The Market Today

The Inflation Hits Keep Coming; BoJ Tilts Dovish in Deputy


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Import Prices the Latest Inflation Data to Show Price Traction:  Consistent with the strong pick-up in goods inflation seen in the CPI report, the January import price data showed more price pressures than expected.  Overall import prices rose 1.0% on firm core prices and a 4.3% increase in petrol-based products.  Excluding food (+0.8% MoM) and fuels, core prices rose 0.5% MoM, the strongest pace of price gains since 2011.  Import prices have been gaining traction (showing positive gains MoM) beginning in early-2017, coinciding with the turn lower for the Dollar.  However, even excluding the Dollar impact, a better global growth outlook has been helping firm up commodity prices beginning mid-2017.  This morning’s data builds on the recent run of stronger inflation data, increases even further the likelihood of a March FOMC hike, and increases the growing potential that the Fed raises their SEP projections to show four hikes in 2018.

 

Strong Start to 2018 for New Housing Activity:  Housing starts and building permits boomed in January with starts up 9.7% and permits up 7.4%.  These data have big month-over-month swings when weather in one region is worse-than- or milder-than-normal, as is the case with the January data.  However, the YoY data provide a little more clarity on the overall strength by region.  Housing starts are now up 70% YoY in the West, up 2.4% in the Northeast, down 3.4% in the South, and down 25.7% in the Midwest.  While the pace of gains in housing activity have slowed, they continue to be positive and the sector is expected to be accretive to economic growth this year.

 

At 9:00 a.m. CT, the University of Michigan’s Consumer Confidence index is expected to show a slight tick lower for a fourth consecutive month.

 

TRADING ACTIVITY

Yesterday – Equities Extended Recovery Despite Rates Holding Higher: Early equity strength looked as if it may prove to be a head fake as an opening jump slowly dissipated and the major indices turned negative around 10 a.m. CT. However, the time spent in negative territory was brief. Stocks quickly reversed, climbed for the remainder of the day, and closed near their session highs. The Dow gained 1.2% and, through Thursday’s close, was up 4.2% on the week and on pace for its best week since November 2016. This week’s strength comes after the index lost more than 9% over the last two weeks. For some perspective, that last stronger week in November 2016 followed just a 2.6% drop in the two weeks prior. The S&P 500 also rose 1.2% on Thursday to take its total weekly tally to 4.2% which would be its best since January 2013. The S&P fell 8.8% over the last two week’s compared with just a 0.8% decline in the two weeks preceding the January 2013 week. The morning weakness pulled Treasury yields off of new multi-year highs but as stocks recovered into the afternoon, so too did yields. The 2-year yield rose 2.1 bps to 2.18% while the 10-year yield added 0.7 bps to 2.91%. The Dollar’s year-long woes continued as the greenback weakened against all major currencies to a new 38-month low.

 

Overnight – U.S. Stocks Looking for Sixth Straight Gain as Sovereign Yields Move Lower: Asian markets were mixed to close out the week in a short-handed session where many markets remain closed at the start of the Lunar New Year. Japan’s Nikkei led the markets that were open, rising 1.2% after an announcement that current Bank of Japan Governor Haruhiko Kuroda has been tasked with another five-year term heading up the country’s monetary policy; his current term lapses in April. Kuroda’s reappointment, along with the separate nomination of an extremely dovish deputy governor (Masazumi Wakatabe), tilts the scales towards a continuation of what Kuroda characterized a couple of weeks ago as the “tenacious” easing of policy. In Europe, stocks are stronger but not to the demise of sovereigns. Core and peripheral sovereign debts are well-bid and longer maturities have led European curves lower and flatter. The German 10-year yield is down 3.2 bps while similar maturity Italian debt has dropped 5.2 bps with both currently at the lows of the day. Longer Treasurys are comparably strong with the 10-year yield down 2.9 bps at 2.88%. The 2-year yield, however, is up 1.3 bps to 2.20%. U.S. equity futures are essentially unchanged as stocks attempt to extend their win streak for a sixth day.

 

NOTEWORTHY NEWS

Industrial Output Dropped in January for the First Time in Five Months as Manufacturing Leveled Off, Mining Disappointed, and Utilities Output Rose at a Slower Pace: Disappointment in January’s industrial production report was enhanced somewhat by a net downward revision to cumulative activity in December (worse) and November (better). Overall industrial production fell 0.1% to start the year after rising 0.4% to close 2017 (previously +0.9%). Manufacturing output was unchanged for a second month in January and 0.1% was shaved off of previous estimates for the prior two months. Despite the negative revisions, 4Q17 was still one of the best quarters for manufacturing output since 2010. Capacity utilization also pulled back, but held at its second highest level since early 2015. Mining disappointed with a 1.0% drop and December’s gain was revised to down 0.4%. Utilities output rose another 0.6% after solid 4.6% result in December.

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