The Market Today

Small Business Confidence Fails to Rebound as Labor Market Continues to Be Challenge: Small business optimism rose less-than-expected in February, with the NFIB’s sentiment index increase 0.5 points to 101.7 (exp. 102.5).  The small increase falls short of indicating a rebound following the big decline from August through January.  However, the decline in optimism has at least leveled out.  The underlying data showed unchanged sales expectations, a 2-point drop in plans to hire, and a 2-point increase in difficulty filling job openings.  Interestingly, the compensation plans index fell again, down another 2 points to the lowest level since 2017.  This has occurred as average hourly earnings growth has risen to its fastest pace of gain of the cycle at 3.4% YoY. Looking At the biggest obstacles for small businesses, higher costs of labor and finding quality labor continue to define this part of the cycle.

 

Consumer Price Growth Weaker-Than-Expected on Drop in Prescription Drugs and Auto Prices: Consumer price inflation rose less-than-expected in February with headline prices rising 0.2% MoM and core prices up just 0.1%.  The weaker rate of growth brought the YoY rates down from 1.6% to 1.5% (headline) and 2.2% to 2.1% (core).  Looking at the details, energy prices rose 0.4% MoM and food and beverage prices gained 0.4% MoM, both stronger than recent reports.  At the core level, excluding food and energy prices, housing inflation was stronger, transportation prices excluding fuels were weaker, medical care prices were notably soft, and the remainder of the categories were mixed.  For housing inflation, owners equivalent rents rose 0.33% MoM versus a 12-month average rate of +0.27%.  Additionally, hotel prices shot higher with lodging up 1.3% versus a 12-month trend of +0.3%.  New car prices fell 0.2% MoM while used car prices sank 0.7%.  Medical care prices fell 0.2% MoM on a large, 1.0% decline in medical care commodities and a 0.7% drop in hospital and related services.  Medical care commodity prices were dragged lower by the largest drop in pharmaceutical prices on record, down 1.0%.

 

Bottom Line: Rising rent prices reflect two issues, continued affordability challenges in the housing sector and a firmer base for core inflation.  However, falling medical care and auto prices could provide a challenge to keeping consumer price gains near the Fed’s 2% target.  After a brief run of synchronized firmness in the key drivers of inflation, some of the major categories are beginning to diverge which is likely to create even more uncertainty for Fed officials.    

 

TRADING ACTIVITY

Yesterday – S&P 500 Ended a Five-Day Losing Streak With its Third Best Day of 2019: U.S. stocks strengthened throughout Monday’s session as gains in all 11 sectors helped lift the S&P 500 to a 1.5% gain and a close near its high mark of the day. Monday’s recovery followed a five-day, 2.8% pullback last week, the largest of the year, and was led by a more than 2% gain for the tech sector. Shares of NVIDIA surged 7% to outpace others within the sector after announcing a strategic acquisition. Apple’s stock rounded out the top 5 within the tech space with its 3.5% gain, spurred by a ratings upgrade to a “buy” from Bank of America. Consumer-specific stocks gained more than 1% after January’s retail sales confirmed activity bounced back, albeit unconvincingly, from an even-worse-than-expected December plunge. Industrials closed near the bottom as Boeing dragged following reports its newest 737 model was being grounded by several countries after another deadly crash over the weekend. However, the company’s shares recovered from down 13.5% to close off 5.4%, a reversal that helped pushed the Dow into positive territory for the day. Despite equities’ rebound, Treasury yields barely budged from Friday’s closing levels. The 2-year yield added just 1.4 bps to 2.48% while the 10-year yield rose just 1.1 bps to 2.64%, both holding near the bottom of their year-to-date ranges.

 

Overnight – Brexit Headlines Swing Markets About: The momentum created by U.S. equities climbing throughout Monday’s session spilled over into a second day of strength in Asia. While China led Monday’s improvement in the region, Tuesday’s gains were more evenly spread across the continent: China’s CSI 300 was up 0.7% while Japan’s Nikkei added 1.5% and South Korea’s KOSPI added 0.9%. The tone was made firmer by reports that the EU had agreed to certain concessions with the UK related to the Irish backstop, potentially the biggest sticking point in the Brexit debate. The Pound jumped on the headlines, with investors seeing better odds, albeit still a long-shot, that PM May’s Brexit deal could be approved in today’s parliament vote. The currency has since reversed, however, and is notably weaker after PM May’s Attorney General said the risk of the Irish backstop, that it keeps the UK in the EU customs union indefinitely until a broader agreement is forged, isn’t fully mitigated by the EU’s concession. The Attorney General’s legal advice also pulled European yields near their lows of the day, less than 1 bp above Monday’s levels. Treasury yields edged down after small business confidence missed estimates, dipped to new lows on the Brexit-related developments, and fell even further after the softer-than-expected CPI inflation data. Between the 2- and 10-year notes, the curve was around 1 bp lower. U.S. futures were mostly stronger although the Dow lagged in negative territory as Boeing shares continued to have an outsized and negative effect.