The Market Today
Tax Reform on President’s Desk
by Craig Dismuke, Dudley Carter
3Q Growth Revised Down 0.1% to a Still-Strong 3.2% Pace: In the biggest report of the day, growth in the third quarter was revised down 0.1% to 3.2% QoQ SAAR in the BEA’s final revision. Consumer spending was partly responsible for the modest negative revision, as overall personal consumption rose 2.2% in 3Q instead of the 2.3% previously estimated. Consumer spending on goods was revised up but offset by a slower pace of outlays on services. Given the recent strength of the other consumption indicators, this only boosts the 4Q outlook. Total private investment was unchanged at +7.3% on a mix of small tweaks to the underlying categories. Business spending on equipment was even stronger than estimated but the effect was neutralized by small negative changes to spending on structures, intellectual property, and inventories. Housing was also less of a drag on overall investment. There were small tweaks to the imports and exports data that created an almost imperceptible lowering of the contribution from external trade. Government spending was slightly better than estimated. The small QoQ changes had no impact on the 2.3% YoY rate of growth, which remained at its strongest level since 3Q 2015. The final revisions don’t change the story of an economy that picked up in the second half and has momentum heading into 2018.
Elsewhere, two regional Fed surveys were mixed and initial jobless claims rose somewhat more than expected. The Philadelphia Fed’s Business Outlook Index rose unexpectedly but remains below stronger levels from early in the year. The Chicago Fed National Activity Index declined more than expected to a three-month low but remained above zero, indicating a slower but still positive rate of growth. Initial jobless claims totaled 245k last week, the highest level since November 10. Continuing claims jumped back to a three-week high. Despite the weekly disappointment, considered alongside the rest of the labor data, the claims information doesn’t change the outlook for continued improvement in the labor market.
Yesterday’s Trading Activity – Climbing Yields Pushed the Curve to Steepest Level in a Month: U.S. equities gave up early gains and spent most of the U.S. session trading almost on top of Tuesday’s closing levels. By Wednesday’s close, the Dow dropped 0.11% while the S&P and Nasdaq were even quieter with less than 0.1% declines. Within the S&P, a strong day for the energy sector helped counterbalance losses elsewhere. Energy companies gained 1.4% on average after the EIA reported a larger-than-expected drawdown in crude stockpiles and a smaller-than-expected build for gasoline. Production did rise to another record, however, and U.S. exports of crude continued to benefit from the gap between U.S. WTI and Brent. Tuesday’s sector losers – those companies negatively impacted by rising interest rates – finished at the bottom again on Wednesday. Real estate companies and utilities suffered anew as Treasury rates added to their weekly climb. The curve continued to steepen with the 2-year up 0.4 bps, the 5-year 1.4 bps higher, the 10-year adding 2.9 bps, and the 30-year climbing 5.2 bps. As a result, the spread between 2s and 10s hit its widest mark (63.6 bps) in more than a month. Yields have risen sharply this week as Republicans have made the full-court press to push through their tax reform plan. The House passed the bill (again) in a lunchtime re-vote required to clean up a couple of procedural problems in their previous version. With the bill now through both chambers of Congress, the President’s signature is all that is left before the bill can become law.
Overnight Activity – Markets Maintained Mix Response to Passage of U.S. Tax Bill: The global equity market’s obsession with U.S. tax reform continued to moderate overnight and the weekly run up in U.S. yields subsided. A gauge of stock performance across the Asian-Pacific slipped 0.2% while the Stoxx Europe 600 crept higher by less than 0.1%. The Bank of Japan announced it was keeping its current monetary policy in place for now. Despite stronger growth in the region and in improved outlook in the bank’s official statement, inflation remains well below target. After the decision, BoJ Governor Kuroda explained “We won’t decide to raise our interest rates just because the economy is in good shape. …What is important is for us to continue our monetary easing with persistence, creating an environment where our 2% inflation target can be achieved and maintained in a stable manner.” Foreign sovereign yields also traded in different directions overnight while U.S. Treasury yields fell to flatten the curve for the first time this week. The 2-year yield was down 0.8 bps, the 5-year yield was 1.3 bps lower, while maturities out from there dropped roughly 2.0 bps on average. U.S. equity futures were positive overnight despite the mixed results elsewhere indicating stocks may try and end their two-day slide.
Existing Homes Surged to New Cycle High: The latest data from the National Association of Realtors showed sales of existing homes jumped to a new cycle-high in November. Sales rose 5.6% MoM, comfortably surpassing estimates for a more modest 0.9% improvement, to an annualized pace of 5.81MM units. That pace easily eclipsed the previous cycle best of 5.70MM units from March of this year and was the best since a 6.40MM unit pace in December 2006. The strong MoM percentage improvement was even more impressive considering that October’s results were also revised modestly higher. Sales were better in three of the four major regions but strength in the South and Midwest accounted for most of the monthly gains. The recent strengthening in the housing data has been a surprising and positive development for a sector that struggled for most of the year.