The Market Today
September’s Existing Home Sales Expected to Remain Week; China Growth Slows; Italian Political Uncertainty Persists
by Craig Dismuke, Dudley Carter
Existing Homes Sales Expected to Remain Weak: At 9 a.m. CT, the National Association of Realtors will release what is expected to be another disappointing report on existing home sales. Existing home sales are expected to have slipped 0.9% in September which would slow the overall pace to 5.29MM units. That would mark the weakest pace for sales since February 2016 and a continuation of weakness we’ve seen as mortgage rates have risen and supply pressures have kept prices elevated.
At 11 a.m. CT, Atlanta Fed President Bostic will speak on his economic outlook and will be followed by remarks from Dallas Fed President Kaplan, in a separate appearance, at 11:45 a.m. CT.
Yesterday – Risk-Off Takes Hold of U.S. Assets Early: Risk-off took hold of U.S. markets around 10 a.m. CT Thursday, sending stocks sharply lower and setting off a modest flight for safety into Treasurys. Stocks were hovering in negative territory but hunkered down about the time headlines hit that Treasury Secretary Mnuchin would skip an investment conference in Saudi Arabia. Mnuchin became the latest high-profile name to fall off the attendee list amid the ongoing tensions related to a Saudi journalist’s disappearance in Turkey. Also adding to the pressure was a sell-off in Italian bonds after the EU criticized the country’s budget plans and an overnight move lower by Chinese equities. China’s CSI 300 dropped to its lowest level in two and a half years. Market uncertainty has been heightened lately by a confluence of factors, sparked by a jump in interest rates two weeks ago. Tech stocks continued to bear the brunt of the selling, evidenced by the Nasdaq (-2.1%) outpacing losses for the Dow (-1.3%) and S&P 500 (-1.4%). Consumer discretionary stocks were the S&P 500’s worst performers, weighed on most heavily by online retailers, a close relative of the tech giants, and automakers. The Treasury curve responded by flattening on lower yields, as the 2-year yield fell 1.4 bps while the 10-year yield dropped a slightly greater 2.6 bps.
Overnight – U.S. Assets Look to Shake Off Slower Growth in China, “Unprecedented” Italian Deficit Plan: Global shares have been mixed Friday but U.S. equity futures picked up after yesterday’s sharp sell-off. Sovereign bond yields, including Treasurys which were roughly 1 bp higher across the curve, have ticked up in concert despite peripheral European debt yields rising the most. One of the most frequently mentioned global macroeconomic risks over the last couple of years has been an expected slowdown in the Chinese economy. The recent trade tensions with the U.S. that have resulted in tariffs and threats of more was seen exacerbating already-existing stressed fundamentals. Overnight, hard data showed the slowing growth trend is playing out. China’s economic growth slowed to 6.5% YoY in the third quarter, 0.1% worse than expected and the slowest since the financial crisis. Weaker manufacturing was the primary culprit. After shares dropped over 1% early, an afternoon rally sent the CSI 300 up 3.0% for the day. The recovery ensued after several top officials from key financial agencies offered public statements indicating plans to support markets and the economy. In Europe, the Stoxx 600 was modestly negative while Italy’s FTSE MIB had fallen 0.7% to its lowest level since February 2017. The EU responded to Italy’s budget plans it delivered earlier this week with a letter calling the level of its planned deficit “unprecedented” and “an obvious and significant deviation” from the original agreement. The yield spread between Italian and German 10-year debt, a measure of Italy’s risk premium, widened to 2.89%, the most in almost 6 years (November 2012).
Fed’s Quarles Says Gradual is Best: Fed Governor Quarles said Thursday, “I do think that we’ll be able to follow a gradually increasing path for a period of time,” but added “My preferred path for policy is more gradual than I think many other people’s.” However, it’s not because he’s concerned about inflation being too low, but rather because he’s “optimistic about the potential for the economy.” Because his estimate of potential growth is higher than the median, and he has “significant doubt” about the NAIRU estimate, he believes “There is significant room for us to satisfy some of the demand for labor in the economy from bringing people back into the workforce.”
Bullard Discloses the Math behind His “We’re Good Where We Are” Statement: In Memphis on Thursday, St. Louis Fed President Bullard disclosed the method he’s using to support his desire for the Fed to forego any further rate increases. In a presentations titled “Modernizing Monetary Policy Rules”, Bullard described how he’s adjusted the widely-known Taylor rule for economic changes in determining that the Fed essentially has no work to do. After incorporating a lower short-term “r-star”, a flatter Phillips Curve, and replacing actual inflation with inflation expectations, Bullard concluded “maintaining the current level of the policy rate would be an appropriate policy over the forecast horizon.”