The Market Today
Powell Critical of “Fed-Put”; This Week Brings December Retail Sales and CPI
by Craig Dismuke, Dudley Carter
This Week’s Calendar – December Retail Sales and CPI Inflation: This week’s calendar will bring the final piece of the holiday shopping puzzle in December’s advance read on retail sales (Friday). After Gallup forecast almost-record high sales expectations, the November retail sales data confirmed a strong start. Since then, the smaller bits of data have been positive. Now, the December retail sales report is expected to show a 0.5% MoM increase in sales. If correct, personal consumption is likely to come in at a stellar 3.0% in 4Q and help bring GDP to close to 3.0%. Also scheduled for Friday is the December CPI inflation report. Consumer prices are projected to rise 0.2% MoM at the core level keeping the year-over-year rate at 1.7%. More important will be the stability of the big ticket components: rents, medical care, and autos. On Tuesday’s calendar are the December Small Business Confidence index (currently half-a-point from an all-time high) and the November Job Openings and Labor Turnover report.
Overnight Activity – Global Equities Continued to Strengthen While Sovereign Yields Have Shifted Lower: The good times for global equities continued to roll overnight with most indices gaining to start the week. At the same time, however, there has been a slight bid for sovereign debt that has flattened most curves slightly on lower yields. The tone in equities was firmer starting in Asia where a broad measure of regional equity strength ex-Japan rose more than 0.3%. The positivity carried over and has helped lift the Stoxx Europe 600 more than 0.2% to its highest level since August 2015. Also likely giving equities a boost was the European Commission’s Eurozone economic sentiment indicator hitting a more-than-17-year high to close out 2017. Eurozone retail sales were also firmer-than-expected for November and German Chancellor Merkel was expected to meet for a second day with the leader of the Social Democrats to talk about a potential coalition government. Still, even as stocks have risen, longer yields have drifted lower. The 10-year yields for Germany and France have fallen more than 2.5 bps and the 10-year Treasury yield is around 1.5 bps lower. The Dollar is modestly stronger and matching its best daily performance since mid-December.
ICYMI – January 5, 2018 Weekly Market Recap: Stocks carried last year’s positive momentum into the first trading week of 2018 as the three major indices combined for a total of 11 new record closes and the S&P posted its best week since December 2016. There were more signs of global growth synchronization that helped support the rally and also pushed yields up to start the week. The Treasury curve ended higher with most of the net move made on Tuesday as markets reopened from the New Year holiday break. The 10-year yield rose 5.8 bps on Tuesday and a total of 7.1 for the week. Some of key economic releases, including December’s Fed Minutes and nonfarm payroll report, had an intraday impact when they were released but each move ultimately dissipated. Click here to view the full recap.
Governor-Select Powell Critical of QE3 and the Fed Creating Asset Bubbles, in 2012: With the Fed’s release of its meeting transcripts late last week, we learned of newly selected (still awaiting confirmation by full Senate) Fed Chair Jerome Powell’s views on QE3. The transcripts, unlike the Minutes, are not edited repeatedly and reflect the actual conversations during the meetings. When QE3 was approved in September 2012, then-Governor Powell said, “I’m supporting [the decision] with a certain lack of enthusiasm, and I am somewhat uncomfortable with the road that we are on.” In the October meeting, he was more direct, saying “I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.” The implications for investors today are numerous: 1) Powell understands the risk/reward nature of investors when a “Fed-Put” is perceived, 2) Powell is focused on damage the Fed could be doing by keep its balance sheet bloated, and 3) Powell will likely heavily factor into account any adverse impact on the functioning of the markets as the Fed continues to slowly unwind their balance sheet.