The Market Today
Inflation, Holiday Sales, and Fed Rate Hike
by Craig Dismuke, Dudley Carter
This Week’s Calendar – CPI, Holiday Shopping, Fed Hike: This week’s economic calendar brings several important reports, with three very significant releases. November’s CPI inflation report is scheduled for Wednesday and is expected to show core CPI remain at 1.8%. CPI inflation has stabilized in recent months after dropping from 2.3% to 1.7% in the first half of the year. November’s Retail Sales report is scheduled for Thursday and will be the first good look at how the holiday shopping season is progressing. Given the early Thanksgiving holiday and earlier-than-normal retailer discounts, November’s sales make up a disproportionately large portion of holiday sales. As such, Thursday’s report could bring an upside surprise. Finally, the biggest event of the week will be Wednesday’s FOMC decision. The markets are now pricing in a 98% likelihood of a third rate hike for 2017. Another hike will bring the target fed funds range to 1.25-1.50%. The markets would be shocked if the Fed does not hike – something the Fed wants to avoid. We will focus on the language surrounding the stubbornly low wage growth/inflation and the dot plot. As kickers, the ECB and BOE both meet this week and Congress will continue to work on reconciling the House and Senate tax plans.
Octobers JOLTs Job Openings report will be released this morning at 9:00 a.m. CT. Job openings remain very high and are expected to remain high.
Overnight Activity – Treasury Curve to Open Lower and Flatter after Quiet Global Start: Global markets were mixed overnight with a slightly softer sentiment showing up on European market screens than was reflected in trading trends earlier in Asia. Equities were stronger across the board in Asia which helped apply some upward pressure to yields there. Gains for Japan’s Nikkei pushed the index to its highest level since the early 1990s. The Stoxx Europe 600 attempted to turn higher but an early jump faded and the index has since turned lower by roughly 0.1%. One of the few bright spots in Europe is a half percent gain for the U.K.’s FTSE 100. The index has been supported by a weaker pound, which drifted down on concerns that last week’s Brexit deal could be more preliminary than originally thought. The U.K.’s Brexit Secretary commented over the weekend that the deal “was much more a statement of intent than it was a legally enforceable thing.” U.K. yields are also lower in a curve-flattening fashion. Yields elsewhere across Europe have experienced similar shifts which has helped dictate the early trends for U.S. Treasurys. The 2-year Treasury yield is down 0.4 bps at 1.79% while the 10-year yield has dropped 1.6 bps to 2.36%. U.S. equity futures are mixed early with contracts on the Dow and Nasdaq positive while those for the S&P have edged just below break-even.
Explosion Reported in NYC: The NPYD has confirmed an explosion near the NYC Port Authority subway station at 40th and 8th, near Times Square in Midtown Manhattan. The A-C-E subway lines was evacuated. Initial reports indicate several wounded and authorities confirmed that a suspect has already been detained. The 10-year Treasury yield dropped 2 bps after the initial report and has since risen 1 bp. It appears that this will not have a major impact on markets.
ICYMI – December 8, 2017 Weekly Market Recap: Interest rates ended marginally higher last week after an early-week downtrend in Treasury yields reversed in the final two trading sessions. A gap higher in yield early Monday, following some risk-positive developments over the weekend, had mostly moderated by the day’s close. A period of global equity weakness weighed on yields through Wednesday when the spread between the 2-year and 10-year Treasury touched a new 10-year low of 52.8 bps. A mention of a possible infrastructure plan being released by the end of January and a kick of the fiscal can by Congress to December 22 drove yields positive for the week on Thursday. A true-to-form nonfarm payroll report on Friday – strong hiring but disappointing earnings – helped those small weekly gains hold. Click here to see the full recap.
Bloomberg Intelligence – Muni Debt May Be Allowed for Liquidity Rules: “Municipal debt may become more attractive for banks to hold in order to meet liquidity rules. The liquidity coverage ratio originally excluded U.S. municipal debt. Bills to allow some muni debt to be treated as high-quality liquid assets have passed the House, are moving in the Senate and should become law by mid-2018.”
Bloomberg Intelligence – Good News for Growing Regional Banks: “U.S. regional banks will be able to increase assets without fear of new regulatory costs and oversight, including their capital review process, under a bill likely to pass by 2Q. The bill has enough Democratic support to end a filibuster. The House could create a few hiccups along the way, but should pass the measure.”