The Market Today
Positive China Data and a Week of Soft U.S. Inflation Data
by Craig Dismuke, Dudley Carter
Import Prices Cap off Week of Unthreatening Inflation Indicators: Import prices rose 0.6% MoM in March, stronger than expectations, again owing partly to the monthly increase in petroleum products and fuels. This brought the year-over-year rate up from -0.6% to +0.0%. When excluding fuel prices, core import prices were softer than anticipated, falling 0.2% MoM. Autos and parts import prices were unchanged while capital goods prices fell 0.2% MoM. The soft import prices come despite a marginally weaker Dollar to start the year. There continues to be little evidence of any worrisome inflation pressure.
Consumer Confidence Back?: At 9:00 a.m. CT, April’s University of Michigan Consumer Confidence Index will be finalized. The preliminary read showed a fourth-consecutive month in confidence’s rebound from November’s low. If the report holds as initially reported, the U.M. report would confirm that consumer have fully regain their confidence from the high drama at year-end.
Vining Sparks Economic Outlook: Vining Sparks held its 2nd Quarter Economic Outlook Webinar yesterday. The themes included 1) the fundamentals of the economy appear stable despite the recent weakness, 2) the biggest threat to the domestic economy this year will likely be the global weakness, 3) the increased risks for Fed policymakers today, 4) an explanation of why the Fed has shifted from expecting restrictive policy by YE20 to expecting policy to remain accommodative through 2021, and 5) why the recent inversion of the 3M/10Y spread appears more like 1998 than other curve inversions. A replay of the webinar is available through your Vining Sparks representative as well as the slidedeck.
Yesterday – Yields Pressured Higher by U.S., Global Forces: Most sectors within the S&P 500 closed up on Thursday but the overall index ended unchanged for the day as health care stocks sank 1.2% to offset the gains elsewhere. Analysts continued to point to political risks in Washington for health cares’ woes, after the latest call from HHS for private insurers to pass on prescriptions rebates through to the insured. Industrial stocks were the top performers on Thursday, while financial stocks closed up in second place ahead of the first earnings releases for the sector today from JPMorgan, PNC, and Wells Fargo. Despite a shaky day for equities, Treasury yields were pressured upward by multiple forces and closed higher by more than 3 bps across the curve. U.K. yields jumped after Friday’s Brexit deadline was pushed to October 31 on Wednesday evening and set a floor under global yields. U.S. jobless claims were reported at their lowest level in almost 50 years earlier in the day, confirming continued strength in the labor market, and headline producer price inflation firmed up more than expected. Yields held higher in the afternoon following an auction of 30-year bonds tailed around lunch. For the day, the 2-year yield rose 3.3 bps to 2.35% while the 10-year yield added 3.2 bps to 2.50%.
Overnight – Risk-on After China Data, U.S. Bank Earnings: Global equities were almost exclusively in positive territory with analysts pointing to stronger data from China ahead of earnings from a couple of major U.S. banks. China’s trade surplus was much stronger than expected in March as exports ($) surged 14.2% YoY after sinking more than 20% in February, weakness blamed on volatility around the Lunar New Year. The recovery easily surpassed estimates for a 6.5% bounce and offered a sign of stability for the global economy. However, imports sank 7.6%, falling for four months straight for the first time since 2016, adding to the uncertainty around the Chinese economy. Nonetheless, total financing expanded more than expected during the month and could support stronger activity in the months ahead. The release of the stronger financing data aligned with a jump in the price of crude and a big move up in global equities and bond yields. Adding to the optimism, Eurozone industrial production slipped less than expected in February as better activity in France and Italy offset another weak data point from Germany. U.S. equity futures added to overnight gains after JPMorgan beat estimates on revenue, net interest income and margin, and earnings, while also keeping their full-year outlook intact. In the earnings release, the company’s CEO said “consumer spending remains robust,” and “Even amid some global geopolitical uncertainty, the U.S. economy continues to grow, employment and wages are going up, inflation is moderate, financial markets are healthy and consumer and business confidence remains strong.” Well Fargo’s bottom line earnings also exceeded estimates. Around 7:30 a.m. CT, S&P futures were up 0.7% and the 10-year yield was 5.2 bps higher.
Bullard Said U.S. Monetary Policy Normalization is Over: St. Louis Fed President Bullard (2019 voter) said during a Thursday presentation that the Fed’s official shift to patience in its March projections “mark[s] the end of monetary policy normalization in the U.S.” Drawing a contrast between normalizing monetary policy and conducting monetary policy, Bullard added, “The FOMC may elect to adjust monetary policy going forward, but any such adjustments would be in response to incoming macroeconomic data and not part of an ongoing normalization strategy.” While he hopes that the yield curve will steepen as mid-year data recovers from weakness at the start of the year, he cautioned that, “A meaningful and sustained inversion of the Treasury yield curve would be a bearish signal for the U.S. economy.”
Clarida Echoes Tone of March Minutes: Fed Vice Chair Clarida’s Thursday comments sounded as if he were reading from the March Minutes released on Wednesday, highlighting that risks to the outlook and muted inflation meant that the Fed could be patient as it determines the need for any additional changes to monetary policy. On the economy, he highlighted that the global economic data had slowed, and while he expects it to return to its prior, more positive trend, he noted that it’s had an effect on the U.S. data.
Williams Less Worried about the Economy’s Momentum, But Wants to See Inflation: New York Fed President Williams (2019 voter) three-month average payroll growth of 180k is “a sign that, slower growth than last year, for sure, but still, the economy’s still got positive momentum.” He also sounded more optimistic about the uncertainty around the turn of the year that had raised worries about a possible recession. “The signal I get is that worries about the economy that maybe we had – I had – several months ago, that the economy may be slowing much more sharply than I expected, those worries have receded somewhat.” However, he also said, “I do worry that if inflation systematically undershoots our target, inflation expectations can come down and drift to a lower level and make it harder for us to achieve our goals. It’s really important we get to 2%.”