The Market Today

Savings Rate Drops 2007 Levels as Confidence Remains High and Spending Picks Up More than Incomes

by Craig Dismuke, Dudley Carter

Happy Holidays:  The bond market has a recommended early close today in anticipation of the Christmas holiday.  Happy Holidays to all of our readers!


Today’s Calendar – Savings Rate Drops to 2007 Level as Consumer Confidence Remains Sky-High:  This morning’s early economic data was generally in-line with expectations, essentially summarizing the recent trends all on a few reports.  Core PCE inflation rose just 0.1% MoM, but was enough on an increase to bring the YoY rate up from 1.4 to 1.5%.  Personal income for the month of November was slightly weaker than expected, rising just 0.3% MoM or 0.12% on an inflation adjusted basis.  Nonetheless, spending rose more than expected, up 0.6% MoM.  However, October’s spending was revised down offsetting the stronger November spending tally. Given consumer’s willingness to spend at a faster growth rate than their incomes are growing, the savings rate fell 0.3% to its lowest level of this cycle, 2.9% (savings as a % of disposable income).  This is one of the handful of growing concerns heading into 2018.  More broadly, one of the growing imbalances we will be watching in 2018 is the sky-high consumer and business confidence – Questioning, how much further can it rise and what is the implication of it pulling back?


Business Investment Indicator Shows Solid Two-Month Data Despite Weaker November Result:  On the business investment front, the November Durable Goods Orders report showed a 0.1% drop in orders for core capital goods items (a proxy for business investment in equipment).  However, October’s orders data were revised up 0.5% to +0.8% MoM.  It appears that business investment continues to improve, which we expect to continue heading into 2018 – particularly the second half of the year.


New Home Sales Expected to Pull Back from 25% Increase YTD:  At 9:00 a.m. CT, the November New Home Sales report is expected to show sales pull back 4.4% after rising 6.2% in October.  So far in 2017, new home sales have risen 25% despite the 30-year mortgage rate averaging 25 bps higher in 2017 than in 2016, a 39% increase in lumber prices, and home-price gains steadily outpacing income growth.  Also at 9:00 a.m., the University of Michigan will release its final read on consumer confidence for the month of December.


Overnight Activity – Catalan Separatists Maintain their Assembly Majority: U.S. assets were hardly changed ahead of this morning’s congested U.S. economic calendar. U.S. equity futures were quietly positive against a mixed backdrop in global markets. A mostly positive day for equity investors in the Asian-Pacific soured somewhat in Europe. The MSCI Asia Pacific Index closed 0.3% higher but the Stoxx Europe 600 is down 0.2%. The broad weakness in Europe was led by the financials sector but ten of the index’s twelve sectors were lower on the day. The most notable event overnight was the election in Catalonia that resulted in separatist parties maintaining their majority in the regional assembly. Spain’s national government disbanded the previous Catalan government on October 28 via a never-before-used article in the national Constitution. The invoking of Article 155 occurred after Catalan leaders declared independence from Spain following a contentious and controversial independence referendum on October 1. Spain will remain in control of Catalonia for now and until a new local government can be formed. Spanish stocks are down over 1% overnight and the clear underperformers on the day. Sovereign yields are modestly higher in Europe with peripheral country debt leading the rise but Treasury yields had held close to unchanged. After this morning’s U.S. data, Treasury yields crept higher in a flattening trend while equity futures remain little changed.


Yesterday’s Trading Activity – Stocks Rebounded but Longer Yields Slid for the First Time This Week: U.S. equities rose Thursday and sector trends remained consistent with those seen in Wednesday’s session. Energy companies were the clear outperformers in Thursday’s trading, leveraging higher prices across most of the energy-commodity complex. Financial companies were the second-best performer within the S&P while utilities and real estate companies continued to round out the bottom of the sector ladder. The losses in those sectors unfolded despite longer yields falling for the first time in six days. The 30-year yield slid 3.5 bps to 2.84% while the 10-year yield edged 1.4 bps lower to 2.48%. Even with the 10-year yield moving lower Thursday, it has risen in nine of the last eleven sessions and is up more than 14 bps over that period. The 2-year yield led maturities of five years an in higher with a 2.1 bps increase to 1.88%, a new nine-year high. Shorter bill yields fell ahead of a successful late afternoon vote in the House that will keep the Government open through January 19. The Senate passed the bill shortly after, sending it to the President for his signature.

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