Expected to Hold Pattern; ADP Projects Big Month for Job Growth: The January jobs data from ADP projects 234k private nonfarm payrolls were added during the month, well above expectations of 185k. Moreover, ADP’s December figure of 250k was revised down to only 242k even though it missed the BLS’s number badly (+146k). Often, there are big revisions to the ADP report bringing it closer in-line with the BLS figure. Perhaps the ADP revision points to a larger revision upward in Friday’s BLS release. As for January, this morning’s news is a strong indicator and economists are likely to revise their January predictions up (currently at +181k) over the next 48 hours. Mortgage applications for the week ending January 26 fell 2.6% as purchase apps fell 3.4% and refi apps dropped 2.9%. The 30-year mortgage rate rose 5 bps to 4.41% during the week bringing it to its highest rate since March. The Employment Cost Index, one of the best indicators of wage gains, rose 0.6% in 4Q which was in-line with expectations. While it was a slightly weaker quarter, it was good enough to bring the YoY rate of wage/salary/benefit gains up to 2.58%, the fastest pace of gain since 2008.
The FOMC will conclude its first meeting of 2018 at 1:00 p.m. CT. The Fed Funds Futures market is now pricing in a 4% chance of a rate hike, still well-below the level consistent with the Fed not upending the markets. Given the recent volatility, a surprise hike seems like a very remote possibility. However, investors continue to place over a 90% chance of a hike by the March meeting. There will be no post-announcement presser. We will be very surprised if there are any significant changes to the Official Statement. The risks for the bond market are certainly weighted toward a more hawkish view on the state of the economy.
State of the Union: President Trump delivered a call to bipartisanship in his State of the Union address last night. The President lauded the strong economy, cherry-picking some strong data points and embellishing a few, as presidents always do in the SOTU. While there were some party-line zingers, the overall tone was much more moderated than most of the President’s tweets. He called on Congress to enact immigration reform (including a pathway to citizenship) and a significant infrastructure spending program. If not for the left side of the hall sitting on their hands most of the night, one might have considered this agenda to have come from a Democratic president. The speech was not necessarily a game-changer, but Trump will likely enjoy a bump in his approval ratings and Republicans might be more willing to get on the train at this point. However, the fruit will be evident quickly, as Congress goes back to negotiating a budget agreement with a February 8 deadline.
Yesterday’s Trading Activity – Stocks Slumped as Rate Rise Remained in Focus: Stocks endured a bludgeoning on Tuesday that pushed the Dow down over 400 points at its daily low. Once trading came to a merciful close, the index had lost 1.4% of its value while the S&P shed 1.1% and the Nasdaq dropped 0.9%. The bears were out in full force as several separate factors took swings at equity sentiment. Health care companies were the worst performers in both the Dow and S&P after a surprise announcement from some powerful names suggested they were joining forces for an experimental venture into the health care space. A joint statement from Amazon, Berkshire Hathaway, and JPMorgan Chase indicated the powerful triad was creating an “an independent company that is free from profit-making incentives and constraints. The initial focus of the new company will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.” Energy companies were the penultimate performer as a slippage in crude prices intensified. More broadly, equities continued to succumb to the nervousness created by the recent run-up in interest rates. That trend continued on Tuesday as the yield curve reached new multi-year highs. The 2-year yield added another 0.8 bps to 2.12%, the 5-year yield climbed 1.5 bps to 2.51%, and the 10-year yield rose 2.6 bps to 2.72%. The net result was the steepest twos-to-tens spread (59.2 bps) since December 20.
Consumer Confidence Rebounds, Optimism on Stock Market Moves Further into the Stratosphere: The Conference Board reported a stronger-than-expected rebound in consumer confidence in January as a recovery in the expectations index helped offset a slightly weaker current assessment. The disappointing December drop was also revised to be slightly less severe. The moderation in the current assessment occurred as a better employment outlook was unable to fully compensate for a slightly less-positive assessment of business conditions. The labor market differential which shows the difference between the share who believe jobs are plentiful and the share who see jobs as hard to get rose to 21.2% in January, the highest since July 2001. Looking ahead, a slightly greater number of consumers expected better business conditions and hiring but less in the way of higher incomes. But the mix of moves didn’t discourage consumers’ expectations for their equity-related investment holdings. An impressive 51.6% of consumers answered that they expect higher stocks prices over the next year, the most optimistic outlook in the survey’s more-than-thirty year history.