The Market Today

FOMC to Hike as Inflation Misses Again


by Craig Dismuke, Dudley Carter

Today’s Calendar – FOMC to Hike; CPI Misses Again:  It’s Groundhog Day for the CPI inflation report.  Another monthly miss to the weak side and another swift market response.  Headline CPI rose 0.4%, as expected, thanks to a 4.23% MoM increase in energy prices.  The core measure, however, rose only 0.1% (exp. +0.2%) bringing the YoY rate down from 1.8% to 1.7%.  Driving the weaker-than-expected results were weakness in apparel prices (-1.28% MoM), transportation prices excluding energy components (-0.37% MoM), recreation prices (-0.11%), other goods and services (+0.06% MoM), and a renewed weakness in medical care prices (+0.05% MoM).  The transportation ex energy weighed particularly on the final tally and was driven by another drop in motor parts prices (-0.52% MoM), an unusual drop in maintenance and repair prices (-0.27%), and a big 1.79% MoM decline in public transportation prices (airfares fell 2.4% MoM and are often volatile).  On the steadier side, housing rents posted another solid monthly gain, up 0.33% MoM.  However, lodging prices fell 1.34% MoM and household furnishing prices dropped, offsetting the more steady gain in rents.  Overall, this is once again a broadly weak inflation report.

 

The FOMC is scheduled to release its final rate decision of 2017 at 1:00 p.m. CT followed by a press conference from Chair Yellen at 1:30 p.m.  As discussed in yesterday’s MT, there is consensus that they will hike for the third time this year but there is ample disagreement regarding their forward-looking projections.  Some argue the infamous Dot Plot will show higher dots based on 1) the increasing likelihood of tax cuts, 2) an abnormally low unemployment rate, and 3) recent firming in the inflation data.  On the opposite side, some expect the dots to remain largely unchanged citing 1) the FOMC’s reluctance to base policy on tax law that has yet to cross the finish line, 2) continued weakness in wage growth despite the low unemployment rate, and 3) core inflation that has firmed up but which remains stuck below the Fed’s 2% target.

 

CFO Survey Shows Tax Reform Optimism and Potential Wage Growth:  An infrequently cited Duke University CFO Confidence Survey (4Q) showed CFO confidence rise to its highest level since the survey began in 1996.  The survey cites optimism about tax reform as the cause for the recent increase.  It also reported that companies are having difficulty hiring and retaining quality labor and expect to raise wages more next year.

 

Overnight Activity – Markets Shrug Off Brief Blip from Alabama Election as they Turn to U.S. Inflation Data, Fed Decision: U.S. equity futures were mixed overnight as global markets fared differently in trading leading up to this afternoon’s Fed decision. Asian markets were generally stronger early but European equities tarried near Tuesday’s closing levels; the Stoxx Europe is down less than 0.1%. U.S. equity futures are hovering around near unchanged after recovering from an early overnight drop. Futures contracts dipped just before 9 p.m. CT as reports began filtering out that the special election for an Alabama Senate seat was tilted in favor of Democratic candidate Doug Jones. The race was eventually called for Jones and, once the vote is certified, which some say could take place after Christmas, Jones will fill the Senate seat vacated by current Attorney General Sessions and currently occupied on an interim basis by Republican Luther Strange. The market response reflects the uncertainty created from knocking one seat off of the Republican’s already-slim majority in the Senate. Once Jones officially becomes an Alabama Senator, Republicans will only be able to lose one vote instead of two in votes on unfinished business on the agenda. Treasury yields also dipped on the reports, but recovered and tracked European yields higher. Ahead of this morning’s U.S. inflation report, the curve have shifted up by roughly 2.0 bps inside of 30 years and to their highs of the session. After the inflation miss, markets reversed course; equity futures advanced and Treasury yields tumbled with the Dollar. The 2-year yield fell to down 1.6 bps while the 10-year yield dropped to down 2.7 bps.

 

Yesterday’s Trading Activity – Telecoms Keep Rising to Push Dow and S&P to New Records, Rates Rise on Economic Data: U.S. equities were mixed in Tuesday’s trading as the Dow marched 0.49% higher, the S&P added a more modest 0.20%, but the Nasdaq slipped 0.19%. The daily gains for the Dow and S&P pushed both indices to their third consecutive record high. The S&P’s gains came on an evenly split performance where 50% of the covered companies rose and 50% of the companies fell. Telecommunication companies finished atop the S&P again and continued an impressive run that began nearly a month ago. Since the House passed its tax plan on November 16, the sector is up nearly 16% and has been one of the biggest beneficiaries of a tax-related sector rotation. At the other end of the S&P, utilities and energy companies were the worst performers. Crude prices reversed early morning gains as fears surrounding the shutdown of the Forties Pipeline appeared to subside. The daily climb for stocks was briefly interrupted by a tweet from Rand Paul saying he wouldn’t vote for a “budget-busting bill”. That tweet also had a brief impact on shorter bill yields. Further out, the 2-year yield closed 0.8 bps higher at 1.83% and the 10-year yield added 1.3 bps to 2.40%. U.S. yields were already tracking their European counterparts higher before the stronger-than-expected U.S. results for small business confidence and producer prices.

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