The Market Today
Quiet Week of Data; Vining Sparks’ 4Q Webinar
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Vining Sparks’ 4Q Economic Outlook Webinar: This week is relatively quiet for the economic data with a handful of housing reports, a few Fed speakers, and Vining Sparks’ 4th Quarter Economic Outlook webinar. As for this morning’s data, the New York Fed regional manufacturing index for October unexpectedly rose from 24.4 to 30.2 on stronger shipments and number of employees, and despite a weaker read on new orders. Homebuilder confidence is scheduled for Tuesday and is expected to hold flat at 64 in October (a strong level historically). September’s housing starts and building permits data is scheduled for Wednesday with both expecting to show weak monthly results. September’s existing home sales data is expected to show a 0.9% MoM decline in sales, the sixth month of declines in 2017 and the fourth consecutive drop. As for the Fedspeak, Dudley’s comments Wednesday and Yellen’s comments Friday are likely to be the most impactful for the markets. Finally, we will host our 4th Quarter Economic Outlook webinar on Thursday morning and will look at 1) what has been driving the stable economic growth, 2) expectations for growth heading into 2018, 3) how the hurricanes are likely to affect the data and Treasury yields, 4) why recent inflation weakness appears to be more broad-based than some Fed officials seem to believe, and 5) the implications for interest rates going forward.
Overnight Activity – Treasury Yields Ignore Global Trends to Start Monday Higher: Global equities started Monday firmer and U.S. equity futures improved ahead of the first full week of quarterly corporate earnings. The two biggest blemishes in global equities were the 0.19% drop for China’s CSI 300 and the 0.54% pullback in Spain’s IBEX 35. Consumer inflation data in China was as expected while producer prices topped estimates and matched their fastest monthly rise since 2011. More importantly for China over a longer horizon will be this week’s 19th Party Congress. The event will result in turnover in key political positions and offer insights into certain policy expectations for the next several years. Japanese politics will also be in focus with Prime Minister Abe’s party expected to gain parliamentary seats in a snap-election he called three weeks ago and which is scheduled to be held this weekend. Losses for Spanish equities unfolded as political uncertainty continued to fester. The concern is that Spain’s national government could invoke Article 155 of the national constitution, potentially as soon as Thursday, which would dissolve the local Catalan government and hand power to rule the region back to Madrid. In sovereign debt markets, Treasury yields moved higher despite lower yields across Europe. The 2-year yield rose 1.6 bps to 1.51% after weekend comments from Fed Chair Yellen continued to show she’s confident that inflation weakness won’t persist. The 10-year yield was up 1.6 bps also at 2.28%. In other markets, crude prices are up overnight – U.S. crude is a hair shy of its highest level since April while Brent moved to one of its strongest levels since the summer of 2015 – on reports that state-backed Iraqi forces have entered the Kurdish held oil-rich city of Kirkuk and clashed with local Kurdish forces.
ICYMI – October 13, 2017 Weekly Market Recap: The yield curve flattened last week on lower yields with the spread between 2s and 10s ending at 77.6 bps, less than 3 bps above the flattest point of the current economic cycle. Shorter maturities remained anchored by the prospects of another 2017 Fed hike, likely in December based on fed funds futures, but the long-end dropped on continued inflation uncertainty. Markets were closed Monday in observance of Columbus Day and yields were unchanged Tuesday after recovering from an early morning drop. The FOMC’s September Minutes on Wednesday didn’t elicit a big market reaction but did show the Fed is uncertain about what to make of the recent inflation weakness. The net takeaway was that many participants believe another hike this year may be warranted despite many wanting to be patient with policy while assessing the incoming data. Longer yields drifted lower on Thursday but with the biggest weekly move followed Friday morning’s disappointing inflation report. While headline prices rose the most in eight months on a big jump in gas prices, core inflation remained subdued. There were other important economic reports released during the week that seemed to get lost in the shuffle. Business confidence hit a new post-election low on disappointing underlying details. Job openings pulled back but remained strong while other data on hires, quits, and layoffs were mixed. Jobless claims continued to decline as the hurricane effect continues to fade. Consumer confidence hit a 13-year high according to the University of Michigan’s latest survey but inflation expectations eased. Click here for the full recap.