The Market Today

Monsoon of Mixed Economic Data; Focus on Powell’s Testimony This Morning

by Craig Dismuke, Dudley Carter


Trade Deficit Increases in January on Weak Exports:  January’s Advanced Goods Trade Balance report showed a larger than expected, $2.1 billion, increase in the trade deficit.  The deficit rose as imports fell 0.5% but exports fell even more, down 2.2% for the month.  Despite the weaker Dollar, the trade deficit is becoming a bit of a drag on overall growth, dragging 1.1% from December’s 2.6% GDP growth.  On a more positive note, wholesale inventories grew more-than-expected in January, rising 0.7% MoM, along with a positive revision to the December data.  Retail inventories also jumped a solid 0.8% MoM.  While trade may drag from growth, an inventory build would help offset that.


Like the Consumer, Business Investment Starts off 2018 on a Weaker-than-Expected Note:  The preliminary report on durable goods orders for January showed broad weakness, including weak tallies on the two most important indicators of business investment in equipment.  Headline durable goods orders fell 3.7% MoM on a big decline in orders for aircraft – both defense (-45.6% MoM) and civilian (-28.4%).  Orders for durable goods excluding transportation items also fell 0.3%.  Specifically related to business investment in equipment, capital goods orders (ex. defense and air) fell 0.2% MoM, disappointing expectations of a 0.5% increase.  Shipments of those same items rose just 0.1%, also disappointing expectations of a 0.3% increase.  However, December’s shipments were revised up from +0.4% to +0.7%.  Going forward, expectations are that business investment will pick up following 2017’s tax reform.  Given the positive December revisions to inventories and capital goods orders, 4Q GDP is likely to hold firm in tomorrow’s first revision despite some weaker data in other areas.


Home Price Reports Expected to Show Continued Momentum: Two reports on home prices are scheduled for 8:00 a.m. CT, the December (and 4Q) FHFA price reports and the December S&P CoreLogic price report.  Thus far, prices have maintained their steady ascent even as sales have been volatile.  The same is expected in today’s releases with the FHFA report expected to show 0.4% MoM growth and the S&P CL report expected to show 0.6% gains.  February’s consumer confidence report from the Conference Board is expected to tick up from 125.4 to 126.5 at 9:00 a.m.


Powell Testimony – Watching for Confidence in Inflation and a Laissez-Faire Approach to Market Volatility:  Even amidst the heavy calendar, the focus today will be on new Fed Chair Powell’s testimony before the House Financial Services Committee at 9:00 a.m. CT.  While his pre-scripted comments will be released a few minutes early, the Q&A will be the real show for investors.  Two keys to watch will be 1) his take on the firming inflation pressure and 2) his response to the recent stock market volatility.  He is likely to sound more confident in his assessment of inflation and less interventionist in his approach to financial market volatility.



Yesterday – Stocks Extended Recent Gains as Treasury Yields Drifted Lower Again: Strong gains Monday left the major indices higher for a third consecutive session and relieved some downward pressure on U.S. yields. Since last Wednesday, the Dow has added more than 900 points, or 3.7%, ahead of the S&P’s nearly 80 point, or 2.9%, gain. At the sector level, telecom and information tech companies were the S&P’s sector leaders but the index’s strength was broad based. Five of the eleven sectors rose by more than 1.2% and only one sector finished below its last Friday close. Utility companies dropped 0.33% on average as bond-proxy sectors fared the worst. As stocks took off, it took some of the steam out of a Treasury rally that had earlier pushed yields to their lowest levels in more than a week. The 10-year yield slipped a total of 0.4 bps to 2.86% after dropping as many as 3.6 bps to 2.83% mid-morning. The 2-year yield fell the most, losing 1.6 bps to 2.22%.


Overnight – Markets Quiet Down as They Await a Word from Powell: Ahead of a heavy dose of early U.S. economic data, including Fed Chair Powell’s first congressional testimony as Fed Chair, global equities have taken a breather as longer sovereign yields have inched higher for the first time in several days. U.S. equity futures were marginally weaker and the 2-year yield was unchanged at 2.22%, the 5-year yield was 0.8 bps higher at 2.62%, and the 10-year yield had risen 1.1 bps to 2.87%. While yields held for the most part after release of Powell’s prepared remarks, the Dollar, which was essentially unchanged, jumped. In addition to the dense U.S. economic schedule, there were several notable reports released on Europe. Despite firming on a monthly basis, regional inflation across Germany showed a slower YoY pace. Later, a monthly miss (0.5% vs 0.6% expected) at the national level dropped the YoY rate to 1.2%, the slowest since November 2016. The European Commission’s economic confidence index, a weighted index covering feelings of businesses and consumers, slipped for a second month but remained at its third strongest level in 10 years.



New Home Sales Slumped in January: New homes sales fell 7.8% in January to an annual pace of 593k, a much weaker result than the 3.5% gain expected by the median Bloomberg economist. Helping soften the monthly miss somewhat were positive revisions for each month in the final quarter of 2017 (+42k total annualized units). Unlike in last week’s existing home sales report which showed weaker activity across all four regions, the slower pace for new homes was driven by a drop-off in just two areas: a 33% decline in the smallest region (Northeast) and a 14% decline in the largest (South). Similar to in the existing sales report, the median sales price eased and fewer transactions allowed the number of homes for sale to push up to 301k units, the most since 2009. As a result, the month’s supply on hand rose to 6.1, the most since 2011.


Fed’s Bullard Warned About Fed Moving Too Far Too Fast: St. Louis Fed President Bullard (non-voter) said the current settings of the Fed’s monetary policy were roughly where they should be and that forward guidance should be for a relatively flat path considering that the natural rate of interest is currently low in his opinion. He again sounded cautious about future rate hikes saying that substantial hikes could make policy too tight. Bullard noted he was a little concerned that with the U.S. economy looking very good, he’s a little concerned the Fed may try and go too far, too fast. Further out the curve, Bullard said that high demand for safe assets is a global issue and he’s skeptical that the 10-year yield will break out from current levels.


Fed’s Quarles Sees Upside Risks for the U.S. Economy: Fed Governor Quarles said he has an optimistic outlook for the U.S. economy and believes risks to growth are tilted to the upside. He said fiscal policy could give growth considerable momentum and noted there’s a real chance the economy could shift to higher growth. However, he said only time will tell if better growth will break the trend of below-target inflation. He does continue to believe that inflation will rise towards the central bank’s target as transitory forces fade which will make further gradual rate hikes appropriate.

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