The Market Today

TODAY’S CALENDAR

Regional Activity, Trade Inflation, Jobless Claims, and Housing: In this morning’s data, two regional Fed surveys pointed in different directions as another inflation report reflected a firmer trend and the labor market received another all’s-clear on the jobless claims front.

 

Regional Fed Surveys: The New York Fed’s Empire Manufacturing Business Conditions Index rose more than expected to a new five-month high. In March, a net 23% of respondents reported that business conditions had improved since February. In the details on current conditions, indexes tracking prices paid, prices received, new orders, shipments, inventories, and average workweek all rose while the number of employees eased. Looking six months ahead, the expectations index fared more frailly, falling to its lowest level in six months on softer orders, shipments, and capital spending indicators. The Philadelphia Fed Business outlook index softened more than expected for March, slipping to its third lowest level since 2016.

 

Trade Inflation: Import prices rose 0.4% in February, doubling expectations, but January’s initial 1.0% increase was trimmed slightly to 0.8%. Stripping out weaker petroleum prices during the month, import prices rose 0.5% for a second month, the strongest stretch since 2011. Food prices rose at a faster pace in February as did capital goods and non-auto consumer goods. Over a year ago, total import prices were up 3.5% (fastest since April 2017) while non-fuel imports were 2.1% more expensive, the fast pace since January 2012. The firmer trend in import prices is consistent with the Fed’s belief that the previous effects of Dollar strength will fade (a transitory effect) and help nudge inflation back towards the 2% target over the medium term. Export prices were up 0.2% MoM and 3.3% YoY.

 

Initial Jobless Claims Hold: There wasn’t much movement in the jobless claims data, as initial claims fell last week from a revised 230k (previously 231k) to a better-than-expected 226k. Initial claims, which have now fallen in three of the last four months, have averaged 221.5k over the prior four-week period. Continuing claims from two weeks ago also held steady, rising a modest 4k from the prior week to a better-than-expected 1.879MM. There continues to be no signs for concern in the jobless claims data series.

 

TRADING ACTIVITY

Yesterday – Yields Moved Lower as Investors Took Equities Lower for a Third Session: Investors in U.S. equities faded an opening jump for a third consecutive session and the three major indexes closed lower after another day of broad-based weakness. The S&P 500 jumped at the open even after headline retail sales were reported down for a third month and activity at the control group (used for GDP estimates) fell short of expectations. And while the consumer discretionary sector did drop 0.20% on the day, it was another bout of weakness for materials makers (-1.32%) that led the S&P 500 to a daily decline of 0.57%. The Dow realized an even-steeper 1.00% drop. As equities weakened, the Treasury curve flattened on lower yields after briefly moving higher following the firmer-than-expected producer price inflation report. The 2-year yield moved up just 0.4 bps after earlier adding 3.3 bps and reaching a new cycle high. The 5-year yield fell 0.8 bps to 2.61% and the 10-year yield shed 2.6 bps to 2.82%, its second lowest level since the market volatility hit in early February.

 

Overnight – Markets Continued Recent Trends as They Await Next Catalyst: Sovereign yields continued to reflect a hint of risk-off bias during Thursday’s global sessions, as longer yields in France and Germany crept lower, consistent with trends seen in Asia, while those on European periphery rose slightly. The German 10-year yield was trading 1.2 bps lower while similar-maturity debts in Italy and Spain were yielding 0.6 bps more. With all quiet on the foreign economic front on Thursday, investors were left to reflect on a soft weekly trend for global equities and reemerging fears of a trade war between the U.S. and China. While markets should take comfort in Larry Kudlow replacing Gary Cohn as the President’s top economic advisor, Kudlow has shown a willingness to make an exception on his anti-tariffs paradigm when it comes to the U.S.’s largest trading partner (more below). Global equities have so far been mixed on Thursday with the major indexes making modest moves in different directions. In the U.S., the Treasury curve continues to flatten with rising short yields (2s +1.2 bps) and lower longer yields (-0.2 bps).

NOTEWORTHY NEWS

Kudlow to Replace Cohn: Larry Kudlow, Senior CNBC contributor and former budget aide to President Reagan, will replace Gary Cohn who recently resigned as director of the National Economic Council after disagreeing with the President’s announcement of import tariffs on steel and aluminum. Kudlow, who also publicly disagreed with the use of broad-based tariffs, supported the Republican tax bill and is in favor of a less burdensome regulatory environment. As to how he may handle disagreements with the president on things such as tariffs, Kudlow said, “The way I was brought up in the Reagan years, you talk it out and you argue it out, but once the president has made a decision, that’s it. My job is to execute. You don’t go through these endless bureaucratic things and delays.” As to the more recent developments on potential tariffs targeted specifically at China, he noted “I am very strongly in favor of tariffs on China, because they continue to violate our intellectual property rights and so forth.”

 

Atlanta Fed’s GDPNow Made News on the Way Up and is Making it on the Way Back Down: The Federal Reserve Bank of Atlanta’s often-quoted GDPNow forecast, known to be a volatile indicator because of the underlying methodology, made news headlines on February 1 after it projected the economy would grow 5.4% to start 2018. That would have been the strongest quarter since the third quarter of 2003 and bucked the usual trend of a first-quarter falter for economic growth. Economists largely dismissed the blockbuster projection because it originated out of the full-quarter extrapolation of a single data point, a big beat in January’s ISM Manufacturing PMI. Now, after a series of negative revisions, the biggest of which came following soft auto activity, disappointing retail sales reports for January and February, and weaker-than-expected business indicators, that same model is now projecting the economy grew by a less impressive 1.9%. Whether it’s residual seasonality in the GDP calculations or consumer spending taking a breather after an impressive 3.8% close out of 2017, economists continue to look for the consumer to pick back up in the coming months as the benefits from tax reform take hold.