The Market Today
Solid Earnings Trigger Stock Rebound
by Craig Dismuke, Dudley Carter
Vining Sparks Economic Outlook Webinar, Thursday October 18 – The U.S. economy continues to grow at a solid rate, the labor market continues to tighten, but inflation has remained modest. This combination has enabled the Fed to continue gradually tightening monetary policy. While the economy appears to be growing above capacity longer term, this environment will likely persist into 2019. Vining Sparks will host our 4Q Economic Outlook Webinar on Thursday to summarize the economic environment as well as provide our updated growth and interest rate projections. To register, click here.
Industrial Production, Homebuilder Confidence, Job Openings, San Francisco’s Daly Speaks: At 8:15 a.m. CT, the September Industrial Production report is expected to show a 0.2% MoM increase in output fueled by a 0.2% gain in manufacturing. At 9:00 a.m., the NAHB Homebuilder Confidence index is expected to remain strong but weaken fractionally. Also at 9:00 a.m., the August JOLTs report will show if job openings remain greater than the number of unemployed persons for a record sixth consecutive month. At 3:15 p.m., new San Francisco Fed Bank President Daly will speak from Wellesely College in some of her first remarks as a policymaker. Daly is a voting member at the final two meetings of 2018.
Yesterday – Stocks Pared Friday Gains as Tech-Led Volatility Persisted to Star the Week: U.S. stocks cut into Friday’s rebound as the uncertainty that began last week continued to weighed on equity valuations. Tech companies again led losses to start the week as the Nasdaq dropped 0.88%. After switching between gains and losses on multiple occasions, the S&P 500 tumbled in the last hour of trading to close down 0.59% and near the lows of the day. The Dow followed a similar trek but ultimately slipped a smaller 0.35%. It was roughly a split performance within the S&P 500 as 47% of all underlying companies closed lower for the day. The tech sector closed down 1.6%, doubling the decline of the second worst performers within the energy sector. Energy companies faltered despite a recovery in the cost of crude. Three of the four sectors to gain Monday are generally considered more defensive in nature. Treasury yields also swung up and down, but spent most of their day below Friday’s levels and ultimately finished little changed. The 2-year yield closed up just 0.2 bps at 2.86% for a second day while the 10-year yield dropped 0.6 bps to 3.16%.
Overnight – Quiet Night as Global Equity Swings Continue: The recent seesawing by global markets continued overnight as the latest leg push sent equities and U.S. Treasury yields higher. Despite another down day for Chinese equities, the sixth out of the last seven, most Asian shares popped higher and European equities have strengthened. Even with a modest drag from U.K. stocks, the broad Stoxx 600 was up a hearty 0.6%. Investors in the U.K. have kept an eye on a mix of positive and negative Brexit-related headlines ahead of an important summit between British and EU officials on Wednesday. Eleven of the Stoxx 600’s 12 sectors gained, with five firming by more than 1%. Energy companies have so far been the heaviest weight on the major indexes as crude prices slipped. In the sovereign markets, peripheral European yields saw the biggest changes and were being led lower by Italy. The country’s coalition government submitted its 2019 budget in time to meet Monday’s midnight deadline. However, the volatility in Italian assets is unlikely over. The EU has a week to review the deficit-increasing document for glaring, rule-breaking proposals, leaving the door open for additional sentiment-shaking headlines. Heading into U.S. trading, the 2-year yield (2.87%) was up 1.0 bps while the 10-year yield (3.16%) was 0.6 bps higher. U.S. futures were also notably firmer against the stronger global backdrop and amid a slew of positive pre-market earnings releases, including beats from Blackrock, Johnson and Johnson, Morgan Stanley, and Goldman Sachs.
Growing Deficit During Good Times a Challenge for Future Slow Times: Treasury reported yesterday a $119 billion budget surplus for the month of September, ending fiscal year 2018 with a budget deficit of $779 billion. This marks the largest fiscal year deficit since 2012 when government spending was still shrinking following the recession-induced stimulus. Tax cuts and increases in federal spending caps have contributed to the growing deficit. Now at 3.9% of GDP, the deficit is projected to continue to grow faster than the economy. Making the current deficit picture more alarming, the federal deficit has historically shrunk during times of economic strength allowing more capacity for deficit-funded stimulus when the economy begins to slow. In fact, the last time the unemployment rate was below 4%, the federal government ran a surplus of 2.3% of GDP. We will discuss this topic as a headwind to longer term growth in our 4Q 2018 Economic Outlook Webinar.