The Market Today
Global Worries Persist
by Craig Dismuke, Dudley Carter
January Trade Deficit Declines Sharply as Tariff Threat Front-Loaded Imports in December: January’s monthly trade balance report was a positive shot in the arm for 1Q GDP projections relative to otherwise disappointing data from other sectors. The trade deficit jumped from $50.5 billion (Nov.) to $59.9 billion in December. However, the deficit shrunk back to $51.1 billion in January as exports rose 0.9% and a 2.6% decrease in imports. Imports appear to have been elevated in December as U.S. companies front-loaded imports from China in anticipation of a January 1 increase in tariffs. Driving exports higher were monstrous jumps in soybean and auto exports. Soybean exports quadrupled to $1.21 billion. The bilateral trade deficits with every one of the U.S.’s largest trading partners fell in January, including a 16% drop in the deficit with Europe, a 6% drop in the deficit with China, a 46% drop in the deficit with Canada, and a 25% drop in the deficit with Mexico. While this appears to be a temporary decline in the U.S. trade deficit, it bodes well for 1Q GDP (see Chart of the Day).
Mortgage Applications Improve as Rates Continue Recent Decline: Mortgage applications rose 8.6% last week, the third strongest weekly gain of the year and the fourth biggest week since the middle of 2016. Lower rates are expected to aid stabilization in the housing sector but most series have yet to reflect a discernible positive effect. However, the general trend for mortgage applications has improved in recent weeks as the MBA’s mortgage rate estimates have declined. The 30-year rate dropped 0.10% to 4.45% last week, down from 5.17% in November and the lowest level since January 2018. In response, purchase applications rose 6.4% last week and refinancing activity improved by a strong 12.4%.
Yesterday – Equities Firmed Up as Treasury Yields Rose, But Both Closed Off Their Intraday Bests: Treasury yields peaked just as U.S. traders flipped on their machines Tuesday, gradually giving up a sizeable overnight increase that had wiped away most of Monday’s fear-induced tumble. The 2-year yield had risen as much as 5.8 bps but ended 2.5 bps at 2.27% after an auction of 2-year notes saw strong indirect demand, solid bid-to-cover, and stopped through by more than 1 bp. The 10-year yield also settled 2.5 bps higher after earlier clawing back as many as 4.7 bps overnight. The pullback in yield during U.S. trading occurred alongside a sideways grind in the major equity indices that gave way to a slightly softer bid in the afternoon. The S&P 500 rose 0.7% after gaining as much as 1.1% around 10 a.m. CT. Still, all 11 sectors closed up on the day, led by energy and financials. Energy companies rode higher oil prices to a first place finish while financials recovered after five consecutive declines. Financials have been beat up as Treasury yields have declined sharply over the last week amid concerns about the global economy. Shares of Apple served as one of the larger drags on the majors after a judge ruled against it in a patent infringement case, proposing a partial ban on certain iPhone models. Other consumer stocks, including homebuilders, lagged after consumer confidence disappointed and housing starts sank more than expected.
Overnight – Global Worries Return: Worries about a possible recession retook the reins overnight, pushing global equity indices modestly into negative territory after most had recovered on Tuesday. Risk sentiment teetered during Asian trading but has soured since the open in Europe. The Stoxx Europe 600 opened up 0.2%, but dropped sharply around 4:30 a.m. CT to trade 0.3% lower for the day. The turnabout occurred alongside a similarly sizeable drop in U.S. futures, a couple of hours after cautious comments from the ECB, and enhanced an existing bid for bonds. ECB President Draghi said risks to the outlook remain tilted to the downside but that a soft patch doesn’t necessarily foreshadow a recession. Nonetheless, “pervasive uncertainty” continues to warrant accommodative ECB policy. He did mention, however, the central bank needs to reflect “on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any.” Although less systemically important than the ECB, an overnight decision from New Zealand’s central bank captured well the market’s current concerns. The New Zealand Dollar collapsed after officials surprised markets by saying their next move could be a rate cut given a weaker global outlook. The renewed risk-off tone firmed up a pre-existing bid for Treasurys and other global government bonds, leading German bund yields deeper into negative territory and the U.S. curve into a deeper inversion. The German 10-year yield dropped as low as -0.06%, the lowest since October 2016, while the 10-year Treasury yield fell as much as 7 bps to 2.35%. The spread between the 10-year Treasury and 3-month T-bill touched -10 bps, the deepest inversion since August 2007.
Consumer Confidence Cooled Unexpectedly in March: Consumer confidence retreated unexpectedly in March as respondents were less upbeat on both the current assessment and near-term outlook. Overall confidence dropped 7.3 points in March, second to last December’s 9.8-point decline as the largest since 2015, to 124.1, the second weakest reading since 2017. Confidence had recovered 9.7 points February, the biggest monthly gain since 2015. The present situation index slumped 12.2 points to an 11-month low while future expectations dipped 4 points. The share answering that current business conditions were “good” fell from a near cycle-high to the lowest level since July 2017, although the migration was more into the “normal” category (+4.7 points) than into a “bad” assessment (+2.5 points); expectations for six months from now saw more modest, but directionally-consistent shifts. The labor market indicators were mixed following volatility in recent nonfarm payroll activity. After February’s 20k net payroll gain disappointed, the labor market differential (jobs plentiful – jobs hard to get) tightened to an eight-month low. However, consistent with a new cycle-high for wage growth in that same payroll report, net income expectations recovered back to near the middle of the recent range. There were a couple of silver linings away from the core indicators, with planned auto purchases jumping to the second highest level of the cycle and home interest recovering from a two-and-a-half year low. The report won’t go far in clearing up the outlook for the Fed, who said that shifting to patience in January would allow for additional data to help “gauge the trajectory of business and consumer sentiment.”
Daly Said Fed Credibility Depends on Sustained 2% Inflation: San Francisco Fed President Daly said “on our dual mandate report card, I feel good about where we are on employment – but a little less so about inflation.” Models and history show “a prolonged economic expansion and a very tight labor market” should be driving inflation higher, Daly said, but that fact pattern has failed to unfold yet in the current expansion. She noted “we’ve grazed 2 percent here and there, including briefly last year. But it hasn’t been sustainable.” After positing several forces currently keeping inflation in check, Daly said too-low inflation “makes the chance of deflation…more likely. And it makes it hard for the Fed to adjust interest rates in the face of economic shocks.” It also has a downward pull on inflation expectations, a common concern echoed by multiple officials in recent communications and one factor behind the Fed’s ongoing exploration for the best framework to achieve their inflation target. “Fed credibility is the foundation of our ability to make effective monetary policy,” Daly said. The Fed needs to “work to deliver 2 percent inflation on a sustained basis. The Federal Reserve’s continued credibility with consumers and businesses depends on It.”