The Market Today
Personal Income Begins to Normalize as Economic Imbalances Remain Evident
by Craig Dismuke, Dudley Carter
Income Drops as Emergency Unemployment Programs Expire: Personal income fell 1.0% MoM in September, a larger decline than expected, as unemployment insurance payments plunged 72.3% MoM and “other government transfers” pulled back 5.3% MoM. The overall decline in government transfers, down 7.0% MoM, was the result of continued unwinding of support programs put in place during the pandemic, particularly the emergency unemployment assistance. Employment income rose another 0.7% MoM, including a 0.8% gain for wage income. Employment income has now risen for 17 of 18 months following the initial pandemic decline, up 17.8% over that time. Employment income is up 7.8% from its pre-pandemic level despite 5 million payrolls remaining missing. Personal spending rose 0.6% MoM, in-line with expectations.
Headline PCE Inflation Rises to Highest Level Since 1990: PCE inflation was broadly firm but fractionally softer than expected at the core level. Headline PCE rose 0.3% MoM bringing the year-over-year rate up from 4.2% to 4.4%, its highest level since 1990. At the core level, prices rose 0.2% MoM keeping the year-over-year rate unchanged at 3.6%. Core PCE was expected to rise to 3.7% YoY. The details show the same story as the CPI report, a pullback in some of the hardest hit areas during the pandemic but broader inflation still present. Owners equivalent rent prices rose 0.43% MoM, the firmest level since 2006. Meanwhile, tenant rent prices rose 0.45% MoM, this fastest pace since 1999.
Consumer Confidence: The University of Michigan’s final reading on consumer confidence for October will be released at 9:00 a.m. CT.
OTHER ECONOMIC NEWS
Pending Home Sales Pull Back but Remain Near Top of 2021 Range: Pending home sales fell 2.3% in September after an 8.1% jump in August, disappointing expectations for a modest 0.5% improvement. Sales slowed in all four geographic regions. Even with the decline, pending sales have generally trended higher since April and notched the second strongest level since January. Both new and existing home sales perked up in September but rising mortgage rates since late last month have raised questions about future activity.
President Biden Releases New Framework for $1.75MM in Spending: As expected, President Biden released an updated framework of his plans to spend $1.75 trillion on social issues and to fight climate change. According to a White House fact sheet, the social spending initiatives would include universal pre-school for 3- and 4-year olds, a one-year extension of the expanded child tax credit, and subsidies for caring for other children, older Americans, and those with disabilities. The climate-related spending would approximate $555 billion and focus on shifting toward cleaner energy. Among other measures in the bill are steps to reduce health care costs, provide more affordable housing, expand education opportunities, and extend the expanded Earned Income Tax Credit. To offset the cost of the new spending, the plan would implement a 15% minimum tax on large corporations and overseas profits, add surcharges on stock buybacks and “multi-millionaires and billionaires,” and close tax loopholes and increase IRS enforcement. In an attempt to rally support among House Democrats, who have held up the Senate’s infrastructure bill in anticipation of the broader spending plans, President Biden reportedly told members, “I don’t think it’s hyperbole to say that the House and Senate majorities and my presidency will be determined by what happens in the next week.”
Economic Imbalance Hit Apple, Amazon Financial Results: Amazon’s quarterly revenue and earnings came up short of estimates and its outlook for sales during the holiday quarter disappointed expectations. Rising costs cut into third quarter results and are likely to persist, potentially reducing fourth-quarter operating profits to nil. Amazon’s CEO said, “In the fourth quarter, we expect to incur several billion dollars of additional costs in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs.” Apple’s revenue missed analysts’ estimates. While demand remained strong, the Company’s CEO said that supply constraints, primarily a shortage of semiconductors, resulted in $6 billion in lost revenue, cautioning that the impact is likely to be larger this quarter.
ECB President Christine Lagarde Talks Down Risk Stronger Inflation Will Force Quicker Rate Hikes: ECB President Lagarde said emergency asset purchases “in my view, will end in March 2022,” implying a tapering announcement may come in December. A second question to be answered was whether market pricing for quicker rate hikes was appropriate amid inflation concerns. “Our analysis certainly does not support that the conditions of our forward guidance are satisfied at the time of liftoff as expected by markets, nor any time soon thereafter,” she said. While it may take a “good chunk” of 2022 before supply-chain issues clear up, “We foresee inflation rising further in the near term but then declining in the course of next year.” She added, “We really very deeply looked and tested our analysis of the drivers of inflation and we are confident that our anticipation and our analysis is actually correct.” Asked again about market pricing, she quipped, “The art of repetition and determination of our conviction should eventually come through.”
Australia’s Central Bank Seen Pivoting Away from Pandemic-Era Policy Next Week: Australian monetary policy and markets are rarely discussed on a global stage. However, interest rates there have made magnificent moves this week which fit the narrative of pivoting central bank views. The country’s central bank was silent following a hot CPI report on Wednesday, sending the yield on the April 2024 bond blowing past the bank’s 0.1% target. The central bank didn’t step in as a buyer Friday to calm markets, exacerbating an earlier increase as investors adjust for a likely policy shift at next week’s meeting. The yield on the April 2024 bond rose from 0.12% last Friday to close at 0.78% today.
Stocks Jumped and Treasurys Steepened: U.S. stocks rallied Thursday as investors hoped the U.S. economy will pick back up after a sharp slowdown in the third quarter. Growth slowed dramatically from a 6.7% pace to 2.0% as fast inflation weighed on real spending, supply issues hit consumption, Delta moderated services spending, investment in housing and business equipment contracted, and trade remained a drag. The picture would have been even more dire had inventories not declined at a slower rate; real final sales contracted 0.1%. However, corporate earnings have been strong and jobless claims continued to improve, providing some solace. The S&P 500 rose 1.0% and the Nasdaq rallied 1.4%, both closing at records, while the Dow added 0.7%. Wall Street’s positivity was unfazed by rising Treasury yields. Yields were volatile early as European curves fluctuated higher during ECB President Lagarde’s press conference (more above) on bets the central bank will be forced to raise rates more quickly than they’re willing to admit amid faster inflation. Earlier, German inflation rose from 4.1% to 4.5%, the fastest in 28 years. More subdued, the 2-year Treasury yield fell 1.4 from a 19-month high of 0.50% while the 10-year yield rose 3.9 bps to 1.58%. The 7-year yield led all increases, up 4.8 bps to 1.45% after an auction tailed by more than 1 bp, despite signs of steady demand.
Yields moved exclusively higher across all major sovereign debt curves Friday while global equities traded lower. Following yesterday’s record closes for the S&P 500 and Nasdaq, the mood dimmed early in after-hours trading. Apple and Amazon both posted disappointing results (more above), citing headwinds from some of the key economic imbalances that are limiting activity and lifting inflation. Nasdaq futures were down 0.9% earlier while the S&P 500 slipped 0.5%. Treasury yields had moved up between 2 and 3 bps across the curve as investors awaited another round of economic data, trailing larger increases registered elsewhere. European yields rose before and after a 2.2% 3Q GDP growth estimate (not annualized) edged out expectations and preliminary inflation data showed core prices rose 2.1% YoY in October, topping expectations for a 1.9% gain with the largest annual increase since 2002. Australian yields were also in focus as a weekly surge continued amid inflation pressures and speculation about central bank policy (more above).