The Market Today
Philadelphia Fed Business Outlook Index Posts Biggest Monthly Gain of the Cycle
by Craig Dismuke, Dudley Carter
Philadelphia Fed Business Outlook Surges to 12-Month High: The Philadelphia Fed’s Business Outlook Index recovered nicely in July, rising 21.5 points to post its strongest single-month gain since 2009. The current-month recovery pulled the index up from 0.3, its second-weakest level since May 2016, to 21.8, its strongest level in 12 months. The ISM-weighted composite rose from 55.8 to 59.7 as four of the five key underlying metrics strengthened and delivery times held steady. New orders rose to a six-month high, shipments hit their best level in 13 months, and inventories recovered. Realizing the biggest change of the four that increased, the index tracking the number of employees jumped to its second-best level on record. Adding to the upbeat tone on the labor market, the average employee workweek hit a 14-month high. The report becomes the latest in a string of data that has showed some firming in the outlook after an early-summer slump. However, the Fed has seemed more focused on global uncertainties and muted inflation ahead of their meeting later this month.
Initial Jobless Claims Remain Low: Initial jobless claims remained low last week, rising 8k to an as-expected 216k. Rolling off a marginally-weaker 217k from the calculation, the four-week averaged edged down from 219,000 to 218,750. Continuing claims improved 42k last week to 1.69MM, although the four-week average ticked up. The labor market appears to be holding up well, despite increased uncertainty and concern about the growth outlook.
Later Today: At 8:30 a.m. CT, Atlanta Fed President Bostic will give a speech in Middle Tennessee ahead of a relatively (positionally) more important appearance from New York Fed President Williams at 1:15 p.m. Last week, Bostic said “I’m not seeing the storm clouds generate a storm yet,” while Williams more aligned himself with Chair Powell’s current position, noting “We’ve got the uncertainties, …inflation continuing to run below 2%.” At 9 a.m., the Conference Board’s leading index is expected to be reported up 0.1% for June after an unchanged result for May.
Yesterday – Treasury Yields Undo Tuesday’s Post-Retail-Sales Jump as Equities Weaken on Earnings and Oil: U.S. stocks slipped for a second day this week and Treasury yields fell more than enough to erase the sell-off that ensued after Tuesday’s stronger-than-expected retail sales report. The S&P 500 dropped 0.7% as the industrials sector slipped more than 2% on a concerning outlook from a U.S. rail company, and the energy sector fell more than 1% on weaker energy prices. CSX Corporation, a component of the industrials sector, led all losses within the S&P 500 with its biggest daily decline in more than a decade. The Company posted disappointing earnings and lowered its full-year forecast amid greater uncertainty about freight loads. The company’s top executive said, “Both global and U.S. economic conditions have been unusual this year, to say the least, and have impacted our volumes, …The present economic backdrop is one of the most puzzling I have experienced in my career.” CSX’s decline weighed broadly on transportation companies, a sector seen as a bellwether for the pace of economy activity. Energy companies’ woes were tied to weakness in oil prices, after a weekly report from the EIA showed swelling supplies of petroleum distillates and seasonally-weak demand for gasoline. As equities slid throughout the day, an early bid for Treasurys, which had developed during rally in European government bonds, intensified. Fully erasing Tuesday’s retails-sales-related rise, the 2-year yield fell 3.9 bps to 1.81% while the 10-year yield fell 5.7 bps to 2.05%.
Overnight – Treasury Yields Rise on Upbeat Data While European Yields Move Lower on ECB Inflation Review: Treasurys were relatively stable overnight despite another drop in yields across Europe as global stocks weakened and a headline indicated the ECB may revisit how it defines its inflation target. Japan’s Nikkei slumped 2% to lead widespread weakness across Asia after the yen strengthened in response to softer-than-expected June exports. Exports out of Japan fell 6.7% in June from a year ago, worse than then 5.4% expected and the seventh-consecutive negative print. The Stoxx Europe 600 opened down 0.7% amid the soft tone set in Asia, but has gradually managed its way back closer to unchanged. However, European yields have steadily moved lower, with a sharp drop noticeable in the intraday chart around 5:30 a.m. CT. A headline hit Bloomberg terminals at 5:29 a.m. that indicated the ECB was studying redefining how it targets inflation. An informal study is reportedly underway to determine if the central bank’s current mandate, consumer inflation “below, but close to, 2%” is still appropriate, or if a symmetrical target, similar to the Fed’s definition, would be more effective. The euro weakened on the headline and yields dipped as such a policy shift could result in rates being held lower for longer. On the trade front, Treasury Secretary Mnuchin said at a meeting of finance leaders from the G-7 countries that the U.S. and China have a phone conversation planned for today, less than 24 hours after the WSJ said negotiations were “stuck in a rut over Huawei.” Treasury yields popped after solid jobless claims and the surging Philadelphia Fed index, with the 2-year yield 2.9 bps higher and the 10-year yield up 3.1.
Fed’s Beige Book Supports the Fed’s Focus on Uncertainties Amid Soft Inflation: The Fed’s accumulation of anecdotal evidence ahead of this month’s policy meeting signaled stable economic activity overall, slower hiring amid a persistently-tight labor market, steady wage gains, and muted inflation pressures. Averaging across the twelve Fed Districts, activity “continued to expand at a modest pace overall…with little change from the prior reporting period.” The update, which gathered information from mid-May through July 8, included a more positive tone on the consumer, the nonfinancial services sector, and manufacturing in some Districts, although factory production as a whole was described as “generally flat.” Tourism, home sales, and nonresidential construction were also characterized constructively while autos and agriculture remained soft. The labor market continued to be described as tight, while hiring slowed and wage pressure were similar to those in the prior period. Importantly, inflation “was stable to down slightly from the prior reporting period,” another factor the Fed can point to as support for their “muted” assessment of overall inflation pressures. A nonscientific analysis of the document shows there continue to be “widespread concerns” about trade tensions, but the situation doesn’t appear to have worsened. The worse “trade” and “tariff” were used a combined sixty times, down from seventy-one in the prior report, while “concern” and “uncertainty” tallied thirty-eight mentions, fewer than the previous document’s forty-four.
Fed Hawk Sees Possible Case for a Cut, But Thinks Current Situation Isn’t It: Kansas City Fed President George signaled she could visualize a situation that would warrant a lower Fed Funds rates, but said she doesn’t believe the current environment is such a case. George said, “my own outlook suggests we will continue to see growth in the economy around or slightly above the trend rate of growth” and that “inflation has remained low and stable, …So for me that suggests we are in a good range in terms of thinking about monetary policy.” She admitted the economy faces increased risks, “primarily coming from trade and tariff uncertainties and certainly…slower growth abroad” but “To this point I think the [U.S.] data’s come in pretty positively.” However, “I’m also prepared to adjust those views should we realize some of these downside risks,” George said, an indication she’s open to cutting rates if the data deteriorate.