The Market Today
Market Turmoil Sends Yields Lower; New Home Sales Sink
by Craig Dismuke, Dudley Carter
Goods Trade Deficit Completely Reverses 2Q Decline in 3Q: The Advanced Goods Trade Balance showed a larger-than-expected deficit in September, although the $0.5 billion increase was small relative to previous months’ increases. For 3Q, the goods trade deficit grew $23.5 billion or 56% QoQ, SAAR, completely erasing the drop in the 2Q deficit. The rebound in the trade deficit is likely to cut sharply into the 3Q GDP tally. Much of that was expected to be offset by an increase in inventory accumulation by businesses. However, September’s Wholesale and Retail Inventories reports, released this morning, were both soft. We continue to expect 3Q GDP, released tomorrow, will come in near 3.1%, a touch softer than expected.
Durable Goods Report Shows Good Quarter for Business Investment, But Slowing Momentum: Also released this morning, the preliminary read on durables goods orders for September showed the recent weakness in business investment in core capital goods items was not as bad as originally reported, but the soft patch remained in September. At the headline level, the report beat expectations, rising 0.8% MoM on a 119% increase in the volatile defense aircraft/parts orders component. More importantly, orders of core capital goods items, a proxy for future business investment in equipment and software, fell 0.1% in September but August’s data were revised up from -0.9% to -0.2%. While orders did not rebound in September, neither did they fall as much as expected in August. However, momentum has yet to turn back to positive. Shipments of the same items, a measure of current activity, were unchanged in September, disappointing expectations for a 0.4% increase. While September’s shipments were weak, the 3Q data collectively point to business investment growing 7.6% (see Chart of the Day).
Jobless Claims Remain Low: Initial jobless claims for the week ending October 20 rose from 210k to 215k, remaining very low.
Housing and Fedspeak: At 9:00 a.m. CT, the September Pending Home Sales report is yet another chance for the housing data to disappoint. At 11:15 a.m., Fed Vice Chair for Regulations, Clarida, will speak on the economic outlook. And at 8:00 p.m., Cleveland Bank President Mester is scheduled to speak.
Yesterday – Tech Collapse Lead Another Day of Sharp Selling on Wall Street: Another brutal day on Wall Street sent U.S. stocks plunging which ignited a flight into the safety of U.S. Treasurys. The Nasdaq tanked more than 4.4%, its largest loss in a day since 2011, and tech (and tech-like) companies dragged the S&P 500 down 3.1%. The Dow tumbled more than 600 points, or 2.4%. Wednesday’s sell-off wiped out the Dow and S&P’s year-to-date gains and pushed the Nasdaq into a technical correction, down over 12% from its most recent record high from late August. Within the S&P, seven sectors tumbled more than 3% and the only support came from defensive sectors. The gains in utilities, real estate, and consumer staples had the feel of required equity allocations rotating into the best of the worst options. After Eurozone PMIs slipped to their lowest level in at least two years, sales of new homes here at home were weaker for a fourth month (more below), compounding concerns about the health of U.S. housing activity. Despite an earnings beat from Boeing before markets opened, AT&T’s results fell short of estimates. A day earlier, 3M also missed expectations and Caterpillar mentioned growth headwinds caused by the steel tariffs. The growing uncertainty has punished equities and pushed longer yields to their lowest level in nearly four weeks. The 10-year yield fell 6.4 bps, the most since the throes of Italian political drama from June, to 3.10%, the lowest since October 2. The 2-year yield pulled back 4.9 bps to 2.83%.
Overnight – Global Markets Show Resilience in the Face of Yesterday’s U.S. Market Turmoil: Global markets have been somewhat resilient overnight in the wake of yesterday’s intense selling that did measurable damage to U.S. equities. Except for miniscule gains in China, the rest of Asia slipped modestly with the steepest losses seen in Japan. The Yen strengthened early to add pressure but has since eased up as the flight to quality has ebbed during European trading. Europe’s Stoxx 600 tumbled at the open to a new low since 2016 but quickly reversed and turned positive on the day. After the ECB kept rates unchanged (as expected) and continued to call for an end to net asset purchases in December (as expected), the index slipped back to unchanged for the day. Considering the recent weakness in some of the European data, most recently this week’s PMIs which dropped to more-than-2-year lows, investors are keen to hear President Draghi’s take on the economic outlook. In his early comments, Draghi has said the data has continued to point to a broad expansion but he did acknowledge that some recent reports have been weaker than expected. The Euro and regional yields have so far been stable. After slipping for a sixth day in a row yesterday, the second six-day losing streak since last week, futures for the S&P 500 have bounced 0.8%. Considering how beat up the index has been this month, an 0.8% gain Thursday would still leave the index 3.3% below its 200-day moving average. Treasury yields have also perked up, cutting yesterday’s decline by roughly half. The 2-year yield (2.86%) was 2.6 bps higher earlier and the 10-year yield (3.14%) had added back 3.6 bps.
New Home Sales Tank on More than Just the Hurricane Impact: New home sales tanked in September, unexpectedly down 5.5%. The drop appears to have been driven by much more than Hurricane Michael with sales down 41% in the Northeast and 12% in the West. In the area that would have been most affected by the hurricane, the South, sales were down just 1.5%. New home sales have now fallen 22% since November’s peak and are down 8.3% QoQ in 3Q18 – which is likely to be one of the sole sources of weakness in tomorrow’s GDP estimate. The inventory of new homes for sale rose to 327k, meaningfully higher than the low point of 142k back in 2012. However, when put in context of the number of households, the inventory remains at just 0.27% versus a longer-run low range near 0.28%. Additionally, the supply/demand dynamics in the flow of new construction still remains encouraging with homebuilders not sitting on a glut of inventory.