The Market Today
Markets Digest Election Results; FOMC Decision Day
by Craig Dismuke, Dudley Carter
No Major Changes Expected for FOMC Statement: At 1:00 p.m. CT, the FOMC will announce its seventh decision of the year. We expect there to be very few changes: no change to the target rate range, few changes to the Official Statement, and no change – yet – to the IOER. The previous Official Statement was very solid listing no material concerns for the economic outlook. Since that time, the housing data has declined and business investment has taken a softer turn. Interestingly, the inflation figures have come in fractionally weaker than expected but medium term expectations have held near the FOMC’s 2% target. However, the remainder of the economic data has been strong since the September meeting. As such, if today’s Statement is unchanged, it will confirm expectations for a December hike. If the areas of weakness are referenced, it would likely be seen as affecting 2019 hikes (Fed currently projects three but the markets expect only two).
Another topic of interest will be the forward guidance on the rate-hike path With policy increasingly closer to neutral, no longer “accommodative,” there is speculation that the language calling for “further gradual adjustments” may be changed at an upcoming meeting to say, as Clarida has recently said, “some further gradual adjustment.” Again, this is more likely to occur at a time when policy is actually changed.
As for the IOER rate, while it is trending above the mid-point for the target range, FOMC participants have expressed a preference for making changes to the IOER rate at meetings which include actual changes to the Target Rate. According to the Minutes from their May meeting, “Participants generally agreed that it would be desirable to make that adjustment at a time when the FOMC decided to increase the target range for the federal funds rate; that timing would simplify FOMC communications and emphasize that the IOER rate is a helpful tool for implementing the FOMC’s policy decisions but does not, in itself, convey the stance of policy.”
Bottom Line: We expect no major changes in today’s FOMC news and that investors will quickly turn their attention back to corporate earnings and the fallout from Tuesday’s election.
Jobless Claims Remain Low: Also released this morning, initial jobless claims for the week ending November 3 ticked down from 215k to 214k. Additionally, repeat claims for jobless benefits fell to 1.62 million, another new low going back to 1973.
Yesterday – Post-Election Risk-On Relief: Stocks rallied sharply Wednesday after voters handed the House back to Democrats but left control of the Senate with the Republicans. History has shown a Congressional gridlock under a Republican White House to be a positive setup for stocks, although there are reasons to believe this time could prove more difficult for a significant push higher – stocks are already up notably since Trump’s election, a Fed-tightening cycle is well underway, the fiscal boost (tax cuts, government spending) is expected to fade, and U.S. remains in a trade dispute with China. Still, Wednesday’s tone was clearly risk-on. Broadly supporting sentiment were comments from President Trump and Representative Pelosi, the presumptive Speaker nominee, about a willingness to work together on bipartisan projects. More granularly, tech reasserted itself as an equity leader and health care companies finished near the top. Analysts said a split in Congress makes significant changes to the health care system less likely. The industrials and materials sectors rose more than 1%, likely benefitting from the fact that infrastructure improvement is one of the few things both parties have shown support for. Energy companies gained despite U.S. WTI falling for an eighth day after inventories grew more than expected and production hit a new record. The safest sectors were positive but lagged behind. The Treasury curve ended flatter but near the highest levels of the day. The 2-year yield rose 2.9 bps to 2.96%, a new cycle-high, while the 10-year yield added a smaller 1.1 bps to 3.24%. Yields held in morning trading but came under pressure in the afternoon after a 30-year Treasury auction became the latest sale to report weak demand metrics and as equity prices closed at their highs.
Overnight – Treasury Yields Pullback as Stock Rally Fades: Yesterday’s strong equity gains in the U.S. have had little lasting effect on major indices abroad Thursday. After a mostly positive day in Asia, European stocks have given up most of their early gains that had pushed the Stoxx 600 0.7% higher. As the index retreated to trade up just 0.2%, U.S. futures extended early losses with the S&P 500 dropping to down 0.4% ahead of U.S. trading. Treasury yields gradually drifted lower throughout the overnight session and unwound at least a portion of yesterday’s rise. The 2-year yield was 0.8 bps lower and the 10-year yield had decline 2.4 bps. Despite the directional shift relative to Wednesday, the trend was still for a flatter curve. The spread between the 2-year and 10-year Treasury yields dipped to 25.9 bps, the lest since early October. Chinese shares were the one blemish on an otherwise positive day in Asia, even after data showed unexpectedly solid month for both imports (+21.4% in $) and exports (+15.6%). The increase in Chinese exports was the largest since February. Italy’s FTSE MIB was down 0.5% and leading losses across Europe. The index snapped to its lows of the day after the EU singled out the country’s public finances out as a specific risk in the foreword of its Autumn forecast and penciled in a 3.1% budget deficit for 2012, outside of the EU’s parameters. The report also said the EU expects growth in the region to continue, but “decelerate”, and cautioned that “The road ahead is however fraught with uncertainty and numerous, interconnected risks.”
Consumer Credit Grew By Less than Expected in September: The Federal Reserve’s monthly consumer credit data, which excludes loans tied to real estate purchases, showed total outstanding credit rose by $10.9B to close out 3Q, less than the $15B economists had expected. The disappointment was driven by a drop in the non-revolving category that consists primarily of consumers’ credit card balances. The $312MM contraction in revolving borrowing was the fifth this year and, with a full quarter still to go, is the most in a year since 2012. As a result, the total net increase was accounted for by a $11.2B rise in non-revolving debts, primarily auto and student loans.