The Market Today

No Fed Official Sees Inflation Risk Tilted to Downside

by Craig Dismuke, Dudley Carter


Jobless Claims Pull Back, Remain Encouraging:  Initial jobless claims for the week ending April 7 fell from 242k to 233k, a mild pullback after a surprisingly high report covering the previous week.  While claims are still slightly higher than some of the recent, historically low reports, they also remain at very low levels.  In any other environment, claims of 233k would be considered outstanding.


Import prices rose less-than-expected in March, flat at the headline level and up just 0.1% at the core level.  Prices on imports from Canada fell 0.2%, likely a reaction to the USD rising 4% against the CAD during February.  More broadly, the Dollar was up 3.0% against a trade-weighted basket of currencies in February.  On a YoY basis, headline import prices rose from 3.4% to 3.6%, weaker than the expected increase to 3.8%.  For now, import price inflation remains only a minor concern when compared to the firmer prices seen in the U.S. service sector.


At 7:45 a.m. CT, the April Bloomberg Survey of Economists is scheduled for release.


Leading Indicator Points to Consumer Rebound in March: According to Bank of America’s credit card data report, released this morning, March consumer spending rebounded in a meaningful way.  BofA economists speculate the realization of tax refunds, growth in after-tax personal income, and pent-up demand accounted for the rebound.



Yesterday – Stocks Slipped as Geopolitical Woes Outweighed Upbeat Tone in the Fed Minutes: U.S. stocks experienced another choppy day of trading Wednesday as geopolitical woes weighed on sentiment. The major indexes opened lower after a pre-market morning tweet from President Trump warned Russia about a missile strike on Syria. Stocks clawed back off the lows but turned down again on reports that Saudi Arabia had intercepted and shot down a Houthi missile over Riyadh. Markets again shrugged off the news and briefly turned positive before giving up those gains and drifting lower for the duration of the day. The S&P 500 fell 0.5% and finished near its daily low. The heightened tensions in the Middle East boosted oil prices and overshadowed a surprise weekly build in U.S. inventories and another week of record production. The upbeat tone in the Fed Minutes (more below) seemed of secondary concern for the markets. Fed funds futures barely budged and the 2-year yield was unchanged at 2.31%. The 10-year yield fell 2.0 bps to 2.78%.


Overnight – Equities Look to Rebound as President Trump Softens his Stance on Syria Strike: The overnight global market trends were again broken up by an early morning tweet from President Trump. U.S. equity futures were modestly higher despite a weak finish in Asia and mixed price action across Europe. The Treasury curve was hardly changed (higher) and the Dollar had firmed somewhat. At 5:15 a.m. CT, the President tweeted “Never said when an attack on Syria would take place. Could be very soon or not so soon at all!” Stock futures immediately climbed to their highs of the day at +0.5% and the Treasury curve ticked up to just over 1 bp higher. The Dollar added to earlier gains notched after the Euro weakened on a third monthly decline in Eurozone industrial production. Also pressuring the Euro were the ECB’s March meeting Minutes. Focusing on some of the more dovish commentary, the Minutes characterized risks to the global expansion as “tilted to the downside”, reflected “widespread concern” about trade protectionism, and showed members “broadly agreed” that “evidence for a sustained rise in inflation” was “still not sufficient”.



FOMC Minutes Reflect Growing Confidence: The Minutes from the Fed’s March meeting reflect an increasingly confident Fed and were consistent with the previously released Official Statement and Summary of Economic Projections. All officials believed the outlook had strengthened and expected fiscal stimulus to provide a “significant boost to output over the next few years” while many said that they had become more confident inflation would move up and stabilize around 2 percent. For the first since 2011, when detailed balance-of-risk submissions began being published, no Fed official believed the risks to inflation were to the downside (see Chart of the Day). A “strong majority” believed escalation of trade tensions posed downside risks but many seemed unconcerned about the increase in market volatility. Almost all supported continued gradual rate increases and “a number of participants indicated … that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected.” Bottom Line: The Minutes echoed the greater confidence implied in the Statement and SEP. While the official risk assessment remained “roughly balanced,” the Minutes showed that, if anything, the Fed may be leaning toward risks being tilted to the upside.

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