The Market Today
Markets Brush Off Impeachment; Yield Curve Steepest of Year
by Craig Dismuke, Dudley Carter
Jobless Claims Continue to Warrant Observation after Smaller-Than-Expected Pullback: Initial jobless claims for the week ending December 14 pulled back from 252k to 234k, not quite the drop that was expected and the second-weakest reading since February. While the holidays tend to distort the week numbers, even the non-affected weeks appear to be showing slightly-elevated results going back to early November. This will continue to be important to watch given the historical precedent of claims being one of the leading indicators of a change in the pace of job growth (see Chart of the Day).
Philly Fed Headline Disappoints but Details Improve: The Philly Fed report on regional manufacturing activity disappointed expectations, falling from 10.4 to 0.3. However, the underlying details were less discouraging. The important new orders index actually rose 1.0 point to 9.4 while the shipments, unfilled orders, delivery times, inventories, and average workweek indices all improved. Combined with the New York Fed report released earlier in the week, the two regional indices point to the ISM Manufacturing index ticking up in December.
Existing Home Sales: Existing home sales for the month of November will be released at 9:00 a.m. CT. Sales are expected to tick lower after gaining almost 2% in October. Since January’s trough, existing sales are up 10.7% through October. Also released at 9:00 a.m., the November Leading Index is expected to inch higher but remain weak.
Stocks Slipped in Quiet Session: After clinging to marginal gains for most of the session, U.S. equities dropped just before Wednesday’s close to finish with hardly noticeable losses. With sectors evenly split between gains and losses, the S&P 500 closed down 0.04% to break a five-day win streak that had pushed the index to a new all-time high Tuesday. Industrials led Wednesday’s declines as shares of FedEx weighed while the more defensive real estate and utilities sectors rotated into the first and second place positions. However, the minimal market chatter was mostly focused on a rise in Treasury yields that pushed the spread between the 2-year and 10-year Treasury yields to its widest since November 2018.
Key Treasury Spread Hit Widest in a Year: The absence of obvious catalysts left analysts pointing to technical charts and repositioning as reasons for the 10-year yield’s modest 3.7-bp increase to 1.92%. With the 2-year yield rising just 0.6 bps to 1.63%, the spread between the two securities widened to 0.28%, the largest premium since November 2018. The Fed’s rate cuts in 2019 and signal for a prolonged pause, some improvement in the economic data, and a possible phase-one trade deal have combined to steadily drive the key Treasury spread wider from its inverted low point of -0.05% in August.
Markets Brush Off Impeachment: Global bond yields are on the rise Thursday despite modest weakness across most major equity indexes. While it has had little to no market impact, the earliest overnight headline came following the U.S. House voting to impeach President Trump, setting up a trial in the Republican-held Senate. Away from U.S. politics, most of the economic-related activity overnight surrounding a handful of central bank decisions.
Central Banks Sound Cautiously Optimistic: The Bank of Japan voted to keep rates unchanged and sounded marginally more optimistic than in October, saying “the impact of the slowdown in overseas economies on domestic demand is expected to be limited” but “continue…for the time being.” Governor Kuroda said in his press conference, “Overseas risks have improved somewhat from a while ago and it’s true that we have seen relatively bright signs. …Still, the risks remain very high and we need to watch them closely.” The Bank of England voted 7 to 2 to hold policy steady, noting “tentative signs of stabilising” global growth, continued accommodative financial conditions, the “partial de-escalation of the U.S.-China trade war,” and the fact that “it was possible that household and business sentiment could pick up in the near term” with PM Johnson’s new parliament majority offering somewhat more clarity to the Brexit situation. Away from the major players, Sweden’s Riksbank became the first central bank to move a key policy rate out of negative territory. In response to concerns about the efficacy and negative side-effects of negative rates, the Riksbank raised the repo rate from -0.25% to 0.00% where it “is expected to remain…in the coming years.”
Global Yields Pull Treasury Yields Up: Amid a broader rise in yields across Europe, Treasury yields held overnight gains despite modest disappointments in this morning’s economic data. The 2-year yield was 0.8 bps higher after 7:30 a.m. CT while the 10-year yield rose 1.9 bps to 1.94%, nudging the spread above 0.30% for the first time in 13 months.
Another Fed Official Supports the Pause, Hoping for Inflation Overshoot: Chicago Fed President Evans said Wednesday that the Fed has “gotten to a point where we’re pausing in a reduction in our short-term policy rate.” The recent rate reductions have nudged interest rates lower to a “good setting” and he “can’t see a reason why we would need more restrictive policies” considering inflation has persistently been “too low.” “If we got up to 2.5% [inflation] I think that would further reinforce a view that our objective is in fact symmetric,” Evans said, adding “It’s important that we overshoot at this point in the economic cycle.” Earlier in the day, New York Fed President Williams also said policy is “accommodative” and in a “good place” to support the economy, even though “there’s still some significant risk to the downside.”