The Market Today

Senate Leaders Working Deal to Keep Spending


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Remain Exceedingly Low:  Initial jobless claims for the week ending February 3 fell from 230k to 221k, back down to its second-lowest level since 1973.  Moreover, there were only three reports in 1973 lower than the current 221k.  At 7:45 a.m. CT, the February Bloomberg Survey of Economists is scheduled for release.  Most interesting will be economists’ revisions to their inflation, Treasury yield, and Fed Funds forecasts given the wave of better earnings data last week.  Our wage tracker has ticked up from the 2.0-2.4% range it held since early-2014 to 2.6% in recent weeks (see Chart of the Day).  This is the highest the tracker has been since early-2009.

 

Washington to Vote on More Spending to Avoid Midnight Government Shutdown:  The Senate is expected to vote on a budget deal today to avoid a government shutdown.  Senate leaders announced yesterday they had reached a two-year deal that would raise spending levels $300 billion above the caps implemented in both the 2011 Budget Control Act and the Bipartisan Budget Act of 2015. Defense spending would increase $165B ($80B in 2018, $85B in 2019) and $131B would go to nondefense spending ($63B in 2018, and $68B in 2019). The Senate will also attempt to suspend the debt ceiling until March 2019, past the midterm elections. It also would include funding of $80B to $90B for relief efforts for the recent hurricanes and wildfires, fund the CHIP program for 10 years, and raise funding for community health centers through 2019. The general spending levels would have to be appropriated across the various detailed categories, and therefore could also necessitate another short-term continuing resolution. The votes today will be interesting as the plan will need to be approved by both the Senate and the House.  The deal is somewhat bewildering in that it goes against everything fiscal conservatives fought for back in 2011 and the very issue which birthed the Tea Party movement.  However, it appears that the fiscal hawks have meaningfully less influence today than they did back in 2011.

 

TRADING ACTIVITY

Yesterday – Stocks Tried to Stay Positive but Failed as Crude Prices and Higher Rates Weighed: A valiant effort by the major U.S. equity indices ultimately came up short as last-minute selling erased hard-earned gains and pushed the major indices to a negative close near the lows of the day. The Dow was essentially unchanged, down 19 points, as the S&P faltered a larger 0.5%. Energy companies were the biggest drag on the major indices and higher interest rates crept back onto the scene. Energy companies suffered losses as crude prices dropped more than 2% on a second weekly build of crude inventories and higher stocks of gasoline and other distillates. Adding to the bearishness of the EIA’s weekly report was an all-time high production figure of 10.3MM barrels per day. Higher rates also, once again, played a role in the intraday volatility. Stocks peaked just after 10:00 a.m. CT but turned lower as longer yields turned up. On the day, the 2-year yield rose 1.8 bps to 2.13% while the 5-year yield added 1.7 bps to 2.56%. The 10-year yield climbed 3.4 bps to 2.84%, just 0.003% below last Friday’s close which marked the highest level since January 2014. As a result, the spread between 2s and 10s rose to 71 bps, the most premium in almost three months (November 13).

 

Overnight – Market Swings Continued, Bank of England Issued Hawkish Forward Guidance: The unpredictable price action that has whipped markets back and forth this week has continued overnight. The MSCI Asia Pacific Index rose 0.3%, its first gain in four days, while the Stoxx Europe 600 has traded down 0.4%. Global rates are on the rise again and the biggest moves being made by U.K. Gilts. The entire Gilt curve shifted higher after the Bank of England lifted its growth projections for 2018 and 2019 to 1.8%, said it expects inflation to remain above 2% into 2021, and sees a “very limited degree of slack” left in the economy. As a result, the Committee hawkishly judged that “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period.” The market repriced rate hike expectations to imply a greater-than-50% chance of a May raise. The U.K.’s 10-year yield jumped above 1.60% for the first time since April 2016 and the Pound rose against every major currency. In the U.S., the long end is leading yields higher with the 10-year yield up 3.8 bps to 2.86%, nearing its post-nonfarm payroll intraday high (highest since 2014). The 5-year yield is up 2.0 bps to 2.58% with the 2-year yield 0.6 bps higher at 2.13%. U.S. equity futures are notably higher.

 

NOTEWORTHY NEWS

Fed Officials Not Concerned About Market Volatility, Expect Gradual Rate Increases in Response to Better Growth and Signs of Some Inflation Pressures: Atlanta Fed President Bostic (voter) said the Fed is likely to continue on a “slow gradual pace of raising interest rates” as long as growth remains “robust” and if the pop in wages in January’s payroll report is the beginning of firmer wage increases. Dallas Fed President Kaplan (non-voter) called the recent market volatility “healthy” and said he doesn’t expect it to have an impact on the real economy. He also acknowledged underlying wage pressures are growing because of the tightness of the labor market but isn’t convinced it will create broader inflation because businesses have limited pricing power. However, he expects gradual rate increases to continue in a “patient and gradual manner” to mitigate the risks of imbalances that would result from overshooting maximum employment. New York Fed President Dudley (voter) also noted the recent market volatility has had “virtually no consequence for the economic outlook” yet. Charles Evans (non-voter) from Chicago sees the unemployment rate down to 3.5% by the end of 2020 but showed a patience towards additional policy moves, calling for the Fed to wait until at least the summer before acting again. However, he did say he could support another hike if inflation perked up and believes the risks seem to be moving toward more inflation.

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