The Market Today

Merkel Out, EU Stocks Rise; Chinese Stocks Down Another 3%


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Income and Spending Both Rise in September Highlighting Strength of Consumer: Personal income rose 0.2% in September after August’s data were revised up from +0.3% to +0.4%.  While the September headline was weaker, the positive revision kept the overall results in-line with expectations.  On a YoY basis, personal income is now at 4.4% growth, down from 4.9% in June but remaining at a reasonably strong level.  Real disposable income rose 0.07% MoM bringing the YoY rate of growth down to +2.87%.  Real disposable income has held fairly steady, growing 3.0% since mid-2017.   Personal spending rose a stronger-than-expected 0.4% after August’s data were revised up from +0.3% to +0.5%.  Personal spending is now growing at a YoY rate of 5.0%.  With spending outpacing income, the savings rate fell 0.2% to 6.2%.  All in all, while real disposable income was softer than desired, the overall spending and income trends remain positive.

 

PCE Inflation Trending Just below Fed’s 2% Target: PCE inflation rose 0.1% MoM at the headline level and 0.2% MoM at the core level.  As a result, headline PCE growth fell from 2.2% YoY to 2.0% YoY but core held at 2.0% YoY, in-line with the Fed’s target.  One interesting note, the base effects were expected to cause PCE inflation to run faster-than-target through most of 2018.  However, over the past two months’ data, consumer prices have shown weaker growth than expected.  As a result, the real rate of inflation appears to be trending just below the Fed’s 2.0% target.

 

TRADING ACTIVITY

Overnight – Risk-on in Europe, U.S. Help Treasury Yields Recover Portion of Last Week’s Drop: Global markets have been mixed Monday after a tumultuous week of trading that cut at least a couple percentage points off most major equity indices. Asian equity markets were mixed overnight while European companies’ shares have strengthened. Chinese stocks sank 3% in an otherwise stable day for the region and the country’s currency fell back near its weakest level since 2008. In Europe, however, the mood is much more upbeat. The Stoxx 600 has rallied 1.6% on wide-spread gains across the region. Italian stocks were out in front with a 2.6% improvement as German shares gained 2.1% and France’s CAC added 1.1%. The gains in Germany developed despite Chancellor Merkel saying she’ll step down as head of the CDU and exit politics completely when her term as chancellor ends in 2021. Financials have outperformed after HSBC’s quarterly results lifted spirits. Sentiment around Italy improved after S&P left Italy’s credit rating unchanged, despite downgrading the outlook to negative. That has also helped push yields in Italy significantly lower and been another force supporting higher yields in core global bonds. Germany’s 10-year yield was 4 bps higher. U.S. stocks look poised for an opening bounce that would help alleviate some of the pain from last week’s steep losses with contracts on the S&P 500 0.9% higher. Treasury yields have ticked higher with the 2-year yield up 1.6 bps and the 10-year yield 1.9 bps higher.

 

NOTEWORTHY NEWS

ICYMI – October 26, 2018 Weekly Market Recap: Yields tumbled last week amid a global stock rout that rocked U.S equity valuations. The 10-year yield sank 11 bps, as the Dow and S&P 500 erased their year-to-date gains and the Nasdaq dropped into correction territory.  The ripple effects transcended national borders and knocked several percentage points off most major global indices. Concerns about global growth were pushed back into the spotlight by several earnings misses by major U.S. companies, more signs of a possible slowing in the Eurozone economy, and central bankers signaling optimism in their plans to continue moving away from easy policy. All those market moves overshadowed another strong headline GDP report for the U.S. economy that wrapped up the strongest back-to-back quarters since 2014. Personal consumption and government spending led the economy to growth of 3.5% growth despite disappointing results from U.S. businesses and recoils in inventories and trade. Housing’s struggles, which persisted in updates on new and pending (existing) home sales, were highlighted by the fact that residential investment contracted for a fifth time in the last six quarters. Click here to view the full recap.

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