The Market Today
Recent Market Volatility Continued Overnight, But Has it Dented Consumer Confidence?
by Craig Dismuke, Dudley Carter
Later Data More Important than Jobless Claims and Lagged Home Price Changes: Initial jobless claims for the week ended December 22 matched estimates at 216k while the prior week’s 214k level was revised up to 217k. The four-week average for the metric dropped just under 5k to 218k, a six-week low. Continuing claims were modestly weaker than expected at 1.7MM but still near the low end of the range from the last 50 years. While claims tend to be volatile around the holiday season, the messaging is still that the labor market remains solid. The FHFA’s House Price Index is scheduled for an 8 a.m. CT release and is expected to reflect a 0.3% increase for October.
Consumer Confidence Expected to End 2018 With Modest Decline: At 9 a.m. CT, the Conference Board’s Consumer Sentiment index is expected to edge down just over two points in December to a five-month low of 133.5. While the headline index is heavily driven by consumers’ assessment of the labor market, which has yet to show signs of a significant impact from the market turmoil, consumers are also asked to rate current and future business conditions, a more likely avenue for concerns about the markets to enter into the results. With the markets entrenched in volatility since early October, the data will provide one indication of whether consumer sentiment, and thereby potential future spending, is being hampered by the ongoing retreat in U.S. equities. The survey is designed so that consumers receive their questionnaire around the first of the month with submissions typically accepted through the 18th. Through the survey window, the S&P 500 was on pace for its worst December since the Great Depression (1931) and December was set to become the worst month of a given year for the first time in history. Still, consumer spending data for October and November, volatile months for markets in their own right, were solid and anecdotal evidence has pointed to booming holiday sales.
New Home Sales Expected to Post November Rebound, But We’ll Likely Have to Wait Longer to See: New home sales slumped 8.9% in October, the worst month so far in 2018, to an annualized 544k unit pace, the slowest since March 2016. Economists have penciled in a 4.2% recovery estimate for November which would lift the sales pace to 567k units, the second slowest since August 2017. However, the data will be delayed as a result of the ongoing government shutdown.
Yesterday – S&P 500 Followed Worst Christmas Eve Performance on Record With Biggest December 26th in History: U.S. markets reopened in the Christmas spirit Wednesday as stocks roared back, oil prices spiked higher, and the Treasury curve rose by approximately 7 bps at most maturities. The S&P 500 nearly tipped into a bear market Monday after sinking 2.71% in its worst Christmas Eve performance in history. But cheerful investors were in the buying mood Wednesday and sent the index surging 4.96%, the best December 26th on record. After dropping more than 650 points (2.9%) on Christmas Eve, the Dow snapped back 1,086 points (4.98%), its biggest points gain in history. It was the best daily percentage gain for both indices since March 2009. With Amazon near the top, consumer discretionary stocks rallied more than 6.28% to lead all gains and notch the sector’s best day since 2009. Energy companies rose 6.24% and were a close second as U.S. WTI spiked 9.7%, the most in a day since 2016. Tech companies were the third best performers. The Nasdaq leapt 5.8%, also its best day since March 2009. As equities stormed back, the Treasury curve lost its flight to quality bid, leaving the curve higher by roughly 7 bps at most maturities. The 2-year yield closed up 6.5 bps at 2.62% while the 10-year yield added back 7.0 bps to 2.81%. The 2-year yield’s bounce pulled the yield off its lowest level since July. The 10-year yield closed above 2.80%, an important 2018 technical level, for the first time in four days.
Overnight – U.S. Equities Set to Pullback after Historic Recovery on Wednesday: Outside of a 3.9% rally for Japan’s Nikkei on Thursday, there has been little global follow through to Wednesday’s huge day on Wall Street. There were modest gains in smaller Asian markets but China’s CSI 300 slipped 0.4%. Year-over-year growth in Chinese Industrials’ total profits weakened for a tenth month out of the last eleven and contracted (-1.8%) for the first time since 2015. In Europe, the Stoxx 600 was off 1.1% with Germany’s DAX leading losses in the region. The German index was down 2.0% and sliding deeper into a bear market, off more than 23% from its January peak. While the European markets failed to join in the euphoria of yesterday’s U.S. moves, they had also closed prior to record Christmas Eve losses for U.S. stocks. Considering the severity of yesterday’s upside move for U.S. stocks, crude oil, and Treasury yields, it’s not too surprising to see some give back in the overnight session. Earlier, U.S. futures were off roughly 1.5%, WTI was 1.7% lower, and Treasury yields had cut into yesterday’s rise. The 2-year yield was 3.8 bps lower while the 10-year yield had fallen back 5.4 bps.
Weak Wednesday Economic Reports: The S&P Case Shiller 20-City Composite Price Index rose 0.41% in October from September and was 5.03% higher than a year ago. While the YoY rate of gain was slightly firmer than expected, it nonetheless represented a seventh month of a weaker gain and the slowest since October 2016. The broader national index showed a modestly stronger 5.48% gain from October 2017 but also registered its seventh consecutive month with a slower gain and was also the softest since 2016. While typically ignored by markets, the Richmond Fed’s Manufacturing index caught some headlines after posting its largest monthly drop on records starting in 1993. The index plummeted 22 points to -8, the weakest since February 2016. The primary culprits were a collapse in shipments and indicators tracking orders activity. Shipments hit their weakest level since 2009 and new orders (weakest since August 2016) and backlogged orders (weakest since April 2013) both tumbled. The Richmond report comes after similar indices from Federal Reserve Banks in Kansas City (25-month low), New York (19-month low), and Philadelphia (28-month low) all came up well short of economists’ expectations. Those disappointments reinforce messaging from the most recent Beige Book, which aggregates anecdotal evidence from the various Fed Districts, that slower global growth and the trade dispute between the U.S. and China is weighing on U.S. manufacturers.