The Market Today
Stocks Boom Higher; Busy Day of Fed News; Lowest Jobless Claims Since 1973
by Craig Dismuke, Dudley Carter
Today’s Calendar – Weak End to 2018 Housing Starts Data; Jobless Claims Plunge: The December Housing Starts report showed a surprising 8.2% drop in new starts, another volatile report on housing that puts the rate back closer to the low end of the recent trend. Moreover, in just one report, housing starts for the year went from positive to down 6%. As for December, a drop in single family activity was the driver with starts down almost 12% versus a 1.4% increase for multi-family units. However, for the year, single family starts remain up 3.5% while multi-family dropped 22.6%. As for new building permits, they fell, but only 0.1% MoM. Single family permits rose 1.8% while multi-family dropped 4%. We continue to see a housing market that is highly mortgage-rate dependent, is likely to show volatile reports, but which we expect to be accretive to overall growth in 2018.
Initial jobless claims for the week ending January 13 fell from 261k to 220k, the lowest number of new filers since February 23, 1973 (when the total labor force was 31% smaller than it is today). This is a welcomed break from a run of higher reports which were beginning to call into question the short-term direction of the labor market. However, according to the report from the BLS, an unusually large number of states estimated their claims data for the reporting period.
Overnight Activity – Limited Equity Follow Through as Yields Take Another Tick Higher: The global carryover of the strength in yesterday’s U.S. session (more below) has been relatively modest. Big gains on Wednesday for U.S. equities have translated into mixed moves across Asia and Europe. The jump in Treasury yields on Wednesday has filtered into European markets but the degree of follow-through is more subtle. Shares in Japan have been Thursday’s biggest detractor globally while most other indices in the region improved. China’s economy grew 6.9% in the final quarter of 2017, 0.1% better than expected. Most bourses in Europe are higher which has lifted the Stoxx Europe 600 by an unextraordinary 0.1%. The recent risk-on shift has helped nudge yields in Germany and France higher and press yields on peripheral debts lower. Germany’s 10-year yield is up 1.5 bps while the Italian 10-year note fell 1.2 bps. Treasury yields tacked on small increases overnight that reinforced the larger moves in yesterday’s session. The 2-year yield rose another 0.8 bps to 2.05%, the 5-year yield rose 1.0 bps to 2.41%, and the 10-year yield is 1.9 bps higher at 2.61%. Futures trading indicates U.S. equities may take a breather to start Thursday and the Nasdaq may lead the decline.
Yesterday’s Trading Activity – Stocks Rallied Hard Wednesday, Pressuring Treasury Yields to the Highest Levels in Some Time: Stocks broke out of an early morning lull to begin a climb that would last for the remainder of the session and sent the three major indices to new record highs. The Dow led the way with a 322 point, or 1.25%, rally that pushed the index to its first close above 26,000. It took the Dow just eight trading days to add 1,000 points, the fastest stretch in the index’s history. On a percentage basis, it was the biggest daily gain since November. The S&P added 0.94%, also its biggest daily gain since November, on broad sector participation; all eleven sectors moved higher on the day. The Nasdaq split the difference with a daily gain of 1.03%. With just two weeks of trading under their belts for 2018, the Dow and Nasdaq are up 5.7% and the S&P is up 4.8%. Earnings season has produced some solid results so far, helping extend the momentum that made 2017 a record year for U.S. equities. With stocks rallying, rates remained under pressure all of Wednesday and the curve ended with some of the highest yields in months if not years across various maturities. The long end moved the most with the 5-, 7-, and 10-year notes adding more than 5 bps on the day. At 2.40%, the 5-year yield closed at its highest yield since May 2010. At 2.59%, the 10-year yield ended just 3 bps shy of a nearly more-than-three year high set in March. The 2-year yield added to its seemingly endless rise, with a 2.9 bps increasing pushing the yield to 2.04%, its highest yield since September 2008.
Busy Day for News from the Federal Reserve
Fed Chair: In somewhat of a formality, Jerome Powell was approved again by the Senate Banking Committee on Tuesday to take over as Fed Chair when Janet Yellen’s term ends early next month. Because he wasn’t voted on by the full Senate before the previous session expired, it was required he be re-approved. Powell still needs a full vote to be scheduled. Chair Yellen’s term ends February 3.
Vice Chair of Supervision: Randal Quarles, current Fed Governor and top bank regulator at the Fed, was also approved by the Senate Banking Committee and now awaits a vote from the full Senate. Quarles was confirmed by the full Senate on October 5 to take over a partial term that is set to expire at the end of this month. Quarles supported the Fed’s most recent rate increase in December.
A Potential New Governor: The Senate Banking Committee announced a January 23 hearing related to Marvin Goodfriend’s nomination to the Federal Reserve’s Board of Governors. Goodfriend, who was a former economist at the Fed and was most recently a professor at Carnegie Mellon, was nominated by President Trump in late November.
Comments from Some Non-Voters: The Fed’s Charles Evans, who dissented to the December rate increase to 1.25% to 1.50%, said he supports less than the median three-hike projection for 2018. He said buoyant asset markets reflect investors’ belief the economy is strong but said elevated demand for safer assets is weighing on the long-end. In addition, a lower projection for the neutral rate probably means a flatter yield curve moving forward. On the same panel, Dallas Fed President Kaplan had a slightly different take, saying he favors raising rates again sooner rather than later to stay ahead of inflation. Last week Kaplan indicate support for three rate increases this year on concerns the economy could overheat. Kaplan said inflation pressures are building and sees the unemployment rate catching 3-handle by the end of year because of the tax cuts.
Fed’s Mester (2018 Voter) Says Gradual 2018 Rate Hikes are Appropriate: Cleveland Fed President Mester, spent most of her remarks describing why the Fed’s communications with the public are so important. She advocated for fewer mentions within each meeting’s Statement of the “fast” economic data and a greater focus on the long-haul. She also provided a plug for rules-based policy playing some part in the Fed’s policy approach, but did clarify that rules alone were insufficient for effectively carrying out their duties. More immediately, Mester said she sees no signs of a near-term recession and, although she didn’t provide a specific number, believes a continuation of the Fed’s gradual rate increases is the appropriate path for 2018. Thus, we will keep Mester in the three-hike camp.
January Beige Book: The Fed’s January Beige Book showed a consistent pace of “modest to moderate” expansion across 11 of the 12 Districts but upgraded the trends in the Dallas Fed District to a “robust increase.” Looking at the anecdotal evidence for activity at the component level, some retailers noted a better-than-expected result from holiday shopping, residential housing activity “remained constrained” and home prices continued to rise, and manufacturing improved modestly with some embarking on capital investments. The labor market continued to be reported as tight with a shortage of qualified candidates plaguing various sectors. Wages grew modestly since the last report, a slightly slower rate that the “modest to moderate” trends in November, and some expected wages to increase in the coming months. Overall price pressures were reported as “modest to moderate” by most and some Districts highlighted the ability to increase selling prices. This was the first Beige Book to be released since the tax bill passed in December. Some related comments from various Districts:
- Boston – Manufacturing and Related Services: “No contacts expected the just-passed tax reform package to have a big effect on investment.”
- Boston – Software and Information Technology Services: “Multiple contacts also indicated that the new tax legislation would help their business, though only as a one-time boost.”
- New York – Real Estate and Construction: “In areas around New York City, there has been some concern that the new federal tax legislation, which limits deductions for mortgage interest and especially property and state income taxes, will weaken the housing market, especially the high end.”
- Chicago – Impact of Tax Bill: “Almost all contacts thought that the Federal tax bill would have a positive impact on their firms. Most respondents expected to spread the tax savings across outlays for capital, labor, debt repayment, and profit distributions to owners.”
- Minneapolis – Services: “Contacts in the accounting and financial services sectors reported a year-end rush for tax planning services in response to new federal tax legislation.”
- Dallas – Impact of Tax Bill: “numerous contacts were optimistic that tax reform would provide a tailwind to business growth.”
Home Builder’s Remain Confident to Kick Off 2018: The NAHB’s Housing Market Index slipped as expected to a still-high 72 to start 2018. The index had risen unexpectedly to 74 in December, marking its strongest level since July 1999. At 72, the index matched its second-best reading over the same span. Looking in the details, the small decline in January was driven by a single-point drop in both sales indices (current activity and expectations six months from now). The biggest soft spot was in the foot traffic of prospective which fell four points but landed at its second highest level since 2005. Overall, the outlook from home builders was a little softer than in December but held at a level consistent with a continuation of the housing sector’s recent strength.
Industrial Production Finished 2017 on the Strongest Three-Month Stretch Since 2010: December’s industrial production report showed a stronger-than-expected jump to close out the year as a notable gain in utilities output helped to offset a weaker-than-expected result for manufacturing. Lumping in net positive revisions to previous months, the final quarter of last year was the best three-month stretch for industrial production since 2010. Total industrial production increased 0.9% in December compared with expectations for a 0.5% gain. Utilities output, which rose 5.6% in its strongest monthly gain since March, was a primary reason for the better-than-expected overall output. Electric utilities output rose 5.6% while natural gas usage increased by a slightly larger 6.0%. The gains were at least partly weather related, as the NOAA reported a 10 degree drop in the national average temperature from November (45.1 degrees) to December (34.8 degrees). Also adding to the increased output was a 1.6% improvement in mining activity. Manufacturing was the weakest link, rising 0.1% compared with expectations for 0.3% gain. Nonetheless, manufacturing activity still improved for a fourth month, the second longest stretch since 2011, and continued to reflect the benefit of a storm-related rebound, weaker Dollar, and improved global growth outlook. On a related note, capacity utilization improved to 77.9%, its strongest level since February 2015.
Tax Foundation Analysis Shows Top 50 Percent of Earners Paid 97% of All Individual Income Taxes: The Tax Foundation released a report yesterday diving into the details of the most recent IRS tax data release (covering the year 2015). According to the report, “ the data demonstrate that the U.S. individual income tax continues to be very progressive, borne primarily by the highest income earners. … The share of reported income earned by the top 1 percent of taxpayers rose slightly to 20.7 percent in 2015. Their share of federal individual income taxes fell slightly, to 39.0 percent. In 2015, the top 50 percent of all taxpayers paid 97.2 percent of all individual income taxes…”