The Market Today
Geopolitical Risks, Oil Collapse, Fed Concerns Drive Yields Lower
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Housing, Business Investment, Thanksgiving, and Black Friday: Thanksgiving week will be fairly quiet on the economic front, so far as scheduled releases are concerned at least. At 9:00 a.m. CT, the November Homebuilder Confidence index is expected to pull back fractionally but remain at a strong level. Housing activity has certainly been weaker as rates have risen, but builder confidence has yet to be materially affected. At 9:45 a.m. CT, New York Fed Bank President Williams is scheduled to speak from the Bronx. After Clarida, Harker, and Kaplan all showed more caution on their Friday comments, Williams’ take on the outlook could certainly move markets.
October’s Housing Starts and Building Permits data will be released Tuesday, followed by the October Durable Goods Orders report and Consumer Confidence on Wednesday. Also important this week will be the start to the 2018 holiday shopping season. Economists’ expectations for holiday shopping have been strong given the underlying strength of the consumer and the elevated consumer confidence. However, Gallup polling data shows a little less rosy outlook and consumer confidence, on a YoY basis, is actually flat despite still-strong confidence. Nonetheless, we will be keenly interested in Thursday/Friday’s start to the holiday shopping season. It’s worth noting that, historically, strong Black Friday sales has an inverse relationship with strong cumulative holiday sales.
Overnight – U.S. Equities Diverged from Positive Global Trend: U.S. equity futures were down just over 0.3% earlier and Treasury yields had risen by between 1.4 bps and 1.8 bps between the 2-year and 10-year notes. Chinese stocks led the generally upbeat trading day across Asia despite exchanging some hostile comments with U.S. Vice President Pence at the Asia-Pacific Economic Cooperation Summit over the weekend. Chinese President Xi said the actions the U.S. has implemented against his country were “short-sighted” and “doomed to failure.” Pence later said “We hope for better, but the United States will not change course until China changes its ways,” and added “We’re in a very strong position, …The American people know that we have to do something to reset this relationship with China economically. So, I don’t think there’s a timetable.” President Trump will meet with President Xi at the end of the month to discuss trade. European markets were also positive, but well of the highs set early in the session. Brexit remains a risk for markets, but the morning British PM May said there weren’t enough no-confidence letters to support holding a vote. U.S. futures briefly turned positive as European markets jumped at the open but retreated as they’ve eased back closer to breakeven. Contracts on the S&P 500 were lower by 0.2% while the 2-year Treasury yield had risen 2.1 bps (2.82%) and the 10-year yield had added 2.9 bps (3.09%).
ICYMI – November 16, 2018 Weekly Market Recap: The Treasury curve moved lower last week as an assortment of factors (e.g. plunging oil prices, equity weakness, political uncertainty in the US and UK, questions about Fed policy) weighed on global risk sentiment. The bond market was closed Monday for Veterans Day but stocks sold off as tech tumbled and reports said the White House was revisiting potential auto tariffs. Oil prices were a focus the entire week as WTI spent all five days floundering in a bear market, but most acutely Tuesday as the commodity collapsed more than 7%, the most since 2015, to just below $56 per barrel. Equities and yields again moved lower Wednesday as comments from Democratic representatives stirred worries the new Congress could revisit recently eased regulations on banks and hold up passage of the USMCA (updated Nafta). Positive Brexit developments on Tuesday (EU, UK negotiators agree to Brexit plan) and Wednesday (PM May’s Cabinet reportedly supports said plan) were unwound Thursday amid a raft of cabinet resignations and letters written in support of a no-confidence vote. The UK’s 10-year yield sank the most since the 2016 Brexit vote, weighing on US yields as well. Those forces overshadowed a roughly as expected CPI inflation report and strong gain for headline retail sales. On the Fed front, Chair Powell pointed to a list of headwinds facing a strong US economy and comments from a chorus of other officials included a consistent theme of caution and data dependency for future policy adjustments as the overnight rate approaches neutral estimates. The chances of a third hike from here (December + 1st 2019 hike + 2nd 2019 hike) fell from 86% to 24% on the week. Click here to view the full recap.