The Market Today
Positive News from Jobless Claims, Manufacturing Report, and Corporate Earnings
by Craig Dismuke, Dudley Carter
Day 27: The government shutdown now enters its 27th day making it the longest on record. As the impasse persists, economists are becoming increasingly concerned about the impact to the broader economy. Most estimations hold that the shutdown will drag near 0.2% from GDP for every month that it continues, with that figure growing as more and more areas are impacted. December’s Housing Starts and Building Permits data, scheduled for release today, will be delayed because of the government shutdown.
Jobless Claims Low Despite Increase in Federal Filers: Initial jobless claims for the week ending January 12 fell from 216k to 213k. The granular details of the report are always lagged one week, and the January 5 report details showed federal employees applying for jobless benefits increasing from 4,760 to 10,454. If it were not for the government shutdown, jobless claims would likely be close to the cycle-low levels. The shutdown appears likely to continue for an extended period and the data are likely to continue being hit. Nonetheless, initial jobless claims remain very low, in total, reflecting the strength of the labor market at the turn of the year.
Philly Fed Index Offers Respite from Discouraging Data: In a change of pace, the Philadelphia Fed Business Outlook index was better than expected in January, up from 9.4 to 17.0. The trend has been lower since early-2017 including three consecutive declines before this morning’s report. The details of the report show one catalyst for the increase, a jump in new orders. The indices tracking unfilled orders, shipments, prices received, and number of employees all fell. However, the ISM-weighted calculation from the index, along with the weak New York Fed report, points to another decline in the ISM Manufacturing report (see Chart of the Day).
Fedspeak: Fed Vice Chair for Regulations Quarles is slated to speak at 9:45 a.m. CT today.
Bank Beats Lift Stocks, Treasury Yields Make Modest Rise: U.S. stocks rose Wednesday as outsized gains for financials helped buoy the indices amid mixed moves by the remaining sectors. Financial companies within the S&P 500 rose 2.2% to help lift the broader index by a less-impressive 0.2%. Nonetheless, the S&P 500 finished at its highest level since mid-December, is now up 11.3% from its Christmas Eve bottom, and has recovered to 10.7% below its last all-time high from late September. Financials found favor with investors after Bank of America and Goldman both topped earnings estimates with the former’s CEO sounding upbeat on the U.S. economy. Goldman Sachs’s shares shot up 9.5% to lead all gains as Bank of America rallied 7.2% to close as the second best performer among the 500 contenders. Goldman’s 127-point contribution accounted for most of the Dow’s overall 142-point, or 0.6%, gain. Treasury yields ended off their highs but up on the day as stocks gained. Yields showed a positive knee-jerk response to news UK PM May cleared a confidence vote that will keep her government in power for the time being. The 2-year yield edged up 0.6 bps to 2.54% as the 10-year yield inched up 1.1 bp to 2.72%.
Overnight – Caution in Asia and Europe Pull U.S. Futures Lower: Some modest risk aversion overnight has pushed most major global equity indices lower and caused a small tick down in yields on Treasurys and other core sovereigns. Things were looking up midway through the Asian session but a wave of afternoon selling erased morning gains and left the majors there lower at the close. The weakness has carried over into trading on the European bourses and helped pull U.S. futures to their lows of the day. After several U.S. banks boosted U.S. sentiment in recent days with solid earnings, the sector was the biggest drag on the Stoxx Europe 600 which was down 0.3% on Thursday. Shares of SocGen, a major French financial services firm, fell more than 5% after warning on revenue and dragged the overall sector below all others within the index. European autos were also a drag as the sector opened down sharply following Wednesday afternoon comments from a prominent U.S. senator that President Trump is “inclined” to do tariffs on imported autos. The same senator said trade talks with the EU and Japan, which were scheduled to begin early this year, could be delayed by the government shutdown. U.S. futures tracked losses across Asia and Europe with the majors down around 0.4% earlier. Morgan Stanley missed on revenue and earnings and could keep additional pressure on equities at the open. Treasury yields were mostly lower overnight but back near unchanged heading into U.S. trading.
Fed Beige Book Sounds More Cautious on the Outlook: The tone of the Fed’s latest Beige Book was one of moderation when discussing economic activity but continued to signal that a tight labor market is keeping upward pressure on wages. The latest edition said growth “increased in most of the U.S.,” that “All districts noted that labor markets were tight,” and that “wages grew throughout the country” at a “moderate” pace. The results remained mixed as to businesses’ ability to pass higher costs to consumers. The Fed’s contacts cited higher prices being driven by materials inputs, freight, and tariffs while lower energy costs offered some offsetting relief. Overall, the write-up said “Outlooks generally remained positive, but many Districts reported that contacts had become less optimistic in response to increases financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.” The insight into what Fed officials are hearing from Main Street lines up with their pledge for being patient with interest rate normalization in the first half of 2019.
Home Builders Show Signs of Optimism Amid Steady Economic Activity, Falling Rates: The NAHB’s Home Builder Housing Market Index rose for the first time in three months, starting 2019 off with a positive push off its lowest level since May 2015. While positive, the 2-point increase settled the index at 58, matching still its second-weakest level since May 2015. Each of the underlying indices tracking current and expected sales as well as traffic of prospective buyers improved, the former to a greater degree than the latter. The index peaked late in 2017 before slowly declining along a similar path as sales of new homes. The stability in home builders confidence provides some hope new home sales activity, which fell to a 31-month low in October (November data postponed by the government shutdown), might also stabilize. Earlier Wednesday, mortgage applications posted their best two-week gain in three years in response to the recent decline in mortgage rates. The NAHB’s Chairman said, “The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment.”