The Market Today
NY Fed’s Dudley Speaks, Producer Price Inflation Data Weakens
by Craig Dismuke, Dudley Carter
Today’s Calendar – Dudley Speaks; More Weak Inflation Data: July’s producer price report showed another weaker-than-expected batch of inflation data. Prices of final demand items dropped 0.1% MoM versus expectations of a 0.1% increase, the first drop since August 2016. When excluding food and energy, prices also fell 0.1%. This brought the headline year-over-year rate of producer price gains down from 2.0% to 1.9% (exp. 2.2) and the core price gains down to 1.8% (exp. 2.1%). The weaker inflation data was not completely broad-spread with 80% of the July drop coming from weaker prices for services, specifically for chemical wholesalers. However, the weaker prices were not just limited to chemical wholesalers. There continues to be very little price pressure evident in the production pipeline.
Initial jobless claims for the week ending August 5 rose from 241k to 244k marking the 127th consecutive week with claims below 300k. At 7:45 a.m. CT, the Bloomberg Survey of Economists is scheduled to be released. Perhaps the most important event on the calendar today will New York Fed Bank President Dudley’s comments at 9:00 a.m. CT.
Overnight Activity – Equities Continue to Falter in the Face of Geopolitical Tension: Global stocks are almost exclusively lower Thursday as investors remain uneasy about the situation between the U.S. and North Korea. Wednesday evening North Korea issued a response to President Trump’s “fire and fury” remarks, calling them “a load of nonsense” and indicated the preparation of a plan to potentially send missiles into waters near Guam as early as mid-August. U.S. equity futures are notably lower with the Dow’s 0.3% decline the least severe. Other markets have shown less of an impact with little sign of a flight into government bonds. European yields are mixed but little changed, while Treasury yields have added marginally to yesterday’s decline. The 2-year yield has fallen another 1.2 bps to 1.33% and the 10-year is currently down 1.6 bps to 2.23%. Gold remains higher and the Yen has held its bid. Oil prices are up after data Wednesday showed a decline in U.S. crude inventories and a Thursday report indicated OPEC has increased its outlook for global demand. The Dollar erased overnight gains following the softer-than-expected producer price inflation data.
Yesterday’s Trading Activity – Fear Subsides as Early Morning Moves Moderate: Early morning anxiety tied to the recent war of words between the heads of the U.S. and North Korea let up throughout Wednesday’s session. Stocks trimmed morning losses and Treasury yields moved off of session lows. However, gold remained well bid through the close. The Dow fell 0.2% and the S&P managed its way back to essentially unchanged (-0.04%). As a result of the ebbing fears, the VIX index, which tracks expectations of future equity volatility, closed at its daily lows after spiking earlier to the highest level in more than a month. Treasury yields climbed back from a steep morning drop that pushed yields (prices) to their lowest (highest) levels since late June. The 10-year Treasury yield fell 1.4 bps to 2.25% after dropping to as low as 2.21% shortly after 7 a.m. CT. Nonetheless, gold climbed to close at the highest level since June 8. The mixed response between asset classes followed mixed messaging about North Korea from high-level officials in the Trump Administration. Secretary of State Tillerson tried to calm the waters saying, “Americans should sleep well at night, have no concerns about this particular rhetoric of the last few days”. Defense Secretary Mattis, however, took a more hardline approach, commenting that North Korea “should cease any consideration of actions that would lead to the end of its regime.”
Fed Doves Concerned about Weak Inflation, Still Favor September Balance Sheet Plan: Chicago Fed Bank President Evans warned on the low rate of inflation recently saying that undershooting 2% inflation could cost more than overshooting the target. While he still believes it is reasonable to expect inflation to reach 2% over the next few years, the recent below-target readings have been meaningful enough that he is questioning the outlook. He reiterated that the FOMC should be “very careful” going forward. St. Louis Fed Bank President Bullard raised the bar in a Bloomberg interview saying the FOMC does not need to be pre-emptive with rate hikes amidst weak inflation, adding that he’s not very optimistic on inflation gains this year. However, both regional bank presidents affirmed their support of beginning balance sheet adjustments in September.