The Market Today
Record-High Stocks on Brexit Optimism, Trade Progress
by Craig Dismuke, Dudley Carter
Housing Data and Consumer Confidence; FOMC Meeting Begins: The value of the economic data pick up today with reports on consumer confidence, pending home sales, and national home prices. The August S&P CoreLogic home price index (8:00 a.m. CT) is expected to show the year-over-year pace of price gains tick up for a change. The pace of gain has slowed from almost 7.0% year-over-year to 2.0%, as of the July report, as higher mortgage rates and declining affordability have weighed on the sector. Also in the housing sector, the September pending home sales report (9:00 a.m.) is expected to show another monthly gain in sales. At 9:00 a.m., the Conference Board will release its October report on consumer confidence. After falling sharply in September, the index is expected to rebound on still-low unemployment, high stock prices, and low gasoline prices. Worth noting, the FOMC will begin its two-day policy meeting today.
YESTERDAY’S TRADING ACTIVITY
Risk-On Kicked Off Busy Week: U.S. assets started the week with a risk-on tone amid improving trade tensions and receding risk of a no-deal Brexit, as investors reassessed what the implications could be for changes to the Fed’s forward guidance at Wednesday’s meeting. While a rate cut Wednesday remains almost entirely priced in, expectations for more accommodation from there has softened somewhat according to trading in fed funds futures. While the economic data have remained suspect, key risks to the outlook have taken a more positive turn recently.
Trade Progress, Brexit Developments Pushed Stocks Higher: Both sides recently indicated the U.S. and China appear to have made progress on firming up the phase one trade deal. Adding to the trade optimism, President Trump said “we’re a little bit ahead of schedule, probably a lot ahead of schedule” when asked about possibly reaching an agreement he and President Xi could sign next month at an APEC Summit in Chile. And while PM Johnson’s first attempt at setting new elections failed Monday, the risk of a no-deal Brexit seems less likely after the EU granted the U.K. an extension Monday through the end of January.
10-Year Yield Rose Back Near August Levels: The 2-year yield added 2.6 bps to 1.64% while the 10-year yield added 4.8 bps to 1.84%, its third-highest level since early August. For their part, stocks rose solidly and the S&P 500 gained 0.6% to set its first new record in the 65 days since July 26th.
OVERNIGHT TRADING ACTIVITY
U.K. Labour Has a Change of Heart: The global corporate earnings season continued to be a focus Tuesday, although the biggest news in recent hours has been the change of heart by the U.K.’s largest opposition party. Previously against early elections for fear the logistics could unwittingly cause the U.K. to crash out of the EU without a deal, the head of the Labour Party announced within the last couple of hours support for going to the polls in early December since the EU had extended the deadline into 2020. The formal decision for elections is expected to be made later Tuesday when the actual bill is put before parliament for a vote.
Britons Will Have another Say on Brexit: The British pound recovered mightily on the news back to unchanged on the day. The elections are seen by most as an opportunity for the public to voice their opinions on whether the U.K. should leave the EU with PM Johnson’s deal, or potentially reconsider leaving altogether. Oddsmakers have pegged PM Johnson’s conservative party as the favorite to leave the elections with a majority, which could be a major step in breaking the Brexit deadlock.
Equities Set to Pull Back from Record: Despite the newfound Brexit optimism, Treasury yields had ticked lower with equity futures around 7:00 a.m. CT. Alphabet (Google) missed on earnings after markets closed yesterday, pushing its shares lower ahead of Tuesday’s session. Earlier this morning, General Motors cut its full-year forecast, in part because of the recently settled workers walkout. Shares of Merck and Pfizer provided offsetting boosts after better earnings data. The S&P 500 as a whole was weaker by 0.1%, pulling back from yesterday’s record close. The 2-year and 10-year yield were both 1.0 bp lower at 1.63% and 1.83%, respectively.
Texas Manufacturing Contracts but Outlook Signals Some Stability: The Dallas Fed’s manufacturing index dropped more than expected in October to a three month low of -5.1, signaling activity in the region slowed from September. A reading of current employment was softer but remained above worse levels earlier in the year, while production and new orders retreated to their weakest levels since 2016. That weakness was echoed by several other key current indicators. However, indices tracking expectations for the six months ahead were a bit brighter and offered some hope of stability. The outlook for new orders, production, shipments, and employment all picked up but remained at levels well below where they trended for most of 2017 and 2018.