The Market Today

Growth In 2Q Was Unchanged At 2% While PCE Inflation Was Firmer; Trade Tone Tilts Optimistically

by Craig Dismuke, Dudley Carter

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Growth In 2Q Unchanged At 2% While PCE Inflation Was Firmer: Economic growth in the second quarter was unchanged at 2.0% after its final revision. In the details, there were minor mixed revisions in the underlying details that offset one another. On the positive side of the ledger, the boost from government spending was larger than expected while the drag from trade was smaller. Offsetting those positive effects, personal consumption was notched down 0.1%, still matching the second-best quarter of the cycle, and the drag from business investment was a bit larger. Also worth highlight, the Fed’s preferred consumer inflation measure was revised up from 1.7% to 1.9%, showing inflation was somewhat firmer than initially estimated.

Initial Jobless Claims Hold Near Their Lowest Levels In Decades: Initial jobless claims rose 3k last week to a still-solid 213k, providing a positive context in which to view slowing job growth. The pace of job growth has slowed by layoffs haven’t show signs of rising. On a four-week average basis, claims inched down and remain near their best levels in 50 years.

Trade and Inventories: The advance goods trade balance widened out by less than expected in August to -$72.8B, and the inventory data was mixed. On balance, the implication for 3Q growth should be modestly positive.

Later Today: There is a flood of Fedspeak scheduled throughout the day that includes comments from Kaplan (8:30 a.m. CT), Bullard (8:45 a.m.), Clarida and Daly (10 a.m.), Kashkari (1 p.m.), and Barkin (3:30 p.m.). Pending home sales will be released at 9 a.m. and is expected to show a small recovery in August after a disappointing July. The Kansas City Fed will release its manufacturing index at 10 a.m. CT which is expected to have improved but remained negative in September.


China Echoes President Trump More Optimistic Tone On Trade: Treasury yields pushed lower during a mixed session for Asian equities, but have trimmed their declines as European markets strengthened. Following an optimistic tone on negotiations yesterday from President Trump, the spokesman for China’s Commerce Ministry said the two countries are keeping in close contact ahead of a meeting of high level trade officials early next month. Additionally, the Commerce Ministry said China has purchased a “sizeable amount” of pork and soybeans from the U.S. Asian stocks notched modest gains Thursday.

Treasury Yields Cut Into Yesterday’s Climb Despite Stronger Equities: Equity indexes in Europe, however, were broadly firmer and had pushed the Stoxx 600 0.7% higher by midday. In addition to the trade optimism over the last 24 hours, the German economy got a rare bit of good news overnight. Consumer confidence in Germany rose unexpectedly in October and for the first time since February. Still, the index remains near its weakest levels since early 2017. The 10-year Treasury yield had declined 2.3 bps just after 7 a.m. CT despite U.S. equity futures firming up alongside the strength in Europe. The modest decline for yields only partially cut into yesterday’s jump.


Slow Start Quickly Broke Loose As News Flow Picked Up: U.S. markets opened unexcitedly Wednesday but stocks and yields abruptly moved higher after 9 a.m. CT as the news flow picked up. At the same time data showed stronger-than-expected sales of new homes (more below), the White House released a transcript of the call between President Trump and Ukraine’s president that had become the focus of partisan bickering. The phone call appeared to play a key part in House Democrats’ decision to formally begin an impeachment inquiry on Tuesday.

Trump Said China Deal Could Happen Faster Than Expected: Just before 10 a.m. yields and stocks added to their gains on a remark from President Trump that a trade deal with China “could happen sooner than you think.” In addition to several subsequent optimistic comments on the negotiations with China, President Trump also signed agreements with Japanese PM Abe on agricultural and digital trade. The USTR said the agreement will improve export conditions for roughly $7.2B of U.S agricultural products. President Trump said he hopes “final comprehensive deals” will be reached with Japan “in the fairly near future.”

Stocks Rose And Treasury Yields Shot Higher: Stocks held onto their gains and the S&P 500 rose 0.6%. Treasury yields moved persistently upward and ended near their high marks of the day. The 2-year yield added 7.4 bps to 1.68% as the 10-year yield added 9.2 bps to 1.74%. Also related to markets, the New York Fed announced it was increasing the size of both the overnight and term repurchase operations to be held on Thursday.


New Home Sales Rose More Strongly Than Expected As Mortgage Rates Declined In August: New home sales rebounded more strongly than expected in August from a July drop that was less severe than initially estimated. The report, prone to volatility on a monthly basis, showed sales rose 7.1% last month after falling 8.6% in July, less than the 12.8% pullback in the initial release. Adding in small offsetting revisions to May and June, the August annualized sales pace of 713k new homes was the third strongest of the cycle and represented an 18% gain from a year ago. The big jump in July was driven by large gains in the South (6.0%) and West (16.5%) that offset smaller declines in the Northeast (-5.9%) and Midwest (-3.0%). The August gain is the latest item on a list of housing data that has shown recent signs of life as mortgage rates have declined.

Evans Doesn’t See Need For Another Rate Cut Yet: Chicago Fed President Evans said he supported both the July and September cuts, but doesn’t currently see any need for additional adjustments. Evans noted, “We’re in a good place in terms of the rate setting,” adding “I was able to generate a bit of overshooting for our inflation objective over the forecast horizon with simply the cuts that we agreed to and so I did not have another rate cut in [the September dot plot].” He was less certain about any balance sheet changes, saying “we need to just be studying that more.”

Brainard Pondering The Need For Balance Sheet Changes: Fed Governor Brainard told a House Financial Services Subcommittee that, “When you look at the economy, you see strong consumers, you see a continued pretty strong labor market. ..You see wages growing above the rate of inflation but you also see business sitting on the sidelines, capex flattening out, a lot of uncertainty out there.” On the uncertainties the economy faces from abroad, she noted, “We’re watching that very closely, and in my own view it poses downside risks and that’s why it made sense to soften the path of monetary policy.” She described the overnight funding stresses last week a “simple imbalance” but admitted “It does pose questions about whether reserves in the system do need to be allowed to grow again.”

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