The Market Today

Market Caution Continues as Global Data Remains Weak and Trade Talks “Hit a Snag”


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Jump to Highest Level in 20 Weeks: Initial jobless claims for the week ending November 9 jumped 14k to 225k,m the highest rate of new unemployment insurance filings in 20 weeks.  Claims jumped in June on what appeared to be trade-related uncertainty, but have trended between 206k and 221k ever since.  According to the BLS, more states estimated claims for the reference week than normal because of the Veterans Day holiday. However, that should not necessarily pushed the level higher.  Claims tend to be volatile and, at 225k, remain at a very strong level historically.  That being said, the slowing payroll growth and increase in job layoffs (JOLTs report) have economists hypersensitive to any evidence of an increase in job losses.

Producer Price Report Shows Firmer Medical Care Inflation, Soft Production Prices Broadly: October’s producer price inflation report was slightly firmer than expected, rising 0.4% MoM versus expectations of a 0.3% increase.  The increase was based on an out-sized 0.8% gain in final demand trade services which captures retailer and wholesaler margins.  Removing food, energy, and trade, core producer prices rose a paltry 0.1% MoM bringing the year-over-year rate down from 1.7% to 1.5%.  As it relates to PCE inflation, medical care prices were firmer than their recent trend in the October report.  Hospital prices rose 1.12% (12m avg. +0.19%) and nursing home prices rose 0.58% (12m avg. +0.32%).  Combined with other medical care components, these will cumulatively add 0.1% to the PCE report, over four times the 12-month average contribution.

Powell and Williams Headline Busy Day of Fed Speaking: There is a deluge of Fedspeak today including additional testimony from Fed Chair Powell, appearing before the House Budget Committee today at 9:00 a.m. CT.  New York Bank President Williams is also on the tape at 11:00 a.m. speaking at the San Francisco Fed’s Asian Economic Policy Conference.  FOMC Vice Chair Clarida with speak at the Cato Institute (8:00 a.m.), Chicago Bank President Evans will address a fintech conference (8:10 a.m.), San Francisco Bank President Daly will kick off her bank’s conference (10:45 a.m.), St. Louis Bank President Bullard will address a Rotary Club (11:20 a.m.), and Dallas Bank President Kaplan will speak at a community forum in Texas (12:00 a.m.).


YESTERDAY’S TRADING

China Worried About Giving the U.S. Too Much in Writing: U.S. stocks closed with modest gains Wednesday, recovering from a swift drop on a headline that trade negotiations had stalled. The major indices opened lower amid global weakness, but slowly climbed back into positive territory. However, news that U.S. and China trade talks had “hit a snag” briefly disrupted the uptrend. While President Trump had previously said China would buy up to $50B in U.S. farm goods, the WSJ reported “China is leery of putting a numerical commitment” in writing and “wants to have a way out should trade tensions escalate again.” The same report said China has “also resisted U.S. demands for a strong enforcement mechanism, …and curbs on the forced transfer of technology.”

Treasury Yields Remained Lower Despite Equity Recovery: The S&P 500 inched up less than 0.1% while the Nasdaq dipped less than 0.1%. The Dow notched a stronger gain of 0.3%, helped out by surging shares of Disney. The company’s 7.3% jump was the third-largest in ten years and was spurred by reports that its new streaming service, which launched Tuesday, had already eclipsed the 10-million-subscribers mark. Although they appeared to have little if any impact on markets, most of the remaining headlines were saved for Fed Chair Powell’s congressional testimony (more below) and the kick-off of public impeachment hearings. Treasury yields closed lower, with most of the move accumulated during European trading ahead of the U.S. open. The 2-year yield slipped 2.6 bps to 1.64% while the 10-year yield settled down 4.9 bps to 1.89%, both near the highs of the U.S. session.


OVERNIGHT TRADING
Chinese Data Misses the Mark: The caution that has cast a shadow over global markets this week carried over into Thursday as data reminded of the global economic weakness, a day after trade talks appeared to stall. Key reports showed economic activity across China’s consumer and industrial sectors rose less-than-expected in October. Retail sales were up 7.2% YoY, worse than the 7.8% gain expected and equal to the slowest gain since 2003. Fixed investment increased by a less-than-expected 5.2% and industrial production rose 4.7% YoY, short of the 5.4% forecasted gain. Earlier, Japan’s 0.1% QoQ expansion, not annualized, missed expectations for 0.2% growth.

European Data Remains Weak: In a sign of how low the bar is for economic successes in today’s environment, the best news of the day was the 0.1% 3Q expansion, not annualized, of the German economy. The results were an upside surprise to the -0.1% contraction that was expected to push Europe’s largest economy into a technical recession. The Eurozone’s economy as a whole grew by 0.2% QoQ in 3Q, matching expectations. In other less-covered headlines, Australian employment contracted by the most since 2016, retail sales in the U.K. contracted unexpectedly, and the violent protests in Hong Kong continued.

Treasury Yields Hold Lower Amid Mixed Trade Headlines: Against a backdrop of a renewed worries about a trade deal, U.S. equity futures were modestly weaker just after 7 a.m. CT while Treasury yields were holding near their lows of the day. The yield drop accelerated after a spokesman for China’s Commerce Ministry said removing existing tariffs is an important condition for any trade deal, but eased on a headline that China would allow imports of U.S. poultry. Amid the mixed trade developments, the 2-year yield held 2.0 bps lower while the 10-year yield was down 4.3 bps.


NOTEWORTHY NEWS

Powell Echoed His Previous Economic Assessment: Fed Chair Powell’s prepared remarks described the same economic assessment as when he spoke following the Fed’s most recent rate cut in October. Solid consumer spending is being supported by a strong labor market, which has helped offset weak business investment and shield the economy, for now, from weaker global growth and persistent trade risks. Despite the tight labor market, inflation has remained low but is expected to hold near the Fed’s target. Looking ahead, the baseline outlook remains “favorable,” although “noteworthy risks…remain.”

Powell Reiterated the Fed’s Current Plan for a Pause: On monetary policy, he explained that these risk dynamics had led the Fed to cut rates by 0.75% since July to “keep the U.S. economy strong and inflation near [the] 2 percent objective and to provide some insurance against ongoing risks.” Importantly, he was consistent in his description of the current rate setting as “not on a present course,” but “likely to remain appropriate as long as incoming information about the economy remains broadly consistent” with the Fed’s positive outlook. It will take a “material reassessment” of that outlook to cause the Fed to move rates from where they are.

Powell Admits Maximum Employment Remains a Mystery: Powell covered a range of topics in a relatively-uneventful Q&A session. He admitted maximum employment is inherently a mystery but noted it’s been surprising wages haven’t risen faster with unemployment at 50-year lows. Recent comments have shown the Fed is increasingly inflation-focused, and Powell noted he believes inflation risks remain tilted to the downside. Because current interest rates are so low, the Fed won’t have much room to ease in the next downturn, Powell said, which will make fiscal stimulus more important. As such, it’s important the fiscal situation be returned to a sustainable path.


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