The Market Today

THIS WEEK’S CALENDAR

Today – Small Businesses Still Optimistic after September Reversion from Record: Small business confidence slipped back in September after hitting an all-time high (since the early 1970’s) in August. The NFIB reported a slightly larger-than-expected slip in optimism in September as several key components retreated from impressive levels set in in August. Headline optimism fell back from 108.8 to 107.9 and six of the 10 underlying components cooled. Expectations for inventory growth dropped the most while the number planning to hire or make capital expenditures were also lower. However, each remained at healthy levels. The component that captures current job openings that businesses are having a hard time filling was unchanged at its highest level on record. Likely related, the number who said they increased employee compensations rose to a new record level. On the upside, the number who expect sales to improve rose in September back to near its strongest levels of the cycle. Bottom Line: Despite the decline, optimism matched its second strongest level of the cycle, a positive result echoed by the NFIB in its report. The NFIB noted, “In the small business half of the economy, this year has produced 45 year record high measures of headline optimism, job openings, hiring plans, actual job creation, compensation increases (actual and planned), profit growth, and inventory investment. Actual capital spending has also posted substantial gains.”

 

We will also hear speeches and comments from several Fed officials today, including Kaplan from Dallas, Harker from Philadelphia, and Williams from New York.

 

The Rest of the Week: The rest of the week is relatively quiet as it relates to actual economic data releases but will include another heavy dose of Fedspeak. In addition to today’s small business confidence index, there are three reports on inflation: producer prices on Tuesday, import prices on Friday, but most important will be Thursday’s CPI report. Core CPI inflation is expected to tick back up to 2.3% YoY for September after cooling from 2.4% to 2.2% in August. The final economic report of the week will be an update on consumer confidence from the University of Michigan at 9 a.m. CT Friday morning.

 

Scattered amongst those reports throughout the week will be another healthy serving of comments from Fed officials. We’ll hear from Bullard (yesterday), Evans (Wednesday and Friday), Bostic (Wednesday and Friday), and Quarles (Friday).

 

TRADING ACTIVITY

Columbus Day Activity – U.S. Stocks Closed Mixed as Chinese Markets Cratered after Week-Long Holiday Break: Although the U.S. bond market was closed on Columbus Day, the major stock exchanges were open for business and ended with mixed results. The big three indices had tumbled at Monday’s open after Chinese stocks led a bout of global weakness overnight Sunday. The CSI 300 fell more than 4% after the PBoC lowered the reserve requirements for the country’s banks in order to free up liquidity for its economy, a measure seen as a shock absorber of sorts for slower economic activity and the turmoil caused by the trade fight with the United States. It was also Chinese markets’ first opportunity to respond to the snap higher in interest rates with the mainland closed all of last week for a holiday. After wobbling In morning trade Monday, the Dow recovered to close 0.2% higher while the S&P 500 clawed back to nearly unchanged. Tech companies, beat up in last week’s sell-off that was spurred by surging interest rates, remained weak and the Nasdaq fell 0.7% on the day.

 

Overnight – Risk-Off Mood Remains as Treasury Yields Hold at Their Highest Levels in Years: After a three-day weekend break, Treasury yields initially picked up where they left of Friday. After surging late last week on strong data and firm Fedspeak (more below), the 2-year yield had hovered around its cycle-high just above 2.88% while the 10-year yield had climbed as much as 2.7 bps to a new cycle-high of 3.26%. However, the heartburn that it had caused for equity investors last week also lingered. While Chinese stocks bounced Tuesday after big declines the day before, activity across the rest of Asia, in Europe, and in early U.S. futures trading slumped, signaling continued concern about the rapid move higher in rates. In addition to the concerns about higher rates, Italy’s budget plans have crept back into the headlines as EU and Italian officials continued to disagree on the path forward. The Italian 10-year yield has seen double-digit increases each day this week, taking the spread above German debt to more than 5-year wides. As the risk-off tone has strengthened ahead of U.S. trading, stocks futures fell to their lows of the day, down between 0.5% and 0.6%, and Treasury yields gave up overnight gains to move back near unchanged.

 

ICYMI – October 5, 2018 Weekly Market Recap: Coming into last week, expectations were that the odds for market excitement were heavily in favor of Friday’s September nonfarm payroll report. However, the action started earlier thanks to a string of strong economic reports and a comment from Fed Chair Powell on Wednesday. The week began with softer-than-expected construction spending and a lower-but-still-strong ISM Manufacturing index. But things picked up Wednesday after four discrete events sent yields surging to multi-year highs. In less than 24 hours, (1) there were signs of calmer political waters in Italy, (2) ADP’s September payroll figure topped estimates, (3) the ISM’s Non-manufacturing PMI hit its highest level since 1997, and (4) Fed Chair Powell said “we’re a long way from neutral at this point.” The first three pushed the 10-year yield through its May high of 3.11%, a key support level, and into technical no man’s land. The fourth, Powell’s remark, held it there. After Friday’s weather-affected payroll report showed unemployment at its lowest level in 48 years (December 1969), the 10-year yield added to its weekly rise (+17 bps) and finished at 3.23%, its highest since May 2011. As rates rose, and several other factors weighed on the tech sector, stocks sold off and the S&P 500 lost 1.0% of its value. Click here to view the full recap.