The Market Today

Powell and Trump Go to The Hill; Trade Deficit Jumps, Dimming Hopes for 3% GDP in 4Q


by Craig Dismuke, Dudley Carter

Today’s Calendar – Big Jump in Trade Deficit and Weaker Inventory Accumulation Rain on Growing Optimism of 3% GDP Growth in 4Q:  The October Advance Goods Trade Balance report showed a $4.2 billion increase in the trade deficit month-over-month, a $3.4 billion larger increase than was expected.  The $68.3 billion trade deficit for goods was the largest since 2015 and diverges with the recent trend of trade actually being accretive to overall U.S. growth.  After a run of good data pointing to 4Q GDP possibly coming in at 3% or higher, this report throws cold water on that optimism.  Also released, October’s Wholesale Inventory report showed weaker inventory growth in September (revised from +0.3% MoM to +0.1%) and a contraction in October inventories.  Wholesale inventories fell 0.4% (expected to increase +0.4%).  Retail inventories in October were also down 0.1% MoM.  All told, not a good morning for 4Q GDP forecasts.

 

At 8:00 a.m. CT, the September FHFA Home Price Index is expected to show a 0.5% MoM increase in home prices while the S&P CoreLogic 20-City index is expected to show prices up 0.3% MoM to a 6.04% YoY rate.  If so, this will be the first time the S&P Corelogic Index shows prices growing over 6% YoY since 2014.  This is increasingly a concern for affordability (more below).  At 9:00 a.m., The Conference Board Consumer Confidence index is expected to show confidence pullback from 125.9 to 124.0, still a very high level.  Fed Governor Powell will appear before the Senate Banking Committee today beginning at 8:45 a.m. CT to begin his confirmation process as Fed Chairman (more below).  Secretary Mnuchin, NY Fed Bank’s Dudley, and Philadelphia Bank’s Harker are all on the calendar to speak as well.  President Trump is scheduled to meet with Senate Republicans today trying to build consensus for the current tax reform plan.  The road appears bumpy.

 

Overnight Activity – Global Equity Sentiment Firms in Europe, Treasury Yields Hold: U.S. equity futures rose modestly ahead of Tuesday’s U.S. trading session thanks to a positive shift in sentiment in Europe. Futures contract on the big three U.S. indices weakened in early overnight trading as most exchanges in Asia languished. But European markets opened with more optimism, helping to push U.S. futures into positive territory and to their highest levels of the session. The gains in Europe are widespread geographically which has boosted the Stoxx Europe 600 by 0.4%. At the sector level, the energy sector is leading the way despite another down day for oil prices. Oil prices fell for a second day ahead of Thursday’s OPEC-led oil producers’ meeting in Vienna. Treasury yields spent most of the overnight session hovering just above yesterday’s closing levels but have moved lower in early U.S. trading. The 2-year yield is down 0.2 bps, the 5-year yield is 0.7 bps lower, and the 10-year yield fell 0.4 bps. The Dollar firmed again Tuesday but has yet to fully recover from its big dip last week following the release of the November Fed Minutes that described a Committee frustrated by and focused on weak inflation.

 

Yesterday’s Trading Activity – Uneven Stock Trading and Lower Treasury Yields in First Trading Day of the Week: Stocks closed mixed Monday as a modest 0.1% gain for the Dow was offset by similarly modest losses for the S&P and Nasdaq. Energy companies led losses within the S&P as crude prices dropped the most in more than a month and a half. Markets are awaiting Thursday’s decision from OPEC as to whether the group and others will agree to extend production cuts past the current March cutoff. The lack of enthusiasm for the broader indices was also reflected in breadth indicators; fifty-two percent of all companies within the S&P moved lower on the day while forty-eight companies gained. The biggest bright spots for the index were utilities and telecommunications companies which rose roughly 0.4% on average. Treasury yields fell and finished near their lows of the day and the curve resumed its flattening trend for the first time in three sessions. On the day, the 2-year yield edged 0.4 bps lower to 1.74% while the 10-year yield dropped 1.4 bps to 2.33%. Despite the lower yields, the Dollar recovered against most currencies except the yen and closed near its highest level of the day.

 

New Home Sales – A Luxury Builder’s Market:  New home sales rose 6.2% in October, surprising expectations that they would fall over 6% for the month after a 18.9% increase in September.  However, September’s increase was revised down to 14.2% MoM taking some steam from the October strength; nonetheless, sales were still 9% better than expected.  On an absolute basis, new sales rose 40k for the month including a 13k increase in the Northeast (+30.2%), a 12k increase in the Midwest (+17.9%), a 10k increase in the West (+6.4%), and a 5k increase in the South (+1.3%).  The new home market continues to be a builder’s friend with buyers chasing a limited supply of inventory, pushing prices up as they do.  While the median price fell from $324,900 to $312,800, the average price rose $19,100 to $400,200.  The divergence between the median and the average illustrates the strength in pricing for upper-end homes, at least in part a result of record-high stock prices and the resultant boost in net worth and homebuyer confidence.  Plenty of questions are raised by the recent trends including questions of affordability, and durability of the housing gains if stock prices were to reverse.  From a GDP perspective, after just one month of data, new sales in 4Q are 16% above the average monthly pace in 3Q.

 

Kaplan Says a “Balanced Approach” to Monetary Policy Calls for Another Rate Increase in the Near Future: After last week’s Fed Minutes were released, we concluded that the coming weeks and months would be telling as to what the Fed fears the most, below-target unemployment or below-target inflation. Dallas Fed President Kaplan gave his answer in a Monday essay where he wrote that in cases when the dual-mandate goals are being achieved to different degrees, the Fed “will seek to follow a ‘balanced approach’… taking into account the magnitude of the deviations and the potentially different time horizons over which” the goals may be achieved. Kaplan summarized his outlook by saying that he’s “balancing a labor market that is likely to become increasingly overheated in the months ahead with a level of inflation that is running somewhat below” 2 percent. In addition to the risk that the economy “may well move materially beyond maximum sustainable employment sometime in 2018,” Kaplan also said he is monitoring potential “financial imbalances” – he singled out stock market cap to GDP, low equity volatility, corporate debt levels, government debt levels, trading volumes, and margin debt as examples – that could threaten the sustainability of the expansion if they were to abruptly unwind. The bottom line is that Kaplan believes enough “cyclical [inflation] forces are building” to support additional gradual rate increases to ward off overshooting maximum employment and keep from adding to financial excesses.

 

Powell Supports Raising “Somewhat Further” in Written Testimony Released Ahead of Confirmation Hearing: In is written opening remarks, Fed Chair nominee Jay Powell said that he believes strongly in “preserving the Federal Reserve’s independent and nonpartisan status that is so vital” to the central bank achieving its mandate. On policy, Powell will tell the Senate Banking Committee that the Fed’s “aim is to sustain a strong jobs market with inflation moving gradually up toward our target” and that he expects “interest rates to rise somewhat further.” However, given the uncertainty that is inherent in economic activity, and therefore monetary policy, Powell also believes the Fed “must retain the flexibility to adjust our policies in response to economic developments” and “must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation’s financial stability and economic prosperity.” On regulation, Powell’s recent focus as a Fed Governor, he noted the Fed “will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms—strong levels of capital and liquidity, stress testing, and resolution planning—so that banks can provide the credit to families and businesses necessary to sustain a prosperous economy.”

 

Other Fedspeakers Take Opposing Views: Two Fedspeakers offered their takes on the outlook for monetary policy subsequent to Kaplan publishing his essay. One of them, soon-to-retire NY Fed President Dudley, has a similar outlook to that of his Dallas counterpart. Dudley said, “I’m not particularly concerned that inflation is a little bit below target,” and that there is a general agreement at the Fed that the U.S. economy is “pretty much” at full employment. That belief is why “we have been gradually raising interest rates,” Dudley noted. The other Fed official, Minneapolis Fed President Kashkari, unsurprisingly had a drastically different perspective. Kashkari said, “Because inflation is low, I am seeing no reason to tap the brakes on the economy … My perspective is, let’s allow the job market to continue to strengthen, allow more Americans to go back to work, allow wages to strengthen, and then, if we start to see inflation creep back up to our 2-percent target, we can tap the brakes then.” If the Fed does hike in December as expected, it could lead to Kashkari’s third dissent to a policy decision this year.

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