The Market Today
Markets Continue to Digest FOMC Minutes, Jobless Claims Continue to Improve
by Craig Dismuke, Dudley Carter
Today’s Calendar – Producer Prices Firm in September, Jobless Claims Levels Continue Regression to Pre-Storm Levels: Producer price inflation firmed in September while initial jobless claims for the week ended October 7 continued to reflect a fading impact from the recent hurricanes. Headline wholesale prices rose 0.4% from August, driven by a 0.4% increase in the cost of services and slightly below the 0.7% increase in the cost of goods. The 0.4% MoM gain pushed the YoY rate up to 2.6%, the highest since 2012. Stripping out a 3.4% jump in energy and a flat result for food, prices rose a firmer-than-expected 0.4%. This pushed the ex-food and energy YoY rate up from 2.0% to 2.2%, also the firmest since 2012. Unlike the consumer price inflation trends in 2017, the results continue to show stable price gains in the producer pipeline.
Initial jobless claims dropped to 243k last week, better than the 250k expected and the lowest since before the storms hit and pushed claims up from 236k to 298k in the final week of August. The weekly decline lowered the four-week average nearly 10k to 257.5k. Continuing claims from the week before also improved more than expected, dropping from 1.92MM to 1.89MM. The continued improvement in the claims data further supports the story that September’s nonfarm payroll contraction will prove to be an anomaly.
Later this morning, Fed Governors Powell and Brainard will offer their latest remarks. Powell, who is considered to be a centrist on the Committee, is one of the leading candidates to replace Yellen when her term as Fed Chief expires in February. Brainard will appear alongside ECB President Draghi on a panel in Washington to discuss monetary policy. There will also be other top officials from the ECB participating in the panel. Given the uncertainty surrounding global monetary policy, especially in the U.S. and Europe, the 9:30 a.m. CT comments from the panelists could cause some mid-morning market volatility.
Overnight Activity – Sovereign Yields Moved Lower With Equity Futures as JPMorgan Kicks Off Bank Earnings: Longer Treasury yields added to Wednesday’s drift lower and shorter yields reversed yesterday’s slight increase. As has been the case for most of the week, stocks continued to rise in Asia but remained weaker in Europe. The Dollar initially extended its Wednesday slide but recovered to unchanged during the European session. Treasury yields’ overnight moves mirrored the shifts in European sovereigns. After falling as European trading opened, yields inched higher ahead of an auction of Italian debt but jumped the most after industrial production in the Eurozone was reported much stronger than expected for August. Yields quickly gave up those gains, however, after EU’s chief Brexit negotiator acknowledged positive momentum in negotiations but said talks have currently reached “a state of deadlock” because of the U.K.’s Brexit bill. The British pound sank which pushed the export-focused FTSE 100 up more than 0.3%, one of the few bright spots for European equities. U.S. equity futures are weaker, with the steepest decline coming after JPMorgan Chase & Co reported 3Q earnings. The first of the big banks to report this quarter beat revenue and earnings estimates but disclosed a disappointing drop in trading income. Strong loan growth and solid asset management results offset the decline in trading revenue. The 2-year Treasury yield is down 1.0 bps to 1.51% while the 5-year and 10-year notes are off just over 1.5 bps.
Yesterday’s Trading Activity – Stocks Hit Records as the Yield Curve Flattens and the Dollar Weakens after the FOMC Minutes: The most anticipated event Wednesday appeared to barely budge the market’s expectations for future changes in near-term monetary policy. The FOMC Minutes confirmed what has been evident in the recent remarks from various Fed officials: the group is divided on the nature of inflation weakness and there appear to be varying comfort levels with respect to the data that will be needed before continuing with the gradual pace of tightening (more below). Before the Minutes were released, shorter Treasury yields had inched higher while longer yields had edged lower. After a brief dip around the release, both reversed higher and ended near the highs of the U.S. session. The 2-year yield rose 0.6 bps to 1.52% while the 10-year yield dropped 1.3 bps to 2.35%. Fed funds futures were essentially unchanged on the day. The Dollar was already weaker and moved little afterwards. Stocks were already positive but pushed further to close at session highs and new records all around. The Nasdaq led with a 0.25% gain while the Dow and S&P both added 0.18%.
The FOMC Can’t Figure Out Inflation Either: The balance sheet normalization announcement was a non-event at the September meeting considering the details were revealed earlier in June and talked about repeatedly since. Consequently, the big news from that meeting was the Fed’s updated rate projections: 2017 (1 more hike) and 2018 (3 hikes) were unchanged but the Fed projected one fewer for 2019 than in June (2 hikes instead of 3) and lowered the longer-run neutral rate to 2.75%. While the Fed seems comfortable that the economy is near (if not at or past) full employment, there is more concern about the slower inflation realized in 2017. The Minutes confirmed the divide that has been evident in officials’ public remarks. “Many participants”, less than a majority, believed a tight labor market and above-trend economic growth would eventually boost prices and “many” still blamed, at least in part, “idiosyncratic or one-time factors” for the slower price gains. However, there were other factors considered that may be less temporary; “some participants” said “secular trends” such as technology’s effect on businesses’ pricing power may be longer lasting. As a result, “many” believed “some patience in removing policy accommodation while assessing trends in inflation was warranted.” As for the likelihood of a December hike, “many” would support a hike if their medium-term outlook remained unchanged, “several others” need the data to boost confidence the weakness is temporary, and a “few” would object unless the actual data confirmed “inflation was clearly on a path” to 2%. Bottom Line: The biggest group, but not a majority, seem comfortable with a possible December move. However, there is still an evident concern among many that other-than-temporary factors could be affecting the data and may impact the overall pace.
Fed Developments Apart from the Minutes: Wednesday’s two Fedspeakers offered little in the way of new news on their outlook for policy. Kansas City’s Esther George continues to believe gradual rate hikes are warranted based on the reasonable belief the current conditions (e.g. labor market, oil prices, the Dollar) are conducive for inflation to return to 2%. Delaying tightening until data confirms inflation will touch 2% creates undue risks for the economy and financial stability, according to George. San Francisco’s John Williams was also consistent in his call for another 2017 hike and three more in 2018 on the grounds that inflation will reach the Fed’s target over the next couple of years with the U.S. past maximum employment. He believes it will take 4 years to normalize the balance sheet although the target size remains an unknown. Also in the Fed related headlines were reports that President Trump would meet with John Taylor as part of the ongoing search for the next Fed Chair; shorter yields moved up slightly on the report.
JOLTS Report Includes Mixed Details in Last Report before the Hurricanes Hit: There were fewer-than-expected job openings in August and July’s record high level was revised down a touch. Total openings eased from 6.14MM to 6.08MM in August (the third strongest level on record) but the openings rate was unchanged at 4.0%. The other popular metrics in the report were mixed. Disappointingly, the number hires and quits declined (the respective rates also ticked 0.1% lower to 3.7% and 2.1%, respectively) but both remained strong. Offsetting that disappointment somewhat was a second monthly decline in the number of layoffs. Overall, the report appears consistent with an overall healthy labor market in what the was last clean report (not affected by the hurricanes) that we may see for several months.