The Market Today

Market Melee Continued Overnight; Inflation Cools in September


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Another Inflation Miss in September: September’s CPI inflation metrics missed estimates as both headline and core prices rose 0.1% MoM, less than the 0.2% expected. Taking the increases out a couple of extra decimal places, headline price gains were slightly weaker at 0.059%, dragged down by a 0.5% decline in energy prices. The core price increase was actually 0.116% and, now after two consecutive soft reports, dragged the 3-month annualized rate back below the Fed’s 2% target at 1.8%. The headline YoY rate fell from 2.7% to 2.3% on base effects (expected 2.4%) while core remained at 2.2% (expected 2.3%).

 

In the details, there were several soft spots that contributed to the monthly miss. New auto prices slipped a modest 0.1%, the first decline in five months, but there was an unusually large drop in the cost of used autos. Used auto prices fell 3.0% in September, the largest one-month drop since 2003. The key shelter category, which contributes the most to the CPI basket, was also softer. The broadest measure of shelter prices rose 0.16% MoM, the second weakest increase since 2013. Under the headline, the cost to rent a of primary residence rose the least in seven months, owners’ equivalent rent (the largest component) increased by the smallest amount since December 2014, and lodging away from home declined. There were a few categories, however, that firmed. Apparel prices rose for the first time in five months. Despite a third monthly decline in medical care commodities, the cost of medical care services, the more heavily-weighted of the two, rebounded. Transportation services rose the most since February and included a solid month for airfare increases. Bottom line: September’s CPI report showed a second monthly release in which core inflation fell short of estimates. There were mixed results within the details as certain categories firmed up while certain others, including some of the more heavily-weighted, remained subdued. The report is likely to reaffirm those Fed officials who feel there is little risk of inflation running away, but is unlikely in and of itself to derail the decision for December.

 

Initial Jobless Claims Remain Low: Initial jobless claims rose 7k from last week to a still-healthy 214k. The four-week average remains near its lowest levels in decades.

 

Fedspeak: Later today, Kansas City Fed President George (2019 voter) will give a lunch time speech in Tulsa, Oklahoma. In August, George had shown support for a possible rate increase in December.

 

TRADING ACTIVITY

Yesterday – Hump Day? More Like Slump Day: There is no sugar-coating how dreadful Wednesday was for U.S. equities, as almost every measure reflected pain for long positions. U.S. stocks were bludgeoned as the recent tech weakness intensified and led a souring of sentiment more broadly. The Nasdaq, which has benefited from an impressive outperformance by U.S. tech companies, went over a cliff. The index fell more than 4% in its worst daily performance since June 24, 2016 (the day after Brexit) and crashed through its 200-day moving average. The Dow and S&P 500 also sank more than 3% in their worst daily declines since February 8 (shortly after a hot hourly earnings figures spurred fears of higher interest rates). The Dow closed below its 50-day moving average while the S&P 500 broke below its 100-day average. Small cap companies weren’t spared as the Russell 2000 fell the most since February to its lowest level since May. While multiple uncertainties remain – trade relationship with China, global growth divergence, beginning of earnings season, U.S. mid-term elections – Wednesday’s move seemed to be a catch-up response to the surge in interest rates a week ago. The 10-year yield rocketed to its highest level since 2011 last Wednesday after data confirmed the U.S. economy remains strong and the Fed signaled it expects to continue gradually raising rates. While the S&P 500 has declined in each trading day since that surge – the current five-day losing streak marks the longest since nine days of losses immediately before the 2016 presidential election – previous days’ declines were modest. On Wednesday, all 11 of the index’s sectors dropped, over 96% of underlying companies closed lower, 330 of the 505 companies finished Wednesday in correction territory (down at least 10% from their 52-week highs), and the index wiped out nearly three months of gains (lowest since July 11). Treasury yields had moved up during the morning session and showed no signs of a flight-to-quality bid through early afternoon; the 10-year yield was roughly 2 bps higher around 2 p.m. CT. However, as the equity selling sped up into the close, the downdraft proved to powerful. From 2 p.m. CT to 4 p.m. CT, the 10-year yield dropped nearly 6 bps to closed 4.3 bps lower at 3.16%, its lowest since last Tuesday. The 2-year yield also fell 4.3 bps on the day to 2.84% while the 5-year yield shed 5.3 bps to 3.00%.

 

Overnight – Market Melee Continued Overnight: Yesterday’s market turmoil that tanked U.S. equities has indiscriminately upended global markets overnight. Markets across Asia sank with Chinese stocks among the worst performers. The CSI 300 fell nearly 5%, the most in one day since February 2016, to its lowest level since June 2016. Elsewhere, shares in Japan were off just under 4%, Taiwan’s TAIEX slumped more than 6%, and South Korea’s KOSPI recoiled roughly 4.5%. The Stoxx Europe 600 tumbled at the open and was down just under 2% midway through trading and its lowest level since January 2017. And the risk-off selling appears set to come full circle, with early U.S. futures trading pointing to more pain at the open. Treasury yields initially added to Wednesday’s drop as global markets crumbled but have since recovered and were higher on the day. Ahead of this morning’s CPI inflation data, the 2-year yield was 1.9 bps higher at 2.86% and the 10-year yield had added 2.3 bps to 3.19%. The recent rapid increase in Treasury yields has been blamed as one of the major catalysts behind the current market volatility. After this morning’s softer-than-expected inflation report, stocks recovered and Treasury yields trimmed their overnight rise.

 

NOTEWORTHY NEWS

Evans Remains Upbeat, In Favor of “Slightly Restrictive” Fed Funds Rate: Chicago Fed President Evans, who for years was one of the more dovish officials at the Fed, echoed his recent remarks reflecting a more optimistic and upbeat tone on the U.S. economy, trends in underlying inflation, and prospects for gradual rate increases. Evans said the labor market is “extremely vibrant” but noted wages have risen, but “not as much as you might have expected in the mid-2000’s when the economy was doing really well.” Nonetheless, he said he’s “extremely pleased with where inflation is at the moment.” As a result, he’s “extremely comfortable with the path we’ve laid out so far.” He also believes the Fed “could move to a slightly restrictive policy stance,” which he subsequently said was “some target range above 3 percent”, “and, you know, probably pause at that point and see how things are going.”

 

President Trump Said “the Fed Has Gone Crazy”: After Wednesday’s market rout sent equities spiraling the most since early February, President Trump again took a swipe at the Fed’s plan to keep raising rates. When asked about Wednesday’s sell-off, according to CNBC President Trump noted “Actually, it’s a correction that we’ve been waiting for for a long time, but I really disagree with what the Fed is doing.” He said “I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy.” In a subsequent interview Wednesday night, the President doubled down, saying “The problem I have is with the Fed. The Fed is going wild. I mean, I don’t know what their problem is that they are raising interest rates and it’s ridiculous, …The problem [causing the market drop] in my opinion is Treasury and the Fed. The Fed is going loco and there’s no reason for them to do it. I’m not happy about it.”

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