The Market Today

TODAY’S CALENDAR

Leading Index and Consumer Sentiment: There are two economic reports scheduled for 9 a.m. CT on Friday. The Conference Board’s Leading Index is expected to have increased 0.2% in April, more modest than the 0.4% increase in March. The index took a hit in the fourth quarter of last year amid the amped up volatility, pulling the YoY rate of change down from 6.6% in September to 3.1% in March. At the same time, the University of Michigan will release its preliminary estimate for consumer sentiment in May, with economists expecting no change at the headline level. Sentiment fell 1.2 points in April to 97.2, up from 91.2 in January but still below the average level for 2018 of 98.4.

Two Fedspeakers May Listen More than Talk: Fed Governor Clarida and New York President Williams will both make appearances on Friday, but they may do more listening than talking at today’s events. Clarida will make opening remarks at an event in Philadelphia intended to give outsiders a chance for input and ideas on the Fed’s current monetary policy framework and process. At a similar appearance earlier in the week, Clarida provided an unexciting and generic update to his outlook. Williams will meet with community leaders to discuss community development, likely limiting any significant discussions about broader monetary policy.

TRADING ACTIVITY

Yesterday – Upbeat Data and Earnings Give Stocks Another Boost: U.S. stocks rose for a third consecutive session as a morning of upbeat economic data added to the lift from solid earnings from Walmart and Cisco to send the S&P 500 0.9% higher on the day. Housing starts, building permits, the Philadelphia Fed’s Business Survey, and initial jobless claims all exceeded expectations. Cisco shares jumped 6.7% Thursday after its quarterly results beat analysts’ estimates and the updated outlook was brighter than expected. Walmart topped earnings estimates and same store sales growth matched expectations. The S&P 500’s bounce was driven by widespread strength across all 11 sectors and the last three days’ gains have almost completely erased Monday’s 2.4% trade-related drop. The index fell Monday after tensions were ratcheted up further by China retaliating to last week’s U.S. tariffs increase with one of their own. Materials companies led the way Thursday with a 1.3% gain while the energy sector closed in the final spot with a modest 0.4% improvement. Financials closed in second place, jumping 1.1% to notch their best day in a month. Higher rates helped their cause as Treasury yields ticked up off their lowest levels in at least a year. The 2-year yield rose 3.3 bps to 2.19% while the 10-year yield added 2.1 bps to 2.39%.

Overnight – Sentiment Weakens into the Weekend on Trade Tensions, Brexit Breakdown: Global investors have taken risk off the table Friday as trade tensions remain high and a breakdown in Brexit discussions increased uncertainty in Europe. China’s CSI 300 slipped 2.5% on Friday to lead global losses in response to this week’s escalation, including increased China tariffs against the U.S. and actions by the White House seen as specifically targeting China’s tech sector. Overnight, a spokesman for China’s Foreign Ministry said “because of certain things the U.S. side has done, …we believe if there is meaning for these talks, there must be a show of sincerity.” A site managed by a state-run news agency said the U.S. had been using “little tricks to disrupt the atmosphere,” and noted that “if anyone thinks the Chinese side is just bluffing, that will be the most significant misjudgment” since the Korean War. Additionally, a state-run paper wrote a front-page article titled ‘No Power Can Stop the Chinese People from Achieving Their Dream’ which surmised “the trade war will not cripple China, it will only strengthen us as we endure it.” China’s yuan weakened for a seventh day in a row to a new 2019 low. Away from trade, Brexit discussions appeared to break down which had pushed the U.K. 10-year yield down 6.3 bps, the largest global decline on Friday. After weeks of negotiations in search of a Brexit compromise, the leader of the opposition Labour party left a meeting with PM May’s government without a deal and said talks have gone “as far as they can.” Against the shaky global backdrop, U.S. equity futures were down 0.7% around 7 a.m. CT and the Treasury curve was around 3 bps lower. Those moves moderated after President Trump confirmed a 180-day delay for auto tariffs.

NOTEWORTHY NEWS

Kashkari Called Out All the Fed’s Wrongdoings: Fed President Kashkari gave a speech titled “Monetary Policy Framework Review” on Thursday that read more like a speech titled “The Fed’s Gotten It All Wrong This Cycle.” Kashkari said, “With optimal monetary policy, the twin goals of price stability and maximum employment should be in tension. …With inflation somewhat too low and the job market still showing capacity after 10 years, the only reasonable conclusion I can draw is that monetary policy has been too tight in this recovery.” He recalled that in 2016 the Fed “clarified that its 2 percent inflation target was symmetric” which should have “reduced the need to preemptively raises rates.” However, they continued on while inflation was low which was “not called for by our symmetric framework.” He blames a “misread” of the labor market, considering that changing participation trends caused the low unemployment rate to send a “faulty signal.” With the Fed exploring a make-up strategy to better anchor expectations closer to 2%, Kashkari said it’s time for the Fed to “walk the walk and actually allow inflation to climb modestly above 2%.” But “if we felt compelled to raise rates when inflation was below target in this recovery, would we really keep rates low when inflation is above target next time? Count me as skeptical.”

Brainard Implied She Supports Inflation Modestly Above 2%: Fed Governor Brainard echoed Kashkari’s call for the Fed to allow inflation to move modestly above the Fed’s 2% target. She said the “job market is strong” but “the picture on inflation is puzzling this far into an expansion.” She noted, “the emerging contours of today’s new normal are defined by low sensitivity of inflation to changes in labor market slack, a low long-term neutral rate of interest, and low underlying trend inflation.” After acknowledging that “the past three downturns were precipitated not by rising inflation pressure, but rather by the buildup of financial imbalances,” and admitting that an extended period of low rates can fuel such imbalances, she said countercyclical tools should be used to address financial imbalances and monetary policy should be more focused on the dual mandate. Because of the “softness in underlying trend inflation,” Brainard suggested that if conditions “drove overall inflation modestly above 2 percent for a couple of years. The Federal Reserve could use that opportunity to communicate that a mild overshooting of inflation is consistent with our goals and to align policy with that statement.”