The Market Today

****Vining Sparks Economic Outlook Webinar, Thursday October 18 – Vining Sparks will host our 4Q Economic Outlook Webinar THIS MORNING to summarize the economic environment as well as provide our updated growth and interest rate projections. We will look briefly at the recent economic strength and then focus on some brewing challenges.  Those challenges include 1) rising interest rates and the impact on housing, federal interest expense, and corporate balance sheets; 2) divergent growth between the U.S. and other economies; and 3) still-inflated (it appears) asset valuations.  To register, click here.

 

TODAY’S CALENDAR

Jobless Claims Keep Impressive Run Going: Initial jobless claims were solid again last week, dropping from 215k down to a 210k. Despite the weekly improvement, the 4-week average for claims ticked up for a second week as the two strongest levels in nearly 50 years (204k for September 14, 202k for September 7) have now rolled out of the calculation. Still, the 4-week average of 211.8k is exceptionally strong. Continuing claims for the week ended October 6 were also better than expected, dropping 13k to 1.64MM. That marks a new low for continuing claims that reaches all the way back to 1973. The claims data continues to be one of many indicators showing how strong the labor market is.

 

Released alongside the jobless claims data, the Philadelphia Fed’s Business Survey dropped less than expected in October. The survey result of 22.2 marks one of the weaker report from the last two years and saw mixed activity in the ISM-related components. The labor market components of the index, however, were stronger.

 

At 9 a.m. CT, the Conference Board will update its leading index for September, a refresh that is expected to show another month of strength.

 

Also this morning, St. Louis Fed President Bullard will speak to the Economic Club of Memphis. Bullard said last week “We’re good where we are,” with respect to the overnight rate. Just before lunch, Fed Governor Quarles will give an update on the economic outlook in New York. Given his role as Vice Chairman for Supervision, Quarles public comments on monetary policy occur less frequently than others at the Fed.

 

TRADING ACTIVITY

Yesterday – Stocks Ended Little Changed While Treasury Yields Climbed after FOMC Minutes Discussed Restrictive Fed Policy: After a v-shaped morning recovery, the S&P 500 spent the afternoon tarrying around Tuesday’s final tick to a nearly-unchanged Wednesday close. The index dropped 0.03% on the day after all the ups and downs, a result mimicked by the tech-heavy Nasdaq (-0.04%). The Dow fared worse, ending the day off 0.4%. The Dow, which fell 92 points in total, was hit for 71 points by IBM (earnings related), 54 points by Home Depot (analyst downgrade), and 35 points by UnitedHealth Group (give back after a big earnings-related gain on Tuesday). But the more noticeable excitement was in the bond market. After tracking equities up and down during morning trading, Treasury yields were little changed ahead of the Fed Minutes. The Fed’s upbeat September Minutes reaffirmed their plans for more rate increases and included discussion about policy potentially becoming restrictive (more below). In response, the 2-year yield ended the day up 2.3 bps at 2.89%. The 10-year yield closed 4.2 bps higher at 3.21%. The Fed Funds futures curve steepened slightly and the Dollar had its best day in three weeks.

 

Overnight – Mixed Global Session After U.S. Yields Pressured Stocks on Wednesday: Yesterday’s rise in U.S. Treasury yields has helped pressure most other global yields higher in what has been a mixed overnight session for the major global equity exchanges. Similar to the steepening that occurred in Treasurys after the Fed said they plan to keep hiking, potentially into restrictive territory, European yield curves have seen longer yields rise modestly. The French 10-year yield was 1.7 bps higher while the German 10-year yield had added 0.5 bps. But European equities have diverged, with core country exchanges firming up while stocks in Italy and Spain pulled back. In Asia, Chinese stocks were under noticeable pressure and leading widespread losses in the region, dropping 2.4% to a new two-and-a-half-year low. Energy companies were among the weakest performers on both continents as crude prices compounded yesterday’s losses. U.S. WTI was down nearly 1% overnight after sinking 3% on Wednesday on a larger-than-expected build in U.S. inventories. The drop took WTI below $70 per barrel for the first time in a month. In the U.S., equity futures were weaker heading into U.S. trading and the Treasury curve flattened overnight. The 2-year yield was 1.1 bps higher at 2.90% while the 10-year yield drifted 0.9 bps lower.

 

NOTEWORTHY NEWS

FOMC Discusses Potentially Becoming Restrictive as They Plan for More Rate Hikes: The Fed’s September Minutes reaffirmed that “further gradual [rate] increases” are likely in the quarters to come in order to “balance the risk of tightening monetary policy too quickly, … against the risk of moving too slowly.” Despite the official risk assessment remaining “roughly balanced”, the overall tone seemed to lean slightly in favor of more optimism. A “few” said growth had been stronger than they previously expected and there were more upsides risks than downside risks discussed. There was general agreement that “near 2 percent” inflation could be sustained and several saw likelihood of a modest overshoot. The tone was consistent with their call for another rate increase by the end of the year and there appeared to be more in favor of restrictive policy than against it. The balance sheet normalization process was going as planned and not considered responsible for effective Fed Funds moving up within the target range. Bottom Line: While there was nothing earth shattering in the Minutes, the tone seemed to lean towards more optimism and there are more than a couple of officials who believe policy could move above the longer-run neutral rate. Against the strong outlook described, the tone is likely to give markets slightly more conviction about a December hike and could cause them to reconsider expectations for 2019.