The Market Today
The Goldilocks Scenario Remains – Strong Eco Data but Mild Indicators of Inflation
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
This Week’s News – CPI Inflation, Retail Sales, and March Madness Headline Week before Presumed FOMC Hike: This week’s calendar is fairly busy with reports on small business confidence (Tue), homebuilder confidence (Thu), building permits and housing starts (Fri), the January Job Openings and Labor Turnover release (Fri), and consumer confidence (Fri). The most important news, however, should be the February CPI inflation (Tue) and February retail sales (Wed). CPI inflation is expected to show a less-firm read on inflation than in January’s report, keeping the YoY core rate at 1.8%. January’s CPI report, showing the fastest monthly rate of core CPI inflation since 2005, was one of the handful of events which triggered heightened stock market volatility. Retail sales are expected to rebound after a weak January report. However, Treasury data shows a delay in tax refunds again this year which may delay any rebound in spending until March. Either way, consumers are better positioned to grow spending heading into the next few months. After Tuesday’s CPI report and Wednesday’s retail sales data, investor focus should turn to next week’s FOMC Meeting. Last but not least, productivity should be hampered meaningfully this week with the beginning of March Madness.
Also on the radar this week is Senator Crapo’s bank regulatory relief bill which the Senate is expected to pass. The bill leaves a lot of discernment in Fed hands but its main selling point is that it raises the heightened supervision threshold for large banks from $50 billion to $250 billion.
Overnight – Global Risk Gains on the Back of a Goldilocks U.S. Payroll Report: Global equities have strengthened to start the week after risk assets rallied in the U.S. on Friday following what analysts are referring to as a Goldilocks payroll report (see the ICYMI section below). Asian markets rose at the open and European markets have added to the positivity. The Stoxx Europe 600 is higher by 0.3% after several major indices in Asia gained more than 1.5%. U.S. equity futures are stronger to varying degrees. Sovereign yields have been less one-sided and not reflective of a full-fledged risk-on move. Yields in Germany and France ticked lower while Italian yields inched up. Treasury yields are mixed and little changed with the 2-year yield up 0.4 bps to 2.26% but the 10-year yield unchanged at 2.89%. In addition to any changes of sentiment, investors in U.S. debt will also be faced with an influx of supply. The U.S. Treasury is set to auction a mix of bills and notes totaling $145B; 3-Month ($51B), 6-Month ($45B), 3-Year ($28B), 10-Year ($21B). The Dollar is at its session top after slipping and then recovering against the Euro.
ICYMI – March 9, 2018 Weekly Market Recap: The yield curve was modestly higher and steeper last week and stocks rallied in one of their best weeks since the election. The stronger sentiment followed market-positive developments on U.S. metals imports tariffs and a market-perfect payroll report for February. The President indicated on Monday the increased costs on imported steel and aluminum may include strategic exceptions. The tariffs, which were signed on Thursday, did exempt Canada and Mexico indefinitely and gave other countries the opportunity for exclusion. Amidst the tariffs news, Gary Cohn, chief economic advisor to the president, resigned. Bigger news for the economy, however, was Friday’s February payroll report that sent stocks out on a positive note. Hiring crushed estimates but wage growth was weaker than expected and the unemployment rate held as participation picked up. The not-too-hot-but-not-too cold combination relieved some pressure that had begun to build around the Fed feeling behind the curve and potentially moving to tighten four or five times this year. As for the Fed, we heard from two of the more dovish voters, both of which displayed a greater confidence in the current call for a continuation of gradual rate increases. Click here to see the full recap.