The Market Today
Inflation Firms as Fed Commences Two-Day Meeting to Likely Cut Rates
by Craig Dismuke, Dudley Carter
Today brings a heavy day of data as the Fed begins its two-day meeting. On the calendar today are reports on inflation, income, spending, home prices, home sales, and consumer confidence.
Core PCE Inflation Firms as Fed Begins Meeting: Core PCE inflation rose 0.25% MoM, the third-firmest month for the reading since 2009. However, the May figures were revised lower to just +0.15% MoM. As such, the year-over-year rate of core PCE inflation was revised down to 1.49% in May. The firmer June figures brought the year-over-year rate up to 1.60% and the 3m/3m annualized rate up to 2.48%, the strongest pace of gain since 2012. Partially responsible for the firming core pressures was an unusually strong month for durable goods price increases, spread across each of the main categories. Pricing for autos, furnishings and other household durables, recreation equipment, and the sundry other category increased 0.47% in June, the second hottest month since 1993. The firmer inflation report will be welcome news to the Fed given the history of inflation running below their 2.0% target. However, there is a very high bar for keeping them from cutting rates in tomorrow’s decision, and one firm inflation report is unlikely to rise to that bar.
Income and Spending Remain Solid, Savings Rate Revised Notably Higher: Personal income rose 0.45% MoM on a solid 0.5% gain in wages. While tax payments were on the firmer side of the recent trend, disposable income still outpaced the 12-month average, rising 0.43%. Personal spending was solid in June, up 0.3% as-expected although this came from a higher base in May with May’s spending tally revised up from +0.4% to +0.5% MoM. The consumer continues to be a stabilizing force for uncertainty in other parts of the economy. Of course, sentiment has been bolstered by the recent run higher for the equity markets which is at least partially a reflection of expectations for easier monetary policy. The savings rate was revised notably higher today, up almost two full percentage points across the 5-years of revised figures, bringing the rate up to 8.0%. The savings rate inched even higher in the June data, up 0.1% to 8.1% indicating plenty of powder for a future drawdown.
Home Prices, Home Sales, Consumer Confidence: At 8:00 a.m. CT, the S&P CoreLogic Home Price Index is expected to show home price gains continue to slow, down from 2.54% YoY to 2.40%. Home prices were gaining at a rate of 6.72% YoY back in early-2018. At 9:00 a.m., the June Pending Home Sales report will show if future existing home sales are expected to improve. The monthly index is expected to increase 0.5% after improving 1.1% in May. Housing sales have remained disappointing given the precipitous drop in mortgage rates since November. Finally, at 9:00 a.m., July’s Consumer Confidence report from the Conference Board is expected to show confidence tick up after plunging 10 points in June.
Yesterday – U.K. Assets Disrupted a Quiet Global Session as Investors Await Trade and Fed Headlines: The generally mundane trading trends from Monday’s overnight global session carried on during U.S. hours with stocks mixed and little changed while Treasury yields stuck close to Friday’s final levels. The Dow rose 0.1% while the S&P 500 fell 0.2%, with the Nasdaq lagging behind on weakness in tech companies. U.S. trade negotiators traveled to Beijing Monday for the first face-to-face trade discussions since Presidents Trump and Xi agreed to a tariff truce at the end of June. A cautious reading of the tea leaves, however, gave investors little reason to outdo Friday’s record-high closes ahead of an incredibly busy week that’s expected to revolve around the Fed’s first rate reduction in more than ten years. Fed funds futures edged lower in yield, dragging the financials sectors to a last-place finish and keeping a lid on the Treasury curve. The 2-year yield nudged up 0.6 bps while the 10-year yield shed 0.5 bps. Although most markets experienced a lackadaisical day of volatility, U.K. assets swung sharply on headlines pertaining to Brexit, another risk the Fed has identified to support its lean toward easing. The British pound slumped 1.3% Monday, its worst day of the year, to its lowest level since March 2017. The pound has weakened in the face of increased risks of a no-deal Brexit since Brexiteer Boris Johnson took over as prime minister last week.
Overnight – Worries About Trade, Weakness in Europe Weigh on Sentiment Overnight: Anxiousness about U.S.-China trade negotiations and expectations for easier global monetary policy were both sharpened overnight. After a generally-upbeat day across Asia, Europe’s Stoxx 600 slumped 1.3% just before 7 a.m. CT and U.S. futures fell around 0.4%. Japan’s Nikkei 225 gained 0.4% Tuesday and government bond yields drifted back toward their lowest levels in three years after the Bank of Japan penned Governor Kuroda’s dovish comments from June into their policy statement. The central bank left policy unchanged but noted they “will not hesitate to take additional easing measures” if the economy loses momentum. Just before the decision, data showed Japanese industrial production contracted 3.6%, weaker than the 1.7% decline expected and the second-worst month since 2014. There were factors aplenty behind weakness in European equities, including disappointing corporate earnings, a 28-month low for German consumer confidence, a near-six-year low for the European Commission’s Business Climate indicator, and continued Brexit concern. The British pound weakened again Tuesday after PM Johnson on Monday called the current deal with the EU “dead,” raising worries a no-deal Brexit is increasingly likely. Adding to the soured sentiment, U.S. equity futures and Treasury yields dropped to new lows after a three-tweet thread from President Trump further weighed on already-low expectations for substantial progress during this week’s negotiations.
Dallas Fed’s Manufacturing Index Recovers, Signaling Activity Stabilizing but Not Surging: The Dallas Fed’s Manufacturing Index recovered less than expected in July, rising from -12.1 to -6.3, its third weakest level since the summer of 2016. That story held true for a couple of the key underlying indices on business activity and new orders, which recovered but remained low, while employment fared slightly better. The employment index firmed 7.2 points to a nine-month high. Looking ahead, the outlook was somewhat brighter with noted improvements across most every indicator tracking expectations over the next six months. However, there remained evidence of uncertainty among businesses across the Dallas District, a force the Fed fears could lead to continued weakness in business investment into the second half of the year. Businesses reported an improved-but-elevated level of outlook uncertainty and expectations for capital expenditures over the remainder of the year dipped to a new post-election low.