The Market Today
Powell Tweaks Description of the Same Picture
by Craig Dismuke, Dudley Carter
Income and Spending Start 4Q on Strong Note: October’s personal income and spending data were stronger than expected with income rising 0.5% MoM (exp. +0.4%) and spending rising a stellar 0.6% (exp. +0.4%). The results brought the year-over-year rate of income growth up to 4.3% spending up to 5.3%. Tax and non-tax payments rose just 0.16% MoM and the inflation deflator proved slightly softer than anticipated helping real disposable income rise 0.34% MoM, well above the 12-month average of 0.23%. Because spending outpaced income, the savings rate did tick down 0.1% to 6.2%. This marks a very strong start to 4Q consumption data.
PCE Softer than Expected Again: Also released this morning, PCE inflation proved softer than expected, once again, in October. Headline inflation rose 0.2% MoM keeping the YoY rate at 2.0%. Core PCE rose just 0.1% MoM bringing the YoY rate down from an initially reported 2.0% in September (revised down to 1.9%) to 1.8%. This is the second month of softer-than-expected inflation data in both the PCE and CPI reports. It is likely to create a challenge for the Fed’s outlook for three additional rate hikes in 2019.
Jobless Claims Rise Again: Initial jobless claims rose, again, in the week ending November 24 from 224k to 234k. While claims remain low, this is the highest rate since May.
FOMC Minutes and Speakers: The Fed will release the Minutes from their November 8 meeting at 1:00 p.m. CT today. There will also be a host of Fedspeakers on the tape this afternoon.
Yesterday – Markets Saw Powell’s Speech as Increasing the Likelihood of 2019 Pause: As expected, markets were tuned in for Fed Chair Powell’s lunch-time speech (more below). While Powell spent just five of his 34 paragraphs directly addressing the economy and monetary policy, a change in his description of where Fed Funds is relative to neutral estimates set markets off. Less than two months ago, Fed Chair Powell said Fed Funds was a “long way from neutral” which, combined with a couple of strong economic reports earlier that morning to send Treasury yields surging as investors repriced for a potentially more aggressive Fed. Stocks tumbled over the next several sessions. On Wednesday, however, Powell chose a different description, saying the current rate is “just below” the neutral range. Combined with his recent highlighting of several economic headwinds and another line in Wednesday’s speech that the Fed would pay attention to “incoming economic and financial data,” which hasn’t been great, markets saw the tone as bringing forward a possible pause for the Fed in 2019. The Fed Funds Futures curve, which still expects a December hike, flattened to essentially price in just one more beyond that. The Treasury curve initially rallied sharply in a steepening fashion with shorter yields falling the most. The 2-year yield ultimately ended 2.2 bps lower at 2.81% while the 10-year yield ticked up 0.4 bps to 3.06%. The Dollar dropped 0.6% in its largest daily decline since the first of the month. Stocks rallied, with tech out in front. The Nasdaq led with a 2.95% gain, the biggest since October 25 amid a period of notable volatility. The Dow ended up 2.5% in its best day since March and its second best since August 2015. The S&P 500 added 2.3%, also its best result since March.
Overnight – Powell Change Effects Global Yields: The effects of Fed Chair Powell’s tone-change in yesterday’s speech extended into the overnight session. Global equities were mostly positive in response to yesterday’s U.S. rally while global yields ticked lower and Treasury yields continued to decline. Chinese equities were left out of Thursday’s gains with the CSI 300 slipping 1.3% to turn negative for the week. While Powell’s speech was positive for risk assets, this weekend’s trade meeting between Presidents Trump and Xi have obvious potential implications for global markets. European markets were up but had given back most of their gains and U.S. futures were weaker. U.S. futures had retreated modestly with Dow and S&P 500 down just over 0.2% and the Nasdaq 0.5% lower. U.S. crude prices were in focus as WTI fell below $50 per barrel for the first time since October 2017 on another week of record U.S. production and a larger-than-expected inventory build. Prices bounced back subsequently, however, on a headline that Russia could agree with OPEC to cut production. After shaking off the softer tone from Powell on Wednesday, longer U.S. yields are leading the U.S. curve lower. The 10-year yield was down nearly 5 bps to 3.01% after earlier crossing below the psychological 3%-level to 2.995%. The 2-year yield was down 1.6 bps to 2.79%.
Market Pares 2019 Fed Expectations after Powell Adjusts His Characterization of Fed Funds: In a speech to the Economic Club of New York, Fed Chair Powell said there is a “great deal to like” about their economic outlook for “continued solid growth, low unemployment, and inflation near 2 percent.” But it was the change in his description of where the Fed Funds rate is relative to its neutral estimate, despite no changes to the target range since his last assessment, that caused the swift market swings. On October 3, with the Fed’s target range at 2.00%-2.25%, Fed Chair Powell said in a PBS interview that the Fed Funds Rate was “a long way from neutral.” Yesterday in New York, with the target range still at 2.00%-2.25%, Powell said the Fed Funds rate was “just below” the range of neutral estimates. While the Fed’s current projections from September are for a rate hike in December, three more in 2019, and one in 2020, Powell reiterated that “there is no present policy path.” He added, “Our path of gradual increases has been designed to balance [the risk of hiking too fast with the risk of hiking too slow], both of which we must take seriously,” and acknowledged “the economic effects of our gradual rate increases are uncertain and may take a year or more to be fully realized.” With weakness in some key economic reports recently, including inflation, and forward market-based inflation expectations at their lowest levels of the year, markets were keen to see if Powell would sound more dovish. He concluded his economic remarks by pledging that the Fed “will be paying very close attention to what incoming economic and financial data are telling us.”
New Home Sales Slump to Slowest Sales Pace Since March 2016: New home sales sank unexpectedly in October as struggles for housing activity continued to show few signs of abating. While the 8.9% monthly drop exaggerated the relative severity a bit, considering a large positive revision to September’s sales from -5.5% to +1.0%, the annualized pace of 544k units was the weakest since March 2016. No regions were spared, as all four posted notable declines. The sharpest drops occurred in the Northeast (-18.5%) and Midwest (-22.1%), which combined only account for 15% of total sales. However, sales in the South, the largest-volume region, declined 7.7% to their lowest since July 2017 and the West saw 3.2% fewer contracts signed, the least since August 2017. Higher mortgage rates have further crimped affordability that has suffered as price gains have consistently run faster than wage growth. But slower sales have helped pushed the median price down 3.1% from a year ago to $309.7k, the lowest since February 2017. Too little supply was a long-time culprit for rapid price gains, but a shortage no longer seems to be the issue. The number of new homes for sale jumped to its highest level since January 2009. The months’ supply on hand has surged from 5.3 in March to 7.4 in October, the most since 2011. While new home sales tend to see significant revisions, shown to be true in Wednesday’s report, October’s disappointment will for now serve as another sign of continued slowing in the U.S. housing market.