The Market Today
More Disappointing Data in Eurozone; Fed’s Williams on the Tape Today
by Craig Dismuke, Dudley Carter
Chicago Fed Index Rebounds but Remains Soft: The Chicago Fed’s National Activity index rebounded from -0.41 to +0.10 in its August report. The 3-month average for September rose to -0.06, historically consistent with core PCE inflation near 1.5%. The CFNAI is an aggregation of 85 different economic indicators including reports on 1) production and income, 2) the labor market, 3) personal consumption, 4) housing, and 5) sales and inventories. For context, when the CFNAI’s three-month average is above +0.70 following an expansion (or a one-month reading above 1.00), a period of more rapid inflation is expected to occur.
Markit PMIs Expected to Inch Higher: At 8:45 a.m. CT, September’s preliminary Markit reports on the U.S. manufacturing and services sectors are expected to both tick higher. The U.S. remains one of just a handful of major manufacturing nations globally with a purchasing managers’ index above 50 (50.3, according to Markit; below 50 represents contraction). However, manufacturing weakness is presumed given the current backdrop of global weakness and trade uncertainty. Even more important will be the services PMI.
Fedspeak – And Now to Explain Their Votes: Also on today’s calendar are public comments from Fed officials John Williams (NY), Mary Daly (San Francisco), and James Bullard (St. Louis). Given Williams’ influence as the head of the New York bank and role as a centrist on the Committee, investors will pay particular attention to his comments. Bullard dissented from last week’s policy decision preferring to cut rates more. Daly has been relatively dovish in her positions.
OVERNIGHT TRADING ACTIVITY
European Economy Continues To Weaken: Global market sentiment is weaker heading into the U.S. session after another round of disappointing data showed economic weakness in Europe’s largest economy is intensifying. European yields tumbled after Germany’s composite PMI fell more than expected in September, contracting for the first time since April 2013. Looking within the sectors, manufacturing activity contracted for a ninth month in a row and at the sharpest rate since June 2009, as new orders slid to the weakest reading since April 2009. The services sector expanded at the weakest rate of the year and new business was the softest since December 2014. Immediately prior to those reports release, the same surveys for France also missed expectations.
European Yields Drop And Lead Global Rally: Ten-year yields in both countries were hovering just below unchanged prior to the data, but quickly tumbled to new lows after it was released. At 7:15 a.m. CT, France’s 10-year yield was down 6.7 bps at -0.29% and Germany’s had dropped 5.6 bps to -0.58%. Yields across the rest of Europe tracked similar moves. Less than two weeks ago, the ECB announced open-ended asset purchases as part of its return to monetary stimulus, an attempt to offset a slowdown in its economies in the face of elevated global uncertainty.
Treasury Yields Follow But Lag Behind: Treasury yields had opened higher but dropped back with European yields on the increased economic worry, although the moves have been more modest. In front of this morning’s PMI data for the U.S. the 2-year yield was down 1.4 bps to 1.67% and the 10-year yield was 2.6 bps lower at 1.70%. In other markets, U.S. equity futures were generally unchanged despite sharp declines in Europe and oil prices had drifted lower notwithstanding continued supply uncertainty after last week’s attack in Saudi Arabia.
Economic Data Was Solid But Drowned Out By Other Developments: The economic reports last week focused on manufacturing activity and the housing sector and, by and large, were better than economists expected. Specifically on housing, existing home sales hit a 17-month high, the NAHB’s Housing Market index rose to its best level of the year, and housing starts and building permits improved more than expected to new cycle-highs. However, that data drifted well down the list of items markets were attentive to.
Oil Prices And Overnight Funding Markets Drove Markets Early: Oil prices captured Monday’s headlines with their biggest intraday gain since 1991, after a drone attack over the weekend caused significant disruptions to Saudi Arabia’s oil operations. Overnight funding markets became the focus Tuesday with key overnight rates surging higher on an apparent liquidity crunch. Treasury auction settlements and corporate tax payments occurred on the same day, shifting dollars from bank reserves to the Treasury’s general account and leaving some securities holders in search of overnight funding. The Fed was forced to intervene with its first overnight repurchase operation in a decade.
Fed Cut Rates But Content With Watching The Data: Preempted by those two events, Wednesday’s Fed cut was almost an afterthought. However, three dissenters and a lack of consensus in the dot plot shone a light on growing divisions at the Fed as to what should come next. In response to funding pressures, the Fed said it will continue to use temporary operations for now until it can learn more. After drifting lower throughout the week, the 10-year yield closed down 17.6 bps. The Dollar appreciated slightly and the S&P 500 fell 0.4%. Click here to view the full recap.