The Market Today
Government Shutdown with No Plans to Open, Stocks Worst Since Depression … but … Merry Christmas!
by Craig Dismuke, Dudley Carter
Santa Is on the Move: As of the time of writing, Santa is traversing the eastern shores of Australia according to the Official NORAD Santa Tracker at www.noradsanta.org. We hope everyone is having a relaxing holiday season and a Merry Christmas tomorrow.
Markets Focused on Fed, Global Weakness, Trade: The Chicago Fed National Activity Index fell from 0.24 to 0.22 in November in a report that the markets will completely ignore. The bond market will close at 1:00 p.m. CT in anticipation of the Christmas holiday. The markets will remain focused on the fallout from last week’s Fed decision, fears about global growth, and trade friction.
Partial Government Shutdown: As of midnight Friday, government workers in some departments of Federal government representing approximately 25% of total workers were place on unpaid leave. Several of the largest departments have already been funded through September 2019, including Defense, HHS, and the VA. Workers placed on leave have historically received back-pay upon return to work. Social Security and Medicare benefits will still be paid. Military personnel, TSA employees, police, and firefighters will all report to work as usual. With Congress now mostly home for the holidays, it is entirely likely that this partial government shutdown will persist until the new term, beginning January 3, when Democrats will take charge of the House.
Markets Don’t Mind Shutdowns: The modern budgeting process was put into place back in 1976. There were several shutdowns leading up to 1979 when a judge ruled that the 1884 Anti-Deficiency Act required the government to shut down at least part of its operations if Congress did not grant itself spending authority. Since that ruling, there have been 15 shutdowns. While most have been 1 to 3 days long, a 1995 shutdown lasted 21 days with the last significant shutdown, in 2013, lasted 16 days. Historically, the economy does not fall apart because the government halts non-essential services for a temporary period. The markets may experience some short-term volatility, but the impact has historically been minimal and temporary. During the last twelve shutdowns the average change in the 10-year Treasury yield from 10 days before a shutdown to 10 days after has been a drop of 12 basis points. The DJIA has averaged gains of approximately 2.3% during the same time periods. In today’s scenario, the shutdown will add to investor concerns – particularly given that nothing seems to have gone well lately – but the real focus will remain on Fed policy, global growth, and trade.
Traders Likely to Hang On for Half Day of Uncertainty: Most global markets are shutting down early Monday ahead of tomorrow’s full Christmas closure. Following last week’s turbulent trading in the U.S., Japan’s Nikkei slipped 1.1% while China’s CSI 300 rose 0.3%. Europe’s Stoxx 600 ended its half day 0.6% lower with all sectors softer than Friday’s final levels. China’s Ministry of Commerce issued a statement Sunday saying officials had talked to U.S. counterparts last week and “made new progress” on trade discussions. On Monday, China’s Ministry of Finance issued a statement saying it would lower import taxes on over 700 goods starting January 1. While the Statements from China have obvious implications, the partial government shutdown and a weekend statement from the U.S. Treasury remain the bigger focus. Treasury Secretary Mnuchin issued a statement Sunday announcing he had “convened individual calls with the CEOs of the nation’s six largest banks” in relation to last week’s sell-off and that “all confirmed ample liquidity is available for lending to consumer and business markets.” The statement, likely intended to calm the collective nerves, concluded with a reminder that the Treasury sees “strong economic growth…with robust activity from consumers and business.” Still, U.S. futures recently erased modest overnight gains with those on the Dow, which had its worst week in a decade last week, lower by 0.5%. The 2-year Treasury yield was off 1.7 bps to 2.62%, the lowest since late August, while the 10-year yield had pulled back 2.7 bps to 2.76%.
LAST WEEK’S TRADING
‘Twas the Week before Christmas and the Markets Were Stirring: Last week was a mess for the markets as the Fed proved less concerned about recent volatility than investors expected and Congress and the president appeared on-course for a government shutdown. Stocks tanked again on Friday with the Dow falling 414 points, the S&P dropping 2.0%, and the Nasdaq sinking another 3.0%. This marked the worst week for the stock markets since 2011 and the S&P has only once seen a worse December (through 14 trading days) – and that was during the Great Depression. The Nasdaq fell firmly into “bear market” territory on Friday, down 21.9% from August’s high. Oil fared even more poorly, dropping 11.4% in its worst week since 2015. Treasury yields fell on the week with the 2-year down 9.8 bps to 2.63% and the 10-year down 10.7 bps to 2.78%, its lowest weekly close since April. Click here to see the Vining Sparks Weekly Market Recap.
FRIDAY’S ECONOMIC NEWS
Williams Says Fed Could Re-Assess Views on Monetary Policy, Markets Balk: New York Fed Bank President Williams spoke on CNBC Friday morning expanding on Chairman Powell’s comments Wednesday. Williams pointed out that, from his perspective, Powell’s comments that the balance sheet was off the table were based on his baseline economic forecast. That if the economy slowed more than they expected, the Fed would be ready to “re-assess [their] views” and “shift [their] view on monetary policies.” This clarification seemed to placate investors with the Dow surging more than 350 points at the time of the Williams’ comments. However, the real problem with the Fed’s communications Wednesday were not just that the balance sheet was off the table. Rather, it was a weak defense for December’s hike and an even weaker justification for two more hikes in 2019. Powell cited the strong economy in 2018 in raising rates on Wednesday and continued, above-trend growth for two hikes in 2019. Powell’s mindset seemed to ignore/diminish the $17 trillion wiped from global equity markets since January, the 92% of countries in the MSCI world indices with markets in “death crosses,” the 15% drop for the S&P since September, the 60% of S&P companies in “bear market” territory, the recent inversion of the belly of the Treasury curve, the still-below-target inflation, the weakness in business investment, and the stagnating housing market. Granted, participants lowered their projections from three hikes in 2019 to two; but the current backdrop seems sufficiently worrisome to elicit a more noteworthy change of tone. At least that has been the message from the markets.
Consumers Spend Savings in November to Offset Weaker Income Growth: Personal income rose 0.2% MoM in November, weaker than expected and below the 12-month trend rate of 0.3%. Disposable income also grew at just 0.2%, half of the 12-month trend. However, personal spending rose a better-than-expected 0.4%, 0.3% when adjusted for inflation. The solid growth in spending is yet another indicator of good personal consumption results in the 4Q GDP report. As a result of the combination of strong spending and weaker income, the savings rate dropped from 6.1% to 6.0%, the weakest rate of savings of this cycle, save two months in 2013.
Core PCE Ticks Higher but Underlying Trend Remains below-Target: PCE inflation rose 0.1% MoM in November, slightly weaker than the expected 0.2% MoM gain. However, the one-tenth gain was sufficient to push year-over-year core price gains up from 1.82% (1.8%) to 1.88% (1.9%). After weaker gains in 2017, inflation was expected to bounce back above 2.0% in 2018 on calculation factors alone – presuming inflation ran at close to a 2%-growth rate. Core PCE only managed to breach 2.0% for one month, July, and has been fractionally disappointing for most of the year. As a result, the baseline influence on the year-over-year calculation now points to more sub-2% reports over the next ten months even if prices were to rise at a 2%-growth rate each month.