The Market Today
President to Deliver SOTU as Investors Look for Another Reason to Keep the Euphoria Going
by Craig Dismuke, Dudley Carter
State of the Union Address; Home Prices and Consumer Confidence: Today’s economic calendar brings the S&P CoreLogic Home Price index (November) at 8:00 a.m. CT. The index is expected to show a 0.6% MoM gain in prices keeping the YoY rate at 6.3%. January’s consumer confidence report from the Conference Board is scheduled for 9:00 a.m. and is expected to show a slight tick higher in confidence.
President’s SOTU Speech to Call for Immigration Reform, Infrastructure Spending, Call for Bipartisanship: President Trump will deliver his State of the Union address tonight at 8:00 p.m. CT. As always, leaks have been carefully choreographed in the run-up to the speech. The President will tout deregulation, tax reform, the stock markets, wealth creation, and the generally better economic tone. As for forward-looking issues, he is expected to call on bipartisanship in addressing immigration reform and an infrastructure spending plan. As for infrastructure, the President has called for $100 billion to be spent by Washington in hopes of leveraging state/local funds and private investment to the tune of $1 trillion. More details on how they can get to $1 trillion would likely boost investor sentiment. No additional details will leave investors skeptical. For a little context, the longest SOTU address was 89 minutes (President Clinton) while the shortest was 31 minutes (President Reagan) Source: Politico.
Yesterday’s Trading Activity – Treasurys Trimmed Their Overnight Rise as Stocks Fell Back From Record Levels: The daily top for Treasury yields was in ahead of U.S. trading as the curve spent the remainder of Monday drifting back from those multi-year high levels. The 2-year yield pulled back to unchanged at 2.12% after rising to as high as 2.16% earlier. The 5-year yield finished up 2.0 bps at 2.49% after reaching as high as 2.53% around 7 a.m. CT. The 10-year yield gained 3.4 bps to 2.69% but ended below its daily peak of 2.73%. The morning’s economic data was solid, including strong spending and a fourth month of firming in the YoY PCE inflation rate (although it remained at 1.5% when rounded), but unable to push yields further above their recent ranges. Adding to the slight reversal lower of the yield curve was a recoil by U.S. stocks following big gains last Friday that sent the major equity indices to new record closes. Five of the 11 S&P sectors fell more than 1% to start the week and energy companies were the biggest drag on both the Dow and S&P. Crude prices fell back from their highest levels in more than three years on expectation that U.S. inventories rose last week for the first time in 11 weeks. Also hurting the commodity was a jump in the U.S. Dollar which makes the commodity more expensive for foreign purchasers in their domestic currencies. The Dollar rebounded slightly from a more-than-three-year low set last Friday but pared an overnight gain by half during U.S. trading.
Overnight Activity – Equity Weakness Continues as Treasury Yields Add Modestly to Set to New Highs: Yesterday’s weakness for U.S. equities has dragged down sentiment globally on Tuesday and is set to deepen domestically at the opening bell. Finding any green on the global equity screens this morning is a fool’s errand as losses have engulfed indices big and small across Asia and Europe. Stocks in Japan and China fell more than 1.0% while the Stoxx Europe 600 is off by roughly half of that. The breadth of the losses on both continents mimicked yesterday’s U.S. action as almost all sectors have weakened. Futures on the Dow, S&P, and Nasdaq are all off more than 0.5%. After popping higher yesterday, global sovereign yields have leveled off somewhat although there continued to be instances of volatility overnight. Longer U.S. Treasury yields initially made a new 46-month high overnight (2.731%) before falling back a bit during European trading. Yields in Europe fluctuated lower on mixed regional German CPI reports and helped to drag Treasury yields from their highs. Despite an as-expected solid 4Q GDP report for the Eurozone (2.7% YoY), the subsequent softer-than-expected national CPI print for Germany (down to 1.4% YoY from 1.6%, expected 1.6%) helped briefly rally yields there lower once again. Diverging from a 1.1 bps drop on the German 10-year yield, the 10-year U.S. Treasury yield has added a 1.1 bps to 2.71%. Closer in, the 2-year yield is up 0.4 bps at 2.12%
IN THE NEWS
Retail Investors Jumping in Market – The Great Contra-Indicator? (WSJ): According to a WSJ article, “After sitting out most of the nearly nine-year bull market, individual investors are finally pouring in. … Discount brokerages TD Ameritrade Holdings Corp., E*Trade Financial Corp. and Charles Schwab Corp. reported surges in client activity at the end of 2017 that have accelerated in January. The firms attributed much of the activity to retail, or individual, investors who are opening brokerage accounts for the first time, some of them lured by the boom in cryptocurrency and cannabis investments.”
As Expected – Budget Deal Proving Difficult to reach by February 8 Deadline (with the Debt Ceiling Now Approaching): According to a Politico article, “Doubts are growing on Capitol Hill that Republicans and Democrats can reach a long-term budget deal by Feb. 8, when the government will once again run out of money. Party leaders are already pointing fingers at each other, a discouraging sign for the long-stalled talks that could lead to more short-term funding measures.”