The Market Today

Temporary Spike in Gas Prices Takes Some Steam from October Retail Sales: The first look at 4Q consumption, the October Retail Sales report, came in slightly weaker-than-expected, excluding a strong 1.1% jump in auto sales and a solid 1.0% increase in building material sales.  Gasolines sales, up 3.5% MoM, likely pulled some activity away from other categories of spending in October.  That should be temporary given that the national average for regular grade gasoline peaked in early October at $2.91/gallon.  Since that time, prices have pulled back $0.25 to $2.66.  Excluding those larger, more volatile categories, core sales rose 0.34% MoM which, while weaker-than-expected, was still a reasonably strong showing.  However, September’s sales figures were revised down from +0.5% to +0.3%.  This points to a lower revision to 3Q’s stellar personal consumption figures.  Nonetheless, October marked a decent start to 4Q consumption despite being negatively affected by a temporary spike in gasoline prices.

 

Mixed Regional Fed Surveys: Both of the primary regional Fed bank reports were released this morning with the New York report beating expectations (+2.2 points to 23.3) and the Philadelphia Fed’s report disappointing (-9.3 points to 12.9).  The new orders subcomponents fell in both reports while the number-of-employees subcomponents were mixed.  All told, the reports cumulatively point to the ISM Manufacturing Index improving in November after dropping in the previous two months’ reports.

 

Initial Jobless Claims Remain Low: Initial jobless claims for the week ending November 10 rose from 214k to 216k, remaining very low by historical standards.

 

Fedspeak: On the calendar today are speeches from Fed Vice Chair Quarles, Fed Chair Powell, Atlanta Fed Bank president Bostic, and Minneapolis Fed Bank president Kashkari.  Powell already provided his take yesterday.

 

TRADING ACTIVITY

Yesterday – Stocks and Treasury Yields Slipped on Politics and Tech Weakness: U.S. stocks ended lower Wednesday after an early afternoon bounce failed and the major indices drifted back down into the close. The Dow and S&P 500 both dropped 0.8%, the S&P 500 fell for a fifth day, as the Nasdaq lost a slightly steeper 0.9%. Financials were the worst performing sector, with traders pointing to a comment from Representative Maxine Waters, set to become Chair of the House Financial Services Committee, that “Make no mistake, come January, in this committee the days of this committee weakening regulations and putting our economy once again at risk of another financial crisis will come to an end.” Tech companies finished just out of last place as shares of Apple briefly fell into a bear market on continued concerns about iPhone demand. Fueling broader weakness, seven of the remaining nine sectors closed lower, were comments from Representative Bill Pascrell, likely next to head of a key House trade subcommittee, that “If {President Trump] wants a Democratic votes [for the recently negotiated trade agreement with Mexico and Canada] they need to be not only changes in the legislation but more enforcement.” On the upside, the timing of the failed afternoon bounce lined up with a rally in the British pound on reports indicated British PM May had secured support from her cabinet for the Brexit plan agreed to on Tuesday with the EU. Treasury yields showed little response to October’s CPI inflation data and instead tracked equities up and down. The 10-year yield peaked at 3.16% (8:31 a.m. CT) before sliding steadily to as low as 3.09% (1:07 p.m. CT) and ending down 1.5 bps at 3.125%. The 2-year yield shed a larger 2.5 bps as further-out Fed Funds futures fell to flatten the implied path of future rate increases. The effective rate implied through the end of 2019 dropped 0.045% to 2.83%. Elsewhere, crude prices rose for the first time in 13 sessions.

 

Overnight – U.K. Yields Snap Lower on Brexit-Related Cabinet Resignations: Global markets are mixed after an upbeat start in Asia was disrupted by a plunge in U.K. yields and the British pound. Chinese shares led the positive day on the Asian continent following a CNBC report that China had sent U.S. officials a written response addressing some of the areas of concerns about trade. Recent developments have raised hopes that progress could be made to remedy the ongoing trade dispute when Presidents Trump and Xi meet at a G-20 Summit in two weeks’ time. But as European markets opened, sentiment soured after the resignation of the U.K. Brexit Minister sank the pound by more than 1.4% and sent the U.K. 10-year yield down more than 10 bps. The vicious snapback after yesterday’s rise is a reminder of the divided Brexit opinions and the perilous task PM May has of trying to rally enough support for the plan agreed to this week with the EU. A second member of PM May’s cabinet later submitted their resignation, raising the risks of continued political chaos within the divided government and adding to odds of an unexpected Brexit outcome. Treasury yields have tracked core European yields lower, with maturities between two years and 10 years down between 2.9 bps and 4.3 bps. Stock futures, however, managed to remain positive despite the drag from Europe.

 

Powell Says Gradual is Best to Balance Strong U.S. Economy with List of Headwinds: Fed Chair Powell said he’s “very happy about the state of the economy right now,” but did highlight several areas that pose headwinds to a strong U.S. economy, including trade disruptions, fading fiscal stimulus, and a “bit of a slowdown” in global growth that “is concerning.” Still, the Fed has “been gradually moving, again, back up to normal kind of rates,” to try and “extend the recovery, expansion, and to keep unemployment low, to keep inflation low.” He stressed that the gradual nature of the past hikes and those currently planned was to avoid moving too fast or too slow, a reiteration of the risk-management strategy he previously described in a summer speech. He said one of the Fed’s challenges now, which is typical when you get to this point of a cycle, is “We have to be thinking about how much further to raise rates,” and at what pace. On holding a press conference after every meeting beginning in 2019, Powell said it increases transparency and that “markets definitely got in the habit of having us only move on press conference meetings… Certainly, all meetings are live now. We can and will move at any meeting.”