The Market Today
Pivotal Meeting for FOMC Begins, Corporate Earnings, and More Data Delays
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Delayed Data: The economic data are once again being delayed as the Commerce Department tries to determine how long it will take to collect and publish their various reports. Yesterday the BEA announced that this week’s scheduled reports on 4Q GDP, personal income and spending, PCE inflation, and the trade balance would all be delayed. This only adds to the size and potential impact of the data-bomb that is looming.
Home Prices and Consumer Confidence: As for this morning’s calendar, S&P CoreLogic will still report on November home prices at 8:00 a.m. CT (expected to show a further slowing in home price growth) and the Conference Board will release its January report on consumer confidence at 9:00 a.m.
FOMC Faces Challenge of Meeting Dovish Expectations: Most importantly, the Fed will begin its two-day meeting today with big expectations from the markets. Fed officials, almost across-the-board, shifted their mantra from “gradual” to “patient” after December’s market meltdown. The Official Statement’s language is expected to reflect a more measured pace of rate hikes; whether that be in the policy language, the economic overview, or the risk assessment. Additionally, a WSJ article said last week that, “Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected” which ratcheted up expectations from investors. The most-likely place any such plan would be communicated would be in Chairman Powell’s post-announcement press conference (followed three weeks later by commentary in the Minutes). A pivot of this magnitude would lift one of the darker clouds weighing on the markets in 4Q, the risk of a Fed mistake. However, it may be a challenge for a historically slow-moving Fed to deliver as dovish of a result as investors and analysts are expecting tomorrow.
Yesterday – Stocks, Yields Fell as China Slowdown Highlighted as Driver of Corporate Earnings Misses: Treasury yields fell with U.S. stocks on Monday although both finished off their intraday lows. U.S. equity futures portended the weaker open amid a cautious overnight session as investors braced for a week filled with potential landmines that could disrupt global equities’ January recovery. A negative first tick became a near certainty after Caterpillar missed on earnings and provided full-year profit guidance that disappointed analysts’ estimates. A revenue warning from NVIDIA Corp, a prominent U.S. tech firm, shortly after the Caterpillar news added to the downward pressure. Both companies singled out a slowdown in China, which last week reported its weakest annual growth since 1990, as a major reason for the disappointing results. Shares of NVIDIA sank nearly 14% and the tech sector led the S&P 500 to a 0.8% loss. Shares of Caterpillar tumbled 9.2%, their worst day since 2011, and were the biggest drag on the Dow, which also slid 0.8%. Treasury yields tracked equities to their lows of the day and back up as the major indices pared their losses. The 2-year yield settled down 1.7 bps at 2.59% while the 10-year yield fell 1.4 bps to 2.74%. While it didn’t have a noticeable impact on markets, news headlines late in the session indicated the U.S. had filed criminal charges against Huawei, a top Chinese tech company that has been considered a key pawn in trade positioning (more below).
Overnight – Investors Eyeing Corporate Earnings, Trade, and Brexit: U.S. equity futures weakened early in the overnight session as Asian markets closed mostly lower, but recovered back into positive territory as sentiment strengthened across Europe. Tuesday’s global economic calendar is relatively quiet, leaving investors focused on disappointing corporate earnings yesterday in the U.S. and news the Department of Justice had filed criminal charges on a top Chinese tech firm. Shares of Caterpillar and NVIDIA collapsed yesterday after missing analysts’ estimates, with both pointing a finger at unexpectedly-weak results in China. In the afternoon, news broke that the U.S. had filed criminal charges against Huawei Technologies and its CFO on accusations the WSJ summarized as “violating U.S. sanctions on Iran and stealing trade secrets from a U.S. business partner.” In early December, the CFO was arrested in Canada on behalf of the U.S. where she currently is being held awaiting extradition to the States. Her arrest rattled global markets as it was seen complicating trade negotiations. Those fears may resurface considering the latest developments come just a couple of days before top officials meet in Washington for another round of trade talks ahead of the March 1 deadline. Also worth watching today will be a key vote in the UK Parliament on whether officials want to request changes to the current Brexit deal with the EU or ask Brussels to delay expiration of Article 50 which is set for two months from today.
Regional Fed Surveys Improved: An unusually-loud week of economic data started with just a pair of Federal Reserve Bank activity surveys. The Chicago Fed’s National Activity Index inched up in December while an assessment of manufacturing activity in the Dallas Fed region exceeded estimates. The Chicago Fed’s activity index rose in December on a pickup in measures tracking production and incomes while employment metrics were more or less unchanged and data on sales, orders, and inventories softened. The report from the Dallas Fed showed similar results for the current assessment and a positive upbeat tone in expectations for six months ahead. However, a broader context shows it’s still too soon to sound the all-clear signal. The 0.27 reading from the Chicago is still depressed relative to levels from earlier in 2018 and the slight improvement reported by the Dallas Fed, a region heavily-tied to activity in the energy sector, remained at its second-weakest level since 2016. Still, in a period of uncertainty and with a dearth of other key data caused by the government shutdown, a win’s a win.