The Market Today
Investors Breath More Easily Following Recent Trade Headlines
by Craig Dismuke, Dudley Carter
Households Tap Elevated Savings Rate to Spend Despite Disappointing Income Growth: Personal income disappointed in July rising just 0.1% versus expectations of a 0.3% gain. The sources of the weakness were softer wage gains (up just 0.2% MoM, half the 12-month average), weak investment income, and a soft read on government transfer payments. We already knew from the July labor reports that hours worked were on the soft side, but this morning’s report aggregates the full impact to household income. Not to worry, households tapped their recently high savings rate to fuel a strong 0.6% MoM gain in spending. The savings rate was drawn down 0.3% to 7.7% (still high but down from 8.8% back in December).
Inflation Remains Soft Allowing Fed to Re-Assert Its Role As Market-Leader: The Fed’s preferred measure of inflation remained below their 2.0% target in July with the core rate rising 0.2% MoM, keeping the YoY rate at 1.6%. The results were as-expected and mark the 125th month out of the last 130 months that the Fed has missed their inflation to the low side. It appears core PCE inflation will rise back nearer to 2.0% in the short-term based on some transitory factors; but, inflation remains softer-than-desire by the Fed giving them plenty of cover to re-assert themselves as the market leader during this period of heightened uncertainty.
Consumer Confidence: At 9:00 a.m. CT, the University of Michigan Consumer Confidence report for August will be finalized. The U.M. report has shown a larger fall-off in confidence than its counterpart, the Conference Board report.
Yields Inch Higher but Stocks Run on Trade Outlook: There is green across the equity boards overnight as the recent de-escalation of the trade threats has helped calm nerves for the time being. There was a heavy economic calendar in the Eurozone that included disappointing retail sales in Germany (-2.2% MoM), an unexpected increased in the Italian unemployment rate (up to 9.9%), better-than-expected retail sales in Spain, and consumer inflation up to 0.5% YoY and down to 1.2% YoY in France. Politicians in the U.K. failed to block Prime Minister Johnson’s shortened Parliamentary session, leaving a very small window for parliamentary moves to haggle over a watered-down Brexit. However, the overarching market theme remained the détente in the trade war. Japanese stocks rose 1.2%, the Euro Stoxx 50 rose 0.8%, and U.S. stocks futures are up 0.5% overnight. Sovereign yields are generally higher with the exceptions of the German and Italian 10-year bonds, both down approximately 1 bps. Treasury yields have also grinded higher with the 10-year yield up to 1.525% and the 2-year yield at 1.540% ahead of this morning’s economic reports.
Stocks Recover from Last Friday’s Dip: Investor optimism received a boost coming into yesterday’s trading when Chinese Ministry of Commerce spokesperson Gao Feng said China would wait to retaliate. President Trump added to the turnaround in sentiment saying in a morning interview with Fox radio that trade discussions were ongoing and that “a talk [was] scheduled for today at a different level.” U.S. stocks opened the day sharply higher with the Dow up 211 points on the first tick. The S&P finished 1.3% higher, now having fully recovered from last Friday’s dip.
But Treasury Yields Remain Lower, Curve Inverted: Treasury yields, however, remain notably lower. The 2-year yield rose 4 bps on yesterday’s optimism to 1.52%, still 12 bps below last Friday’s open. The 10-year yield rose 4 bps to 1.49%, 15 bps below last Friday’s open. The 2y10y spread remains inverted by 2.9 bps. The selling in Treasurys led to a soft 7-year auction at 1.489%, with a 2.1 bps tail and a weak 2.16 bid-cover ratio. The low bid-cover ratio was indicative of the weakest demand since 2009.
Pending Home Sales
The rebound for pending home sales was unexpectedly set back in July with sales down 2.6%. The report points to existing home sales pulling back over 3% in August. The weakness was geographically broad with losses in all four regions despite another 10 basis point drop in 30-year mortgage rates. According to BankRate.com, the average 30-year mortgage rate has now fallen from 4.76% last November to 3.76% at the end of August. Given that mortgage rates have continued their decline, July’s weakness is likely just the normal month-over-month volatility in housing sales, not the end of the rebound.
ECB Messaging Mixed Heading into September Policy Decision: Dutch central bank governor Klaas Knot indicated a preference against more quantitative easing at this point, joining Germany’s Weidmann in the less dovish camp. Almost simultaneously, incoming ECB president (November 1) Christine Lagarde commented that the ECB has not yet hit the lower bound on interest rates and that they must stand ready to act with their broad toolkit. Going into the ECB’s September 12 meeting (pre-Lagarde), the policy-setting committee is mixed on how it believes it should respond to the deteriorating economic conditions and still-below-target inflation.